Fitch Affirms KKR's Long-Term IDR at 'A'; Outlook Remains Stable

  Fitch Affirms KKR's Long-Term IDR at 'A'; Outlook Remains Stable

Business Wire

NEW YORK -- July 26, 2012

Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of KKR &
Co. L.P. (KKR) and its related subsidiaries at 'A'. The Rating Outlook is
Stable. Approximately $500 million of unsecured debt is affected by these
actions.

The ratings affirmation reflects KKR's position as a global asset manager, its
experienced management team, solid investment track record, large
institutional investor base, predictable fee-earning capabilities, given
sizeable fee-paying assets under management (FAUM), and the potential for
significant incentive income. The ratings also reflect the joint and several
guarantees on unsecured indebtedness at finance subsidiaries by KKR Management
Holdings L.P. and KKR Fund Holdings L.P., in addition to the subordination of
general partner (GP) interests to outstanding indebtedness of the consolidated
company.

Risks to the ratings include 'key man' risk, although Fitch believes private
equity (PE) policies are less punitive than those of its peers; reputational
risk, which can impact the company's ability to raise future funds; and legal
and regulatory risk, which could alter the alternative asset space.

FAUM, which aggregates all assets which garner a management fee, amounted to
$47.2 billion at March 31, 2012, up 3.3% year over year due to capital inflows
and positive valuation movements in certain credit vehicles, offset to some
extent by an increase in distributions to limited partners, driven by
realization activity. The vast majority of management fees are based on
committed and/or invested capital, which does not fluctuate with fair value
movements. Therefore, Fitch believes KKR has a very predictable management fee
earnings stream, which can be used to service outstanding debt. The company
also receives a portion of the monitoring and transaction fees generated from
fund investments, which while significant in recent years can be lumpy
depending on deal volume and contract terminations.

Fitch monitors fee-related earnings as a measure of operating performance.
This metric is calculated as management fees plus net monitoring and
transaction fees less base compensation and benefits less operating expenses.
All incentive fees, including those earned from KKR Financial Holdings LLC
(KFN) are excluded. Fee-related earnings were down year over year in 1Q'12,
given reduced transaction and IPO activity, but remained solid given an
increase in management fees and variable compensation.

Carry and investment income rose 6.3% due to solid portfolio valuation trends.
The fee-related earnings margin, adjusting for incentive income, was 35.5%.
Fitch expects a continuation of solid operating performance over the balance
of the year, supported in part by further capital inflows, but monitoring
termination payments and transaction fees are expected to remain lumpy.

KKR's leverage, as measured by long-term corporate debt divided by fee-related
earnings-EBITDA (FEBITDA), remained modest given solid cash flow generation.
Leverage was 1.46x at March 31, 2012, on a trailing 12-month (TTM) basis,
which is down significantly from 2.90x at YE2009, and compares favorably to
other alternative asset managers. Debt service coverage, as measured by
FEBITDA divided by interest expense, was 8.18x on a TTM basis, which is up
from 6.80x at YE2009.

Fitch believes KKR has a solid liquidity profile, with $855.5 million of cash
and equivalents and $750 million of corporate revolver capacity. The primary
use of liquidity includes the funding of unfunded capital commitments to its
investment funds, potential clawbacks, net loss sharing provisions, dividends,
and operating expenses. At the end of the first quarter, KKR had $594.9
million of unfunded capital commitments to its funds, but Fitch believes the
company has some control over the timing of its capital calls. The clawback
obligation, and net loss sharing provision KKR would need to fund if its PE
investments were liquidated at fair value at 1Q'12, amounted to $73.2 million
and zero, respectively; down from $84.9 million and $93.6 million at year-end
2009 due to improvements in valuation. Fitch believes the likelihood of having
to fund these commitments is remote; however, the absolute dollar value is
deemed manageable and reserves are held against the potential obligation.

KKR's dividend policy is to distribute excess cash earnings on a quarterly
basis, excluding gains on balance sheet investments, but there is significant
management discretion in the definition of excess cash.

The Stable Outlook reflects Fitch's expectation that KKR will continue to
generate consistent management fees and fee-related earnings, grow FAUM
through follow-on funds and expansion into new PE and fixed income products,
manage leverage ratios near the current range, and maintain a solid liquidity
profile.

Negative rating action could be driven by declines in investment performance
which negatively impact the company's ability to raise FAUM and generate fees,
meaningful increases in leverage and/or impairment of the liquidity profile.
Positive rating momentum could be driven by an increase in fund and fee
diversity and reductions in leverage.

Founded in 1976, KKR is one of the largest alternative asset managers in the
world with $62.3 billion of assets under management and $47.2 billion of FAUM
at March 31, 2012. Since its inception, the company has completed more than
200 PE investments with a total transaction value in excess of $465 billion.
The company's stock is listed on the NYSE under the ticker 'KKR'.

Fitch has affirmed the following ratings with a Stable Outlook:

KKR & Co. L.P.

-- Long-term IDR at 'A'.

KKR Management Holdings L.P.

-- Long-term IDR at 'A'.

KKR Fund Holdings L.P.

-- Long-term IDR at 'A'.

KKR Group Finance Co. LLC

-- Long-term IDR at 'A';

-- Senior unsecured debt at 'A'.

Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

-- 'Global Financial Institutions Criteria' (Aug. 16. 2012);

-- 'Investment Manager and Alternative Funds Criteria' (Dec. 23, 2011).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=661367

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Contact:

Fitch Ratings
Primary Analyst
Meghan Neenan, CFA, +1-212-908-9121
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Joseph Scott, +1-212-908-0624
Senior Director
or
Committee Chairperson
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
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Email: brian.bertsch@fitchratings.com
 
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