Aug. 20 (Bloomberg) -- KKR Financial Holdings LLC, the beleaguered Kohlberg Kravis Roberts & Co. affiliate that invests in bonds and loans, will receive a $500 million cash infusion from investors after being hurt by residential-mortgage losses.

KKR Financial is adding capital to weather a subprime- mortgage meltdown that has spread to corporate debt, stocks and currencies. Goldman Sachs Group Inc. last week put $2 billion into its Global Equity Opportunities hedge fund and lined up $1 billion more from investors after a 28 percent decline this month.

Institutions including hedge fund Farallon Capital Management LLC and Morgan Stanley, the second-largest securities firm, will buy 16 million shares at $14.40 each, or $230 million, KKR Financial said today in a statement. The San Francisco-based company expects to raise an additional $270 million by selling stock to existing shareholders.

``We are shoring up the company for tougher times,'' Chief Executive Officer Saturnino Fanlo said on a conference call. ``The cost of obtaining this protection is well-purchased insurance for these challenging times.''

KKR Financial's shares climbed $1.24, or 8.6 percent, to $15.64 at 4:04 p.m., reducing their decline to 42 percent this year.

KKR, the New York-based leveraged buyout firm, raised $800 million in the KKR Financial initial public offering in June 2005. KKR Financial changed its structure in May to a limited liability corporation that makes credit investments. The firm has about $18 billion in assets.

Loan Losses

KKR Financial said last week it sold $5.1 billion in mortgage loans for a loss of $40 million. It may lose an additional $250 million as it divests the rest of its residential mortgage-backed securities. As of last week, it had liquidity of $452 million in cash and other sources.

Fir Tree Partners, JGE Capital Management, Marsico Capital Management, Oak Hill Advisors and Sageview Capital LP also bought shares, according to the statement.

Morgan Stanley already was KKR Financial's second-biggest shareholder, with 3.73 million shares, or about 4.6 of the company's shares outstanding. Farallon was seventh-biggest, with 2.4 million, or 3.1 percent, according to data compiled by Bloomberg.

Common stockholders as of Aug. 30 will have the right to buy shares at $14.40, the closing price on Aug. 17. The rights expire on Sept. 19 unless the company chooses to extend the period.

Investor Support

KKR, which on July 3 filed for its own U.S. IPO, has agreed to a ``backstop commitment'' and will buy $100 million in KKR Financial shares if necessary. Partners of KKR are individually guaranteeing the potential investment, Fanlo said on the call. The firm, which owns about 12 percent of KKR Financial, won't receive compensation for funding the guarantee.

``The large institutional support coupled with KKR's backing'' suggest KKR Financial ``should be able to successfully navigate current market conditions,'' Jim Shanahan, an analyst at Wachovia Corp., said in a note to clients.

Another KKR investment vehicle, KKR Private Equity Investors LP, fell to its lowest level last week since its IPO as a credit crunch threatens leveraged buyouts. The shares of KKR's publicly traded private-equity fund fell 4 cents to $19.46 in Amsterdam today. KKR first sold the shares to the public in May 2006 for $25 apiece.

Commercial Paper

Two KKR affiliates, KKR Atlantic Funding Trust and KKR Pacific Funding Trust, which issue commercial paper backed by residential mortgage bonds, had their ratings cut to the speculative short-term grade of B from F1+ by Fitch Ratings today.

Concern that credit markets will weaken spurred KKR Financial to negotiate with investors through the weekend to complete the sales announced today, Fanlo said. The investors were willing to buy more than KKR Financial wanted to sell, he said.

``The offering was significantly oversubscribed,'' he said, without being more specific. ``These are thoughtful, savvy investors.''

Citigroup Inc. is handling the share sale to common stockholders.

(KKR Financial held a conference call for investors today. To access a replay, dial +1-888-203-1112, pass code 5227456.)

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

Last Updated: August 20, 2007 16:22 EDT