Laurie Poggi – Director, IR Bill Sonneborn – CEO Michael McFerran – COO

Gabe Poggi – FBR Capital Markets & Co. John Hecht – JMP Securities Lee Cooperman – Omega Advisors Robert Schwartzberg – Compass Point John Feldman – [Vance Hall Capital] Brian McMahon – Thornburg Investment

Welcome to the KKR Financial Holdings LLC fourth quarter and 2009 year-end earnings conference call. (Operator Instructions) I now would like to turn the conference over to Ms. Laurie Poggi, Investor Relations for KKR Asset Management.

Good afternoon and welcome to KFN’s fourth quarter 2009 conference call. I am Laurie Poggi, Director of Investor Relations for KKR Financial Holdings LLC and participating on today’s call are Bill Sonneborn, the company’s Chief Executive Officer; Michael McFerran, the company’s Chief Operating Officer and Jeff Van Horn, the company’s Chief Financial Officer. Our financial results released for the fourth quarter and year ended December 31, 2009 was issued today, and as with prior quarters a supplemental information packet was posted on our Web site. Today we also filed our 2009 annual report on form 10-K with the Securities and Exchange Commission. This call is being webcast live on our Web site and a recording will be available beginning later today through March 15th. The audio webcast will be archived in the Investor Relations section of the company’s Web site as well. At this time, I would like to remind you that this conference call contains forward-looking statements that are based on the beliefs of the management team regarding the operations and the results of the operations of the company, as well as general economic conditions. These beliefs and the related forward-looking statements are subject to substantial risks and uncertainties, which are described in greater detail in the filings we have made with the Securities and Exchange Commission. These filings are available on the SEC’s Web site at www.sec.gov. Our actual results may vary materially from those described in these forward-looking statements. Now, I will turn the call over to management. Bill, please go ahead.

Thank you, Laurie, and good afternoon everyone. We are going to cover a considerable amount of information today including a review of our fourth quarter earnings our balance sheet and liquidity and our strategic growth plan. As Laurie mentioned we have posted a supplemental presentation on our website today. Based on investor questions during the past few quarters we have updated the presentation to include more disclosure than we have provided in past periods most notably around our CLOs and I encourage you to review it in conjunction with our earnings release. KFN today is a much healthier business than it was a year ago. We have addressed KFN’s capital structure and liquidity challenges and have dry powder available to deploy to new investment and other opportunities. As we sit here today we are excited about the future of KFN. We like our corporate structure and the flexibility it provides. Our balance sheet is strong with improved risk profiles and we are well positioned to participate in a broad array of opportunities to generate attractive total returns for our shareholders. Later in the call I will discuss how we think about capital allocation and returns on invested capital but first let me begin with an update on KFN since our last earnings call posted this past November. Over 90% of our corporate debt portfolio is held in our wholly owned and majority owned CLO subsidiaries. Accordingly the majority of our cash flows have historically come from our mezzanine and subordinated note holdings than CLOs. Our liquidity profile has materially improved as we have continued to bring our CLOs into compliance with their respective over-collateralization (OC) tests. Here is the status of our five CLOs. First, CLO 2005-1 which has consistently maintained compliance with its subordinated over-collateralization test. Second, CLO 2005-2 which was out of compliance with its subordinate OC test between February 2009 and May 2009 has been back in compliance since that date. Third, CLO 2006-1 which began failing its respective subordinate OC tests in November 2008, regained compliance with its subordinate OC test in August of 2009. Fourth, CLO 2007-A which began failing its respective subordinate OC test in January 2009, regained compliance with its subordinate OC test on January 4, 2010 as previous disclosure we have made. Last, CLO 2007-1 which has regained compliance with its senior OC test as of February 5, 2010. This is relevant and a new disclosure. Since KFN owns a portion of the class D notes in 2007-1 KFN received a payment of $7.5 million of cash during February for passing this test. This represents a partial payment of PIC interest on the notes we hold for the class D. This represents the first cash flow that KFN has received from CLO 2007-1 since November 2008. The last hurdle for all of our CLOs to generating cash flow for all tranches we hold is for CLO 2007-1 to regain compliance with its subordinate OC test. We are focused on bringing this CLO back into compliance, balanced with the objective of maximizing long-term value for this CLO. There are several variables that will impact when 2007-1 comes back into compliance with its subordinate OC test including but not limited to CCC asset prices, any credit rating upgrades and downgrades of our underlying portfolio position, defaults or any asset prepayment. While we are unable to provide you with a firm date as to when 2007-1 will regain compliance with all of its OC tests we do expect that absent unforeseen events we will regain compliance with all of the 2007-1 OC tests over the next six months. Given that KFN now generates ample operating cash flow even excluding 2007-1 we are moving more of our focus to total rates of return reflecting the discounting of all future opportunities to attract value through our structured finance vehicle. Next, our capital structure. On January 15 of this year we issued 172.5 million of 7.5% convertible notes due January 2017. We received net proceeds from this transaction of $167 million which we expect to use to reduce existing indebtedness. This transaction was completed with an initial conversion price of $8.18 per share which represents greater than a 10% premium of $7.37 per share and approximates a 30% premium to our closing share price on the date before January 15th. Since the completion of this offering we have reduced borrowings outstanding under our senior secured credit facility from $175 million as of year-end to $150 million today and we have repurchased $95.2 million of our 7% convertible notes due 2012 resulting in a current outstanding balance of these notes of $180.6 million. The successful completion of this transaction has provided us with increased balance sheet flexibility to manage our future debt maturities and very importantly has substantially reduced the risk of our asset liability duration mismatch we have carried for several years now. On dividend expectations I know that dividends are very important to our shareholders and I do want to spend a few minutes describing this. On February 4th our board of directors declared a cash distribution of $0.07 per common share payable on March 4th. This distribution represents a 40% increase from last quarter’s $0.05 per share distribution. As a dividend paying enterprise having a flow through tax structure it is important to avoid double taxation for our shareholders. Accordingly the legal structure alternatives to achieve this are either being a REIT, a business development company or a publically traded partnership (PTP). Being a PTP affords us more flexibility than either of these alternative structures in a few key ways. First, we have more flexibility in asset mix than we otherwise would as a REIT or a BDC. As a REIT, for example, we would be subject to certain minimum income and asset tests including having 75% of our gross income come from real estate related income and 75% of our assets consisting of real property or loans secured by real property. As a business development company or BDC we would be subject to numerous restrictions including the inability to make investments in other than small cap entities that have public equity outstanding and the inability to invest in debt of affiliates. The comparative flexibility we have as a PTP provides us with the ability to seek the best opportunities to provide an attractive total return to our shareholders. With respect to dividends our status as a PTP allows our board of directors to determine the dividend amount on a quarterly basis. Prior to our conversion from a REIT to a PTP in May of 2007 we were required to effectively distribute 100% of our REIT taxable income to shareholders annually. If we were a BDC we would be subject to a similar requirement. By structuring the PTP affords us great flexibility with respect to dividends and enables us to optimally allocate our income between dividends and new opportunities to the extent we believe incremental returns to our shareholders would be attractive and accretive relative to their expected equity return targets. This flexibility permits us to generate both an attractive dividend yield while increasing both future cash flows and book value through new opportunities. Our primary dividend objective is to pay out a dividend level that at a minimum approximates the estimated tax liability of our shareholders based on our estimated annual taxable income. I do want to highlight that our existing senior secured credit facility currently limits our dividend payment to 50% of estimated taxable income. We have to estimate taxable income on behalf of all of our shareholders and each shareholder has a different allocatable income depending upon the date of their purchase. With that I am going to hand this over to Mike.

Thanks Bill and good afternoon. My comments today will cover several areas; liquidity, income drivers for the fourth quarter, our balance sheet, default and recovery rates on our portfolio and the impact of interest rates on our portfolio. Beginning with liquidity, at year-end we had unrestricted cash of $97.1 million. At the holding company level our operating cash flow before shareholder distributions for the year totaled just over $69 million and $25 million for the fourth quarter. This excludes any cash flow from CLO 2007-A and CLO 2007-1 which does not begin generating cash flow until the first quarter this year as Bill described. During 2009 the components of the $69 million of operating cash flows before shareholder distribution are as follows; $49 million in-flows from CLO 2005-1, 2005-2 and 2006-1, $84 million from positions held outside of our CLO including mortgages, $34 million paid for interest expense, $28 million paid for non-investment expenses including management fees and approximately $8 million in flow from our derivative positions consisting of total rate of return and credit default swap. As of December 31, our cash plus the estimated fair value of our corporate debt positions held outside of our CLOs totaled $685.6 million as compared to outstanding holding company debt maturing before 2036 at year-end totaling $450.8 million. This means that we have 1.5 times asset coverage from our cash and debt positions, not in our CLOs. When combined with our mortgage portfolio and our equity holdings we have approximately two times coverage of our debt maturing prior to 2036. The next topic is fourth quarter results. Net income for the fourth quarter totaled $2.1 million or $0.01 per diluted common share. This compares to net income of $67.2 million or $0.42 per common share for the third quarter of 2009. Operating income for the fourth quarter which we define as net investment income less non-investment expenses, totaled $65.1 million or $0.41 per diluted common share as compared to $54.2 million or $0.35 per diluted common share for the third quarter. Included in net investment income are one-time income amounts from early prepayment of investments that have been carried at a discount to par. This accelerated component of discounted appreciated income which is included in net investment income totaled $10 million for the fourth quarter and $2.7 million for the third quarter. When adjusted to exclude these one-time gains pro forma operating income for the fourth quarter was $55.1 million or $0.35 per common share and pro forma operating income for the third quarter was $51.5 million or $0.33 per common share. The difference between our operating income for the quarter of $0.41 per diluted common share and net income of $0.01 per diluted common share is attributable to other net losses during the quarter of $62.9 million. The $62.9 million of other net losses due to several components I will spend a moment walking you through. The largest contributor to this loss was a write down of the residential mortgage backed securities portfolio held primarily by our REIT subsidiary during the quarter of $62.5 million. The charge reflects our negative outlook for prime mortgage loan performance based on current market factors most notably high unemployment and declining housing values which have translated into an increased expectation on our part regarding expected delinquencies and losses on the residential mortgage loans that collateralize our RMBS position. As of December 31, our RMBS portfolio had an aggregate par value of $278.4 million and an aggregate fair value estimated of $121.9 million. AS of year-end our RMBS holdings constitute less than 3% of our total portfolio. Next we had aggregate net realized and unrealized losses on investments totaling $6.7 million. This amount reflects a $12.1 million charge related to the transfer of certain corporate loans from held for investment to held for sale before they were written down to the lower of cost or market value. As reflected in our balance sheet, loans held for sale held loans totaling $925.7 million as of year-end as compared to $504.1 million at the end of the third quarter. The increase in loans held for sale reflects the balance sheet flexibility we desire to sell loans and improve the credit quality of our CLOs and in particular to facilitate bringing CLO 2007-1 back into compliance with all of its OC tests and as well manage the overall portfolio risk. In addition to the $12.1 million related to the transfer of certain loans held for sale, we also recorded an other than temporary impairment charge from bond positions totaling $3.9 million. These losses were partially offset from gains on investments during the quarter totaling $9.3 million. In addition to net realized and unrealized losses on investments totaling $6.7 million we also recorded a net gain from derivatives and foreign exchange totaling $2.1 million and other income of $3.6 million which primarily consists of fee income from loan amendments and restructurings executed during the quarter. The next topic I will cover is our balance sheet. At year end our credit portfolio consisted of corporate loans and bonds with an aggregate par value of $8.2 billion and an estimated fair value of $7.2 billion. As of year-end the weighted average market value of our corporate debt holdings was 87% of par as compared to 83% of par as of September 30 and 74% of par at June 30 of last year. On our balance sheet we carry loans held for investment at amortized costs less an allowance for loan losses and loans held for sale at the lower of cost or market. Our corporate bonds are carried at fair value with changes in fair value reflected in accumulated other comprehensive income, a component of shareholder’s equity. As of year-end the carrying value of our corporate debt holdings which is what our book value of $7.37 per common share reflects totaled $7.3 billion which is 89% of par value of $8.2 billion. This means that our current book value has an 11% cushion for future losses embedded in it. Our allowance for loan losses totaled $237.3 million as of year-end as compared to $470.2 million as of September 30th. The decrease in our allowance for loan losses is attributable to $232.9 million in charge off’s we recorded during the quarter that [reduced] as either sales of loans we had previously impaired, restructuring of loan positions that had been impaired or transfers of certain previously impaired loans from held for investment to held for sale and for which the difference between our cost basis and estimated fair value of the loan was recorded as a charge off. As described in greater detail in our financial statements including our 2009 annual report on form 10-K we filed today our allowance for loan losses consist of two components; an allocated reserve and an unallocated reserve. The allocated component of our allowance for loan losses relates to specific loans we have determined to be impaired and the unallocated component relates to our entire remaining portfolio of loans held for investment. As of year-end the allocated component of our allowance totaled $81.7 million as compared to $430.8 million as of September 30th. The unallocated component of our allowance totaled $155.6 million as of year-end as compared to $39.4 million as of September 30th. Next we want to provide you some color on our default and recovery rates of our portfolio. To start with we are very pleased with how our portfolio credit holdings have performed over the past year. Defaults on our corporate debt portfolio declined significantly during the second half of the year. Our annualized default rate for the entire year was 6.2% as compared to the loan index default rate of 9.6% and our weighted average recovery rate based on the cost basis of our investment at 66% as compared to industry rates of 49% for leveraged loans and 23% for high yield bonds. In addition we have witnessed significant improvement in default rates during the latter part of 2009 with an annualized default rate for the second half of 2009 of 90 basis points. Our [inaudible]defaults have totaled approximately $946 million. Of this amount Lyondell Chemical Corp., Tribune, Charter Communications, Masonite, [inaudible] have accounted for 80% of our total defaults. Lyondell is currently trading in the low 70’s as compared to trough levels in the 20’s following their bankruptcy in January 2009. Tribune is currently trading in the low 60’s and similar to Lyondell has touched lows in the 20’s following its default. Charter is a bit different of a story as we decreased our exposure to this position based on the expectation it would default. It currently trades in the low to mid 90’s. Masonite was a position that was restructured with us receiving equity in exchange for our debt position. Currently trading levels for Masonite’s equity reflect a recovery of over 80% of our original costs. [Inaudible] is a position we recently exited and for which the proceeds we have received from the sale combined with principle protection payments we received resulted in a recovery above par. [Here] was another position we restructured and resulted in us receiving a combination of cash, debt and equity. A recovery in this position was also above par. The last topic I will cover is the impact of interest rates on our balance sheet. Our assets and liabilities are predominately floating rate and indexed to LIBOR. As a result our balance sheet is asset sensitive to changes in LIBOR. This is evident from the year-over-year declines in net investment income as LIBOR has declined materially since 2007. As of December 31 we are net long on LIBOR by about $1 billion. This means that a 1% increase in LIBOR translates into $10 million of incremental interest income. Based on current LIBOR of approximately 25 basis points we don’t see much downside from today. However, we do see considerable upside. If LIBOR increases by 3% that adds $0.05 per share per quarter to our bottom line. With that I am going to hand it back to Bill.

Thanks Mike. Twelve months ago during the first earnings call hosted by Mike and I to discuss fourth quarter 2008 results I described the four key priorities we were focused on. I want to spend a minute reflecting on these and then talk about where we are going from here. As many of you may recall the priorities we described were first, to aggressively address KFNs near term liquidity issues, predominately from its mismatching of capital structure. Second, ensure that KFN’s capital structure protects long-term value for our shareholders in terms of our ability to leverage our low cost liability. Third, to proactively manage our business and be aggressive about it. Fourth, to continue the growth in our manager’s operating platform. During 2009 we addressed liquidity by bringing our CLO subsidiaries back into compliance and reducing our mark to market exposure through our debt facilities by first converting our way out of CLO through a mark to market transaction to a cash flow CLO and then by paying off the debt issued by CLO 2009-1, its successor, which was our highest cost liability. We addressed our capital structure challenges by extending the maturity of our credit facility, reducing the amount outstanding under it and in addition, through the issuance of new convertible notes in January we accomplished the objective of extending our weighted average debt maturities without having to de-leverage our balance sheet any further. Next we were able to increase the quality of our portfolio, increasing our earnings profile and work through various distress situations that have had very positive outcomes for us. Last, we continue to grow the investment capabilities of not only our credit professionals but of our entire KKR investment team. To put it simply we are very pleased with how we addressed these priorities we laid out for you and we strongly believe that we are now well positioned for the next stage in KFN’s evolution. So what is next? Our framework for deploying capital is based upon our internal strategic asset allocation model. There are three core tenets to our asset allocation methodology which alter our capital allocation. First, provide our shareholders with an attractive total return by balancing holdings that generate solid return on cash flows and those that present opportunities for long-term capital appreciation and to share our cash profits generously with our shareholders. Second, position our portfolio to generate attractive total returns across economic cycles. We have a bias towards addressing inflation risk today and seek to position our portfolio to perform well during periods of high inflation. We want to focus on creating a return profile and dividend paying capability which will benefit in an inflationary high rising rate environment. Based on current monetary policy we think the risk of inflation is becoming increasingly heightened over the next 3-4 years and we are positioning our portfolio to perform well whether material price inflation comes to pass or not. Third, we want to pursue opportunities where we at KKR have a competitive advantage relative to others. We are a global firm operating with professionals and offices around the world. The combination of our global investment team and our deep relationships across many companies and industries provide us with an unparalleled ability to source unique investment opportunities across many asset classes. Next, I will take you through some specifics of where and how we intend to deploy capital. First, our existing corporate credit portfolio. We think of these holdings as having two components. The first being the positions held through our CLO subsidiaries which represent approximately 90% of our total corporate credit and the second is the portfolio of corporate debt held outside of our CLOs. As of December 31, the weighted average remaining reinvestment period of our CLOs was 2.6 years. During the fourth quarter alone we purchased 472 million, selling 389 million of credit for risk management and arbitrage purposes to the CLO subsidiaries. Our dual objectives for our CLOs is to increase cash flow and maximize long-term residual value consistent with regulatory requirements including limitations on trading. The market for new CLOs is beginning to appear and based on the tightening of spreads for senior CLO debt in the secondary market we think opportunities for new CLOs may become interesting at some point in the future. That said, we don’t view our business as dependent on CLOs for growth and will only undertake new transactions where the return profile, risk, structure and liability cost makes sense versus other opportunities to deploy capital or return cash to our shareholders. Syndicated corporate debt is and will continue to be a key component of our business but it won’t be our entire business. In addition to syndicated corporate debt we are witnessing opportunities to meaningfully deploy capital through unique and special situations which range from private debt transactions that we source to controlled distressed and mezzanine opportunities where we see the potential for attractive total returns from debt and equity components, effectively investing in the supply/demand imbalance. The next area is private equity. Post recessionary periods have historically been among the most attractive for private equity investment. Through our industry leading role in this asset class we expect there to be a growing array of opportunities for KFN to deploy capital side by side with KKR’s private equity funds in select private equity investment opportunities. We are also seeing opportunities from KKR’s infrastructure and energy team to invest in physical assets driven by the global demand for infrastructure and dislocations in market sub-sectors like conventional production of oil and gas. We view these opportunities as particular compelling as they both present attractive return profiles, cash on cash returns and a sound hedge against inflation. AS a firm philosophy we generally like to invest capital in [supply] demand imbalances. I do want to spend a moment sharing our thoughts on how we expect to fund future growth opportunities. As Mike previously described we have available capital totaling about $686 million as of year-end which consists of cash and corporate credit held outside of our CLOs both of which are quite liquid. The size of our available capital reflected our desire to husband liquidity to address future debt maturities. The completion of the convertible note offering in January has given us increased flexibility to redeploy some of our available capital. Certain opportunities such as private equity will consist of us deploying capital without any incremental leverage. On the other hand, new CLO transactions would enable us to grow our portfolio with non-recourse leverage. As we deploy capital in new opportunities we will focus on meeting two primary criteria; First, the expected returns on deployment of new capital be accretive to shareholders as measured both by cash flow and book value per share gains. Second, the market opportunities there to execute transactions at terms we find attractive and unique but with the understanding generally that market prices reflect value. We will balance these opportunities with a strong desire to adequately compensate our shareholders with a current yield. I would like to close by thanking our investors who have been supportive during the challenging times we have had. I hope you share Mike and my enthusiasm for the future of KFN. Thank you again for joining us on this call. Now we would welcome your questions. Operator if you could please open the line?

(Operator Instructions) The first question comes from the line of Gabe Poggi – FBR Capital Markets & Co. Gabe Poggi – FBR Capital Markets & Co.: Do you have in front of you the fourth quarter net account accretion?

What are you looking for specifically? Gabe Poggi – FBR Capital Markets & Co.: Just the net. I guess you have the annual number. Just to net out specifically what the fourth quarter number was net of the first three quarters.

The fourth quarter amount was approximately $23 million. Gabe Poggi – FBR Capital Markets & Co.: The two other questions are more macro. Bill you mentioned you are hedging against inflation risk but that is 3-4 years down the line. What are your bigger thoughts on where we are in the economy and unemployment, housing numbers, how have you positioned the portfolio regarding what you are thinking right now and then how the market has kind of slowed down over the last 2 months or so in terms of new issuance, etc. What is your outlook for the next three quarters on that front?

We are very cautious. One of the reasons we have pulled a lot of high yield in the fourth quarter and bought more senior secured loans relative to the high yields we sold in the context of risk management NOI portfolio is concerns about the economy. Even though it is clearly a lot better than it was and the dislocation and illiquidity that was readily apparent in the market a year ago has been somewhat fixed, there is still some challenges. I think the reflection of our write down which is a non-cash charge in our mortgage portfolio of prime mortgages is evidence of our concern of what the next 5-6 years will reflect as the global economy needs to de-leverage. We think that will be quite a drag both on unemployment in the US and in Europe and ultimately that affects supply and demand and even though the savings rate declined today in the economy announcement we think it either has to go up substantially to deal with that de-leveraging or we have increased inflation for purposes of dealing with the leverage problem. So we are trying to position the portfolio both from a risk construction perspective to play both sides of that angle.

The next question comes from the line of John Hecht – JMP Securities. John Hecht – JMP Securities: You mentioned at some point you might if the economics improved enough of new issue CLOs you might entertain pursuing those for growth. What are the structural requirements to get you involved in terms of leveraging spreads?

There is a number of features. One is you have call ability of the structure particularly in the case where you are not issuing a CLO at the top of the credit cycle where spreads are the lowest because you don’t want to have an asset being a loan which is refinanceable even though you may build a credit portfolio of LIBOR plus 500 or 450 loans if your liabilities are locked and you can’t call the structure and you get refinanced out on the asset side you can become upside down on our returns pretty quickly. So one of the aspects is the cost of the liability and the ability to call those liabilities based upon things going well and credit spreads tightening. The second thing is in connection with any sort of CLO financing is insuring that spread, really the spread between what we can get on the assets as we deploy capital over a 1-18 month investment horizon relative to the liability costs, we feel comfortable relative to the risk. We are not there yet today even though a couple of deals have gotten done in the last couple of months. I can’t tell you when we will get there but it is something we have focused on, and model and look at very frequently. John Hecht – JMP Securities: You provide us your top 50 holdings. Can you talk about are there any kind of on a watch list where they might have an imminent maturity or you are seeing some performance issues that you need to focus on that may drive it into default? Can you reference general stability in that group?

When we look at the top 50 holdings, page 7 of the supplemental materials, we cleaned up a lot of this over the course of the last couple of quarters. So in terms of where we are from a point of concern it is less than we have been. Some of that has been healed by companies being able to extend maturities through amendments or refinance. We talked in the context of the prepared remarks in the earnings call about #14, Tribune, and where we stand in the context of that restructuring. We still believe in Tribune having some reasonable prospects. Going down the list, clearly our largest holding TXU which we hold predominately in the form of senior secured term loan is a business that is very focused on natural gas prices out a couple of years but it is still too early to say how that will turn out. I don’t really see anything on this list we are particularly concerned about. We talked about [inaudible], #42. We have actually exited that position at a recovery above par even though it was a defaulted investment and what we went through in terms of the concern and watch list on previous quarterly calls. Other businesses that are on watch list remain on the watch list but their operational improvements and trends are trending the right way in terms of how they have been operating the last couple of months or quarters. So our concern, which also was evidenced in our unallocated reserve growing substantially in the quarter is by fewer companies being on our watch list or those that are on the watch list our expected losses if any being less. John Hecht – JMP Securities: With the 2007-1 can you give a sense of how much cash is being trapped each month or how much senior securities become de-levered each month to get a sense for whatever point that does heal what kind of cash that might accrue to you guys?

2007-1 as we talked about interest rates the amount of cash flows we would expect to get off that deal would be highly dependent on where is LIBOR. Where LIBOR is today if all else being equal if that deal is cash flowing we expect it to generate I would say probably around $17 million a quarter or probably around $64-68 million annually. As far as how much historically is paid out of that deal, that deal started shutting down in late 2008 and beginning of 2009 it has amortized its senior bonds down by $200 million.

Including a bunch of mezz notes that KFN is majority holder of there is basically PIC interest of some of the mezz notes today that total about $57 million that will get paid off before the subordinated notes actually cash flow but KFN will get its share of that $67 million of PIC interest. John Hecht – JMP Securities: 2007-A now cash flow again. Can you give us a sense of what that is on a quarterly basis?

Just to be clear for everyone 2007-A and 2007-1 are deals where we hold 63% of the sub-notes as compared to our first three CLO’s where we own 100%. So 2007-A it is a $1.5 billion deal. Our 2/3 of it is $1 billion. Current LIBOR we think the run rate of that deal cash flow wise to us is probably about $20-22 million a year range.

What you will see in future reporting periods because we consolidate both of those CLOs and there is no minority interest accounting is you will see as those start cash flowing to subordinating note holders and pick up an interest expense which really represents the non-consolidated portion of any cash flows to the subordinated note holders. So if you see a pickup in interest expense it is really the non-KFN owned cash leaving the system.

The next question comes from the line of Lee Cooperman – Omega Advisors. Lee Cooperman – Omega Advisors: Let me ask a few questions where I make the assumptions. Assumption and question number one, let’s assume everything is cash flowing before the end of the year. I am not worried about any one quarter’s results. I am more interested in run rate. The thing for me if all the five CLOs are cash flowing and LIBOR stays around here we would be generating cash flow to the entity of somewhere between $1.50 to $2.00 per share. Again, I am making my assumption but is it a fair assumption you will be generating something approaching $2 a share in cash flow if all five CLOs are cash flowing?

I think that number again based on current rates sounds a little high for us. Just to use 2009 as a proxy if all deals were cash flowing for the entire year we would have received cash flows and expenses of say $185 million. Going forward we are not putting out specifically a forecast around that really because as we rebalance the portfolio around Bill’s comments deploying capital as well as rates there are a lot of variables there that will be beneficial from a cash flow run rate.

We are thinking of spread because as we are getting pay downs and LIBOR plus 300 loans we are redeploying them into LIBOR plus 400-500 with a LIBOR floor of 2 or something like that. So you pick up that spread. Lee Cooperman – Omega Advisors: So it could be a couple of hundred million dollars let’s say?

With everything else being the same, LIBOR 25 basis points and no incremental return on reinvested investments yes. Lee Cooperman – Omega Advisors: Number two, I heard you clearly on the dividend policy and you review quarterly, etc. Your predecessors with the collaboration of the board was paying a $2 dividend when earnings were not materially different than the run rate of earnings would be at the end of the year. Forgetting about the specific dividend and I don’t even know if I need the dividend, I am a high taxpayer like you, but basically the ability to pay dividends will be way in excess of we talk about 40% increase with $0.07 this is a company that generates sufficient cash flow that they can retain earnings and still pay $1 dividend if the board so chose. Am I reading anything wrong? I understand you want to balance the interest with…

That is exactly right. It is a question of we think about capital allocation and generating returns on equity in excess of 12% of any investment of capital allocation of at least 12% on any investment we do and clearly we can increase our dividend policy if we are finding less interesting investment opportunities we can generate with a risk cushion those type of investments and dividends could and would go up under your scenario by the end of the year. It is just a question of how much they go up versus retaining the book value and we look at book value growth and cash flow in the context of distribution at the board level kind of in concert with each other. Lee Cooperman – Omega Advisors: I want everybody to understand. I don’t think they understand. I want to make sure with my limited IQ I am looking at it right. We have an entity that could earn $1.50 to $2.00 could pay $1 dividend trading at less than $7. That is the way I look at it. Third, the $686 million of capital available at year-end to be reinvested what is roughly that capital earning now versus what your targeted return would be? What is that $686 million throwing off to the corporation?

I will take the first part of that and let Bill can touch upon what our target would be. That $686 million per Bill’s comment was using redepositing liquidity. We have since 2008 and during 2009 wanting to make sure we have sufficient dry powder to be able to deal with the debt maturities prior to us [inaudible] off. So the bulk of that was leveraged loans that have of that $686 million, $100 million is cash and you are left with $586 million. That $586 million is broken out in the 10-K we filed.

The bulk of that is loans which probably had an all in coupon of 6% and the bonds probably probably had an all in around 10%. Then there is discount accretion on top of that.

From a cash perspective again there was a price to us holding that much liquidity. That kind of goes back to our thesis of being able to deploy that to new opportunities going forward.

If you think about how we allocate that capital now today it is principally a number of things we could do. We could basically do an on balance sheet warehousing to be ready for a new CLO when liability spreads and structures get to our target levels. Two, we can deploy that capital into opportunities on an un-leveraged basis to generate 12-15% rates of return ideally with a cash component where we get some positive skew in terms of upside and so we don’t have any symmetric return profiles solely with respect to those investments since we have enough of that elsewhere and we have gone through with the board and detailed [the] plan of to allocate that capital. Lee Cooperman – Omega Advisors: An observation I will make and then my last question. I have others but I will go offline. Obviously with your dividend policy you could create a lot more equity for the firm by forcing the conversion of the new converts. Given our level of earnings and the prospective dividend you could afford to pay the 818 [weekly stock] well above 818 to force conversion would make it more desirable to convert or not. I know you can understand that. You can discuss everything you just discussed this afternoon that one you can figure out without any assistance. The last thing I think you addressed but I want to kind of understand the KKR/KFN relationship. A lot of the things you are doing benefit KKR as well as benefiting KFN. You probably haven’t gone down this path but are we, KFN, and even KKR better off with KFN being part of KKR and eliminating any potential conflict of having money manager as one and that comes as a shareholder in both companies though I have to admit I own a lot more KFN than I own KKR. Have you thought about that?

I know you raised this question on the KKR earnings call last week. If you think about it KFN is really designed to be a public face of the investment capabilities of all of KKR. KKR is the manager of a bunch of [pools] of capital one of which is KFN and so it has the risks and opportunities inherent with being a manager. KFN is really representative hopefully of the ideas through our subsidiaries where we deploy capital or where we have a competitive advantage as a firm with an asset allocation framework we drive based on the collective views of people at KKR as opposed to where third parties derive that value which is in the context of the manager which is where we raise capital outside of KFN. I hope you think of KFN as a pool of capital and KKR serves as the manager of the spring to [bare] where we see the greatest opportunity to maximize rate of return and with prudent levels of risk and proper risk management and allocating that capital in a framework we believe protects in a variety of economic times both good and bad. Lee Cooperman – Omega Advisors: In this environment on that question I would assume this collection of assets would be able to earn 20% on your equity. Is that a fair assumption?

Yeah we think it should be able to do that. Lee Cooperman – Omega Advisors: Backing into that it would be like $1.50 type of earning capacity.

The next question comes from the line of Robert Schwartzberg – Compass Point. Robert Schwartzberg – Compass Point: I have three questions all related to earnings. It looks like your related party management compensation for the third quarter was $14.6 million and it looks like it went to $8.2 million for the December quarter. I was wondering is that a sustainable drop? Is that the run rate we should be looking at on a guidance basis?

There are really two differences between related party management comp between the third and the fourth quarter. The first as we talked about earlier in the year in some detail when the CLOs were out of compliance with their OC tests. As a mechanism to increase liquidity for KFN we activated at KKR the management fee of those CLOs in order to effectively re[bate] those management fees as a reduction in G&A to KFN. So the trend you will see is a reduction in related party management comp but an increase in G&A. Going forward I expect that to continue. The other difference is in the third quarter if you recall we earned an incentive fee of about $4.5 million and we did not receive that for the fourth quarter. Robert Schwartzberg – Compass Point: You are doing a great job in getting these CLOs back into compliance. Is the related party comp of $8.2 million is that a good going forward number?

One more time?

The related party comp of $8.2 million is that a base number going forward?

The way I think about it is the monthly run rate of management fees is we will say $1.3 million. So you are running around $4 million a quarter of management fees. You are running probably another $1.25 million quarterly on CLO management fees and that gets you off to I would say…

Most of which other than 2005-1 gets rebated back and from the cash it doesn’t show up as GAAP to the company in terms of a means of extracting cash out of 2007-1 until we get it in compliance.

So now you are at about $5.5 million and you have some noise in there from stock brands which would be mark to market. So that is non-cash so I kind of back that out. Then any difference over and above that going forward is for the incentive fees. In the MD&A if you take a look we do break out for you in the discussion and in the table the components of related party management comp. You may want to look at that as a good guide for the components of this thinking about going forward. Robert Schwartzberg – Compass Point: A quick glance at the 10-K it looks like your non-accruing loans came down by a staggering amount from $730 million to $440 million. If I am right on that which I think I am, is that loan returning to performing status or is those sales of nonperforming loans? What I am really getting at is when did that happen during the quarter and what does that mean in terms of the pickup of interest revenue going forward in say the first quarter of this year or during the year?

It is a mix. There were some loans we exited. A lot of it relates to we talked about taking you through the big defaults. Some of our positions have restructured so they have restructured on new pieces of paper. They are no longer on default and we don’t keep them on accrual because we are not getting interest payments. For the most part of the interesting piece about the types of holdings we have is the majority of those on non-accrual actually are still paying cash coupon but frankly because they are currently on default status we treat them as non-accrual and go to a cash basis until they are clearly out of bankruptcy proceedings our out of default. The other thing we talked about default rates the first half of 2009 versus 2008 we actually saw kind of really that spike of defaults take place and that has abated considerably in the second half of 2009. So as you see that pipeline of deals kind of rolling off default there hasn’t been much new happening to replace it. Robert Schwartzberg – Compass Point: But in terms of timing for most of the resolutions exit weighted towards the ends of the quarter such that fourth quarter didn’t really get that benefit and we might see that benefit in the first quarter?

There is some benefit. You can’t assume there is 100 cents on the dollar go from non-cash production to cash production. That would be an inaccurate assumption. Someone asked us if we did sell and we are not cash producing that we will now be able to deploy the cash producing assets. Robert Schwartzberg – Compass Point: But even if they were throwing off cash but non-accrual they wouldn’t have shown up in interest income on a GAAP basis right? Michael McFerran: They would have once we got the cash. It depends asset by asset if you are worried about principle recoveries you don’t book it to income. If you are worried frankly just about collecting the cash flow stream you pay a principal recovery when you get the cash payment you book it as income on a cash basis. So to Bill’s point, net/net the decline in that balance would easily have some incremental benefit to interest income but I don’t think it is going to drastically change the numbers.

On an $8 billion portfolio it is not going to matter that much even though it will help. Robert Schwartzberg – Compass Point: If you could review for me again the numbers for the operating income the difference between $0.41 and the other $0.35 you mentioned and how that compares?

What we talked about was most of our portfolio on an average basis our holdings are carried at a discount to par. So over time you accrete that discount through that investment income to par and then when an asset prepays which has been quite frequent over the past couple of quarters with the increase in high yield activity you will see the acceleration of that discount the day the asset pays off at par. So for the fourth quarter we actually had $10 million of interest income come from that prepayment activity which represented again the discount to par we are carrying those positions at.

We are carrying, as Mike disclosed on the call, our portfolio at $0.89 on the $1 so there is 11 points effectively of discounting. If our whole portfolio got refinanced tomorrow we would have in interest income a huge pickup of 11% of our overall portfolio. We wouldn’t call that operating because it is an acceleration of that discount so we are backing that off of from the $0.41 to the $0.35 for an apples-to-apples comparison quarter-to-quarter for future disclosure.

It is sort of our best attempt to give you some sort of current run rate of the business. Robert Schwartzberg – Compass Point: What were the numbers in the third quarter?

I think we said on the call it was about $3 million for that same payoff amount. $2.7 million.

The next question comes from the line of John Feldman – [Vance Hall Capital]. John Feldman – [Vance Hall Capital]: My question goes to the growth opportunity you had talked about earlier on the call. Could you just further articulate your thoughts on that growth opportunity in terms of investment opportunities outside of the existing CLOs and how you are thinking about funding those growth opportunities whether it be by equity or debt outside of the CLO structure? How large do you think that opportunity could be?

It depends. We are focused on the overall portfolio construction and capital allocation. So if you kind of think of the capital versus assets which is how we think about it there are a number of ways we can finance any of these deployments of capital. If we are making a selective investment in a private equity investment there is leverage asset, private equity secured by the company’s assets we are investing in so we are not going to leverage it further at KFN. Similarly if we were deploying capital buying conventional oil and gas assets from a major that wants to devote its focus on shale plays we would have if there was any leverage it would be at the asset side secured against the research and the ground. It wouldn’t be financed on the balance sheet at KFN. So we are looking at it from a KFN equity holder’s rate of return profile and how we think about that capital allocation across the various opportunities that we have to deploy capital. I hope that answers your question. John Feldman – [Vance Hall Capital]: It does in part. I guess the second part of that would be what the size of the opportunity is, how we should think about that, whether these distressed and controlled private equity opportunities if you see them as incremental or more significant relative to the CLOs that you are investing in?

On the special situation investments that we are seeing in distressed and more proprietary debt oriented investments that have kind of rates of return in the high teens to mid 20’s, we are very selective of which one of those investments we do. So we may look at 20 investments and maybe do one but we also think the number and volume of investment opportunities and the pricing of those opportunities will continue to increase over the next 24 months if our view of the macroeconomic environment and some of the financing challenges that the market will face over that time period comes to pass. So we are patient in terms of capital allocation there. Given we have the super majority of our capital embedded right now in the notes we hold and the context of our CLO financing structures it is not something that is going to be a revolutionary change in the context of KFN’s capital allocation but it is something we think about over time of how to best optimize rates of return relative to what the CLO market is today in terms of risk adjusted return opportunities. John Feldman – [Vance Hall Capital]: In terms of the traditional bank loan investing opportunities if you would consider thinking about investing outside of the CLO structure using more traditional TRS or other structure to get leverage?

We are not big fans of market value sources of financing. That is one of the things that got KFN in trouble and a number of finance companies into trouble with the end of this downturn was having asset duration that far exceeded your liability duration. So while we could do that it would be highly, highly selective and not something that would have any sort of material aspect in the context of our financing arrangements. We believe that our credit facility or any replacement thereof is predominately the only market based financing we will really have on a material perspective in our capital structure. John Feldman – [Vance Hall Capital]: How are you thinking about or are you thinking about the opportunity to acquire other CLO managers and could that be accretive acquisition for you?

Keep in mind we use CLOs in so much as KFN gets the benefit of that long-term financing as a subordinate note holder. Buying another CLO manager from KFN’s perspective doesn’t necessarily put more financing in KFN’s hands. It puts it into a management business. So it doesn’t necessarily give us that captive leverage that we hold so precious.

If we could buy the subordinated notes of the CLO and the management contract at the same time that would be interesting because then we could use the financing as a funding mechanism for assets we source through one of our subsidiaries. If we pay the right price so we are getting a rate of return similar to what we discussed which is kind of a 15-20% rate of return that could be interesting. But also understand those opportunities for the most part are priced more at least in the senior fee perspective at kind of an 8% rate of return so it wouldn’t meet our threshold. John Feldman – [Vance Hall Capital]: You had given in the past the weighted average market value of the loan and bond portfolio separately. I think you just gave that at 87% for Q4. Can you give that on both the loan book and the bond book?

It is broken out in detail for you in the 10-K. In there are schedules giving you the par of those respective portfolios as well as the market value. If you give me just a second I can try and give you the exact number. I apologize, I don’t have that in front of me and I don’t have the K in front of me but if you turn to the MD&A and the 10-K it is there for you.

The next question comes from the line of Brian McMahon – Thornburg Investment. Brian McMahon – Thornburg Investment: Did you buy the senior convertible notes at a discount?

We have done a few trades. The weighted average we purchased those at is at a discount. Brian McMahon – Thornburg Investment: Collectively?

Collectively. Brian McMahon – Thornburg Investment: What are the prospects for you to renew the revolver rather than pay it down? I think specifically would markets for the spread be better today and would the terms be better especially removing the dividend restriction?

That is a good question. Clearly and you have probably seen this in the case of some similarly situated finance companies who have different restrictions like BDCs the revolver market has been there. We certainly are starting to think the revolver market may be back in the context of a business model like us. So it is something we are constantly focused on. Brian McMahon – Thornburg Investment: Would we expect you to pay that down more?

We look at the opportunity cost of that capital between paying down our revolver and paying a dividend or making an investment with a 12-15% rate of return it is not the best use of cash because we are guessing our shareholders have a hurdle rate greater than LIBOR plus 400. Brian McMahon – Thornburg Investment: But the dividend restriction is kind of material and important?

The dividend restriction of 50% of estimated taxable income was put in place when that revolver was put in place about a year ago.

The next question comes from the line of Lee Cooperman – Omega Advisors. Lee Cooperman – Omega Advisors: As I listened to the call which has been quite enlightening one of the things, this is a suggestion not a question, that would be helpful if you could have told your story I think the original investor here was an income oriented investor and you are now migrating into a growth and income vehicle because your dividend paying capacity is going to be dramatically in excess of the dividend you are likely to pay because of all these creative opportunities you are seeing to invest your money productively. I think if we could kind of educate the growth investor or the total return investor to your business plan that would be helpful to the valuation and the better valuation we get the lower your cost of capital and the more wonderful things you could do. Just as a suggestion, not a question.

Excellent point Lee.

At this time we have no further questions. I will now turn the call back over to Bill Sonneborn for any additional or closing remarks.

Thank you all for being with us over the course of the last year and listening to all the information we went through today. We look forward to getting back to work and driving shareholder value. Have a good evening.

This does conclude today’s conference. Thank you for your participation.