Nov. 10 (Bloomberg) -- KKR Financial Holdings LLC, the debt-investment affiliate of private-equity firm KKR & Co., halted its dividend and arranged $400 million in loans from banks and KKR to pay off other debts.

KKR Financial, based in San Francisco, lined up $100 million from New York-based KKR, run by Henry Kravis and George Roberts, as well as $300 million from Bank of America Corp. and Citigroup Inc., the firm said in statement today.

The debt unit, stung by investments during the past several years in mortgage-backed securities, reduced its quarterly dividend twice since August 2007 to preserve capital. The new bank credit will be used to pay off a loan due next year. The KKR loan is an ``insurance policy,'' Saturnino Fanlo, the company's chief executive officer, told investors on a conference call.

``Liquidity is scarce and markets are extremely volatile,'' Fanlo said. ``The landscape of financial services is fundamentally different than it was just one quarter ago.''

The firm is exploring options including converting into a bank or buying a depositary institution, Fanlo said on the call.

The company last paid a cash dividend of 40 cents a share on Aug. 29. At that rate, eliminating the payout saves about $60 million a quarter. Fanlo declined to comment on whether the company would resume paying a dividend in the fourth quarter, noting that it's a board decision.

Risk Aversion

``I would not believe the current environment would lead to increased risk taking,'' he said on the call. ``I would not today recommend for any change in strategy from what you've just seen.''

KKR Financial has dropped 77 percent this year. The stock fell 41 cents, or 11 percent, to $3.28 at 4:15 p.m. in New York Stock Exchange composite trading.

The firm also said today it had net income of $49 million, or 33 cents a share, compared with a net loss of $261.5 million, or $2.98, a year earlier.

Profit excluding some compensation costs was 33 cents a share, missing the average 41-cent estimate of eight analysts in a Bloomberg survey.

The new money allows KKR Financial to buy new securities as prices for leveraged loans remain low, the firm said.

KKR Financial earlier this year settled a dispute with lenders by agreeing to turn over collateral for commercial paper.

To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net

Last Updated: November 10, 2008 18:40 EST