Aug. 15 (Bloomberg) -- KKR Financial Holdings LLC shares fell 31 percent after the debt investor said it may lose as much as $290 million because of a decline in the value of mortgage- backed bonds it owns.

The company, a unit of Henry Kravis's buyout firm Kohlberg Kravis Roberts & Co., sold $5.1 billion in loans at a net loss of $40 million and may sell its $5.8 billion in remaining residential mortgage-backed securities. Disposing of those assets may lead to a writedown of $200 million in equity and ``additional liabilities'' of as much as $50 million, San Francisco-based KKR Financial said today in a statement.

At least 70 U.S. mortgage companies have halted operations or sought buyers since the start of 2006, according to Bloomberg data. Overdue payments on subprime mortgages to U.S. homebuyers with poor credit rose to the highest level since 2002 in the first quarter, according to the Mortgage Bankers Association.

The ``outlook is, at best, uncertain until credit markets stabilize'' for companies relying on short-term debt financing, a team of Lehman Brothers Holdings Inc. analysts led by Bruce Harting wrote in a research note.

KKR Financial shares fell $4.75 to $10.52 at 4:25 p.m. in New York Stock Exchange composite trading. They climbed 13 percent to $11.89 at 7:58 p.m. in after-hours trading. The stock has declined 61 percent this year.

Fate of IPO

KKR Financial added $8.5 million to second-quarter management fees for its New York-based parent, KKR, which filed July 3 to raise $1.25 billion in an initial public offering. KKR's total management fees in the first quarter were $68.8 million.

``Everybody knows these cycles come and go,'' said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business in Hanover, New Hampshire. ``I can't imagine it's going to derail'' the IPO.

KKR Financial spokeswoman Roanne Kulakoff declined to comment.

KKR has said in a regulatory filing the skittish credit markets were affecting its leveraged-buyout business. The firm, founded by Kravis and George Roberts, said the cost to issue high-risk, high-yield debt has ``recently increased significantly'' as debt investors reject loans and debt offered to fund private-equity deals.

Market Turmoil

Investors are also shunning securities tied to home loans, pushing down prices and forcing hedge funds that bet on the mortgage market to post losses. KKR Financial reiterated its plan to stop buying residential real-estate assets.

The KKR unit has total liquidity of $452 million in cash and other sources, its Chief Executive Officer Saturnino Fanlo said today on a conference call. Its shares rose $1.49 in after-market trade during the conference call to $12.01.

KKR Financial ``should be able to navigate through the current liquidity crisis; however, we are concerned about the potential impact from wider credit spreads,'' the Lehman analysts wrote.

The extra yield investors demand to own non-investment-grade corporate bonds instead of Treasuries has widened to 416 basis points from a record low of 241 on June 5, Merrill Lynch & Co. data show.

The crisis that began with subprime home-loan defaults in the U.S. and put a chill in credit markets spread to equities around the world. The Standard & Poor's 500 Index of the largest U.S. companies has fallen 9.2 percent in the past month, including reinvested dividends.

KKR raised $800 million in June 2005 in the KKR Financial IPO, which it created as a real-estate investment trust. KKR Financial changed its structure in May, becoming a limited liability corporation that makes credit investments instead of a REIT. The KKR unit has about $18 billion in assets.

``In light of the level of disruption and volatility in commercial paper and broader credit markets, estimates of potential exposure are necessarily subject to future revision,'' the company said in the statement.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: August 15, 2007 20:14 EDT