Laurie Poggi – Investor Relations Bill Sonneborn – Chief Executive Officer Michael McFerran – Chief Operating Officer Jeffrey Van Horn – Chief Financial Officer

Michael Sarcone – Sandler O'Neill Gabe Poggi – FBR John Hecht – JMP Securities Leon Cooperman – Omega Advisors Incorporated Edward Ripley – CP Harlot Investments Robert Schwartzberg – Compass Point Sandro Naf – Capital Four Lee Cooperman – Omega Advisors Inc

Please standby, we are about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the KKR Financial Holdings Second Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following today’s management's prepared remarks, the conference will begin with -- today's call is being recorded. I would now like to turn the conference over to Laurie Poggi. Laurie, please go ahead.

Thank you, Melanie, and good afternoon, everyone. Welcome to our second quarter 2010 conference call. During which Bill Sonneborn, our Chief Executive Officer; and Michael McFerran, our Chief Operating Officer will review the results for the quarter and answer your questions. Today, we issued our financial results release for the quarter ended June 30th, and filed our second quarter Form 10-Q with the Securities and Exchange Commission. These documents together with a supplemental information packet are available in the Investor Relations section of our website at www.kkr.com. As required, we 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 that we have made with the Securities and Exchange Commission. These filings are available on the SEC website at www.sec.gov. Our actual results may vary materially from those described in these forward-looking statements. Today’s call is being webcast live on our website. The audio webcast will be archived and a telephonic replay will be available beginning later today through August 18th. And with that, I'll turn the call over to Bill.

Thank you, Laurie. And thank you, everyone, who has joined us for the call today. We appreciate your time and your interest in KFN. I’ll start today’s call by reviewing the highlights of the quarter. In the choppy and negative quarter in the financial market we were able to generate earnings per share of $0.51 for the quarter. Additionally, our Board of Directors today declared a cash distribution of $0.12 per share for the quarter. This represents a 20% increase in our distribution over the first quarter and our third consecutive quarter-over-quarter increase in distributions per share. Our earnings per share of $0.51 for the second quarter compares to $0.82 for the first quarter of this year and $0.14 for the second quarter of 2009. You may recall that in the first quarter we recorded a $39 million gain or $0.25 per share on the extinguishment of debt in connection with our purchase of mezzanine and subordinated notes issued by CLO 2007-1 and 2007-A. Operating income, a non-GAAP financial measure we use calculated as net investment income excluding discount accretion income from early prepayments plus non-investment expenses and excluding the impact of share based compensation and incentive fees was $0.36 for the quarter as compared to $0.39 for the first quarter of 2010 and $0.22 for the second quarter of 2009. Pro forma for previously capitalized debt issuance costs they were written-off during the quarter as a result of our new revolver being put into place. Operating income per share equaled $0.40 for the quarter versus $0.39 in the previous or the first quarter. In addition, the 2009 comparative amount of $0.22 per share included a $12.8 million charge for provision for loan losses which reduced operating income for that period by $0.08 per share. Accordingly, when adjusted for these one items our operating income as our performance 33% year-over-year, driven by higher net interest margin and earnings on retain capital. Book value per share for the quarter ended June 30th was $8.08 per share, a decline from $8.31 at the end of the first quarter. This decline was due primarily to market value declines in high yield bonds, which are all reflected in accumulated other comprehensive income or OCI on the balance sheet. As well as the effects of the treasury market rally during the quarter and the interest swaps primarily contain within our CLOs in which we hedge our bond positions back to floating rate. We continue to focus on the same three areas we’ve discussed last quarter. One, growing cash flow per share, two, book value per share growth, and three, growing distributions per share. While periods of volatility and high yield pricing can create quarter-over-quarter swings in book value, we remain cautiously optimistic that we will be able to achieve all three objectives this year. For example much of the impact of the declining high yield prices in the second quarter on our book value per share as reversed itself already through the month of July. During the quarter we replaced our existing 150 million credit facility due to mature in November 2011 with a new 250 million revolving credit facility that matures in May 2014. This new credit facility provides us with increase flexibility to pursue opportunities and managed cash flows. In addition, that reduces our overall costs of capital. We executed this facility in conjunction with the planned equity offering, which is a topic, I do want to spend a few minutes discussing with all of you. On May 3rd we announced an offering of 25 million common shares and on May 5th in the (inaudible) market we announced that we are withdrawing this offering. We undertook this offering to raise a modest amount of capital for new investment opportunities as we continue to reposition our capital allocation to areas of the markets where see the greatest opportunities. Although, fully subscribed at the time we pulled it, the applied costs of capital at the price of the market – price of KFN at that time was simply too high to proceed. As outlined for you on our earnings call, we remain focus on avoiding earnings and book dilution to our existing shareholders. It’s far better from our perspective to retain discipline and reinvest to substantial portion of our earnings as we have done this quarter. The obvious question in many of your minds is whether or not we planned to announced another secondary equity offering in the near future. Appealing a new credit facility with a four year maturity is significantly our flexibility to deploy capital. Accordingly we are confident that we have sufficient capital to allocate to new opportunities for the immediate future without being constraint by not having incremental equity. Consistent with past remarks in these calls we will only raise equity if we think it is accretive to our all of our shareholders. The next topic I want to touch on is the status of our CLOs, which Mike take you through in a lot more detail during his remarks. During a quarter in which credit markets were volatile, spreads increased, loan and bond prices declined, not only did our CLOs remain in compliance with the respected over-collateralization test, but in aggregate we were able to increase over-collateralization margins. In fact, to the point where all of our CLOs currently have OC ratios in excess where they were when deals were originally issued. Page 20 of our supplemental materials graphically displays this. Our continued increase in this quarter’s distribution per share is reflective of our confidence in the balance spend with management approach we are using with respect to a standing major market or position downgraded default chalk and still producing cash distributions from all of these subsidiaries. Our overall portfolio continues to perform as expected. The EBITDA and earnings of our portfolio companies have generally met or exceeded our estimates thus far this year. We have had no defaults of any holdings during 2010 and two of our modest size holdings that had been on our watch list paid off at par during the quarter. The next point I want to make with respect to our portfolio is our exposure to foreign currency price moment and sovereign debt. We do not have any sovereign debt holdings and we do not anticipate deploying capital to direct foreign debt in the future. We do have minor exposure to holdings that are denominated in foreign currencies. As of June 30th, we had a $150 million market value of holdings denominated in euro and $18 million market value of holdings denominated in British pound growth of any effective hedge. Before handing this over to Mike let me offer a thought on the economy, credit market and the impact these have on KKR financials opportunities. Needless to say, the second quarter was an interesting one, not only was the quarter volatile but the volatility itself was volatile. But the best reaching 2009 level and having five distinct peaks. In fact, on a few occasions during the second quarter it felt as if we were back in late 2008 or early 2009, experiencing the market vertical that we hoped never feel again. The results was for challenging few months for both equity and leverage credit markets as investors and dealers began focus on the impact of European sovereign debt risk, discount the strength of the global economic recovery and appreciate the ongoing fiscal and monetary policy uncertainties around the world. The S&P 500 finished the quarter down almost 12% and high yield spreads widening to both U.S and Europe by 115 basis points and 155 basis points respectively. The leveraged loan market U.S spreads widen even further by nearly 160 basis points, security dealers and other institutional market participants reduce their risk exposures throughout the quarter, which had a meaningfully negative impact on market pricing, trading volume and liquidity. Stepping back from the amplitude of that volatility however, we observe that the recent down draft has created a market where risk return in both below investment grade credit and private equity are currently quite attractive. At quarter end high yield spreads were approximately 110 basis points wider than the 20 year average, in the market where there are more senior secured bonds in this calculation than any other time. And leveraged loan prices were 280 basis points wider. Also, we believe the [faraday] market of the first quarter has turn to buyers market, we like the compensation we are receiving for risk. During the second quarter we purchased over 850 million of assets including deploying capital of the several debt and equity transactions that presents attractive risk return portfolio. The private transactions we deployed capital to included debt and equity security issued by Harden Healthcare, [Ambaya] and the Northeast Retailer. All unique proprietary opportunity sourced by our manager, as well as, allocating capital to private equity opportunities including Hilcorp Resources, an unconventional energy play in the Eagle Ford Shale and Pets at Home, the dominant pet specialty retailer in the U.K. As far as our CLOs we continue to recycle capital to higher yielding assets with the benefit of locked in low cost funding. The effective net interest spread we earn from holding at our CLOs increased to 4.22% during the second quarter, as compared to 3.93% during the first quarter and 3.54% for the second quarter of 2009. That’s a 7% increase in net interest margin sequentially quarter-over-quarter and nearly 20% increase in spread year-over-year. In addition, now about 18% of our CLO loan holdings have LIBOR 4 with the weighted average 4 of just over 2% further increasing the value of our CLO liabilities. Whether our CLOs are half away capital outside of our CLOs we are deploying capital behind a few core belief. First, a V shape economic recovery is a pie tree and the global debt hangover is far secured. Secondly, we remain concern and focus on the 2.2 trillion of debt maturities coming in the next seven years, and as a partner I like to say how the pantheon will be able to digest that pig. And finally, commodity markets will begin to show signs of emerging market exportation of inflation long before the interest curve well, and we want to be position to benefit from that outcome and our ability to grow earnings and distributions. With that, I will hand this over to Mike.

Thanks Bill, and good afternoon, everyone. Net income for the quarter was $0.51 per share as compared to $0.82 for the first quarter of this year. As Bill mentioned, first results were positively impacted by a $0.25 per share gain on the extinguishment of debt we recorded in connection with the purchase of mezzanine, a subordinated note issued by CLO 2007-1 and 2001-A… Operating income was $0.36 for the quarter when adjusted exclude a one-time charge of $0.04 for the write-off of debt issuance, related to our prior credit facility, our adjusted operating income was $0.40 per share. As Bill, previously highlighted, as compares to operating income of $0.22 per share the second quarter of 2009 and $0.30 per share for the quarter when excluding the provision for its loan losses we recorded. Our earnings for the quarter, included realize and unrealized gains from investments totaling $28.9 million. The same includes $58 million of realized gains in such a loan and bond position and $5 million of mark-to-market gain from certain private equity positions, one in particular was a position that went public during the quarter. These gains were offset by lower cost to market unrealized losses totaling $33.8 million and such a loan position held for sale and our transfer is held for sale during the quarter. Book value per share declined from $8.31 as of March 31st, $8.8 as of June 30th. The decline was primarily due to a decrease in other comprehensive income a component of shareholder equity of approximately $0.60 per share is attributable the declines in the market value of certain bond holdings and interest rates swaps, mezz cash flow hedge that are primary held within our CLO. I do want to highlight that since quarter end, certain of our high yield positions most notably NXP have roll back to level that approximate where they were at the end of March. Next I want to provide you with the detail update on our CLO. During the quarter, we increased the over-collateralization margin of our CLO and as of the end of June all of our CLO had OC levels extremely low, at inception of the transaction. I know this seems counter intuitive considering better OC levels will increase during the period when asset prices decline, let me spent a minute on that. As described in our 10-Q filing, OC is a critical test, non-compliance to minimum OC requirements for each deal results to the cash flow that we would otherwise receive from CLO. We need to amortize the senior bond held by third party. This was the primary source of trends we experienced in late 2008 the majority of 2009. Both assets from the CLO are not impacted by market value movement and asset prices, and the exposure of asset price movement is limited to CCC rated asset in excess of our threshold amount pre-CLO and the defaulter asset which are carried at the lower of our ready agency state recovery rate or market value. During the quarter OC increased due to several factors, first, we sold certain of our CCC rated bond holdings early in the quarter at prices in the mid to high 90s, which provided the benefit of reducing the CCC rated assets held on CLO and as result reduce the dollar amount of assets of (inaudible) to market value moment. In addition, we exit certain equity positions in our CLO which for purposes of the OC test received zero value prior to sale. Finally, certain of our largely defaulter position either paid off or resold during the quarter at attractive prices. During the quarter, we received over $35 million of net cash flows from our CLO, lastly quarter we specific that two of our CLO 2007-1 and 2007-A, which represent 8 billion – excuse me, which represent $5 billion of the $8 billion. Total assets we hold in CLO were currently paying down fixed interest on their mezzanine notes that occur during 2009 when this CLO write a compliance with the OC test. As of today, the accrued amount in the mezzanine note issued by CLO 2007-A have been paid off and we expect to remain the accrued amount on CLO 2007-1 mezzanine notes to be paid off by year-end. That said, we are the majority holder of the CLO 2007-1 mezzanine notes that still picked interest we mainly paid off and as such going forward we will receive in fact all of our share of the cash flows from this deal. Next a few comments on our balance sheet and liquidity as of quarter end, our corporate debt portfolio had an estimated fair value of 89% of par and carrying value 91% par. On the liability side, we have reduced our outstanding debt by paying off our prior credit facility, which have a $150 million outstanding as of March 31st, as Bill highlighted for you, we replace this facility in May, the $250 million multi-currency revolving credit facility that matures in 2014. The new structure was attractive to us in several ways. First, our new credit facility is not only a $100 million large than the prior one, it bears interest of lower cost funding, being LIBOR plus 325 basis points, as compare to LIBOR plus 400 basis points of our prior deal. This transaction can be upside to $600 million through additional commitments. The facility also provides more flexibility around payment of dividends as it increases the cap on the percentage of estimated taxable income we can pay from 50% to 65%. As of quarter end, we had approximately $50 outstanding, which we had drawn in euros under the credit. However this – we reduce this amount to zero post quarter end and currently have the full 250 million of borrowing capacity available. With respect to cash flow, as I had already stated, our CLO’s are all cash generative to us. Based on our current holdings as of June 30th and current LIBOR rates, we have operating cash flow run rate of approximately $1 per share annually as of June 30th. Let me put some pressure on this number for you. For quarter end we reported cash of $142 million, corporate debt holding total balance sheet outside of our CLO with an estimated fair value of $533. Subsequent quarter end we pay down via same borrowings in our credit facility by just over $50 million. So on a pro forma basis we have cash and corporate debt holdings outside of our CLOs totaling approximately $625 million plus public and private equity and mortgage assets with estimated fair value totaling additional $181 million or in aggregate $806 million in fair value of assets and cash outside this CLOs. Of the $806 million the cashable portion of $90 million, effectively earning zero until deploy the new opportunities, which meet our criteria and the private equity portion will generate returns and increase as realized. Next, of the $533 million of balance sheet corporate debt holding, approximately $150 million consist of high qualities senior secured loans, as we have warehouse in our balance sheet for purposes our key restructured financing transactions. Today the yield maturity of these assets is 6.5%. The remaining $383 million of corporate debt assets on our balance sheet, which consist of our distressed and private mezzanine holdings are not marked for future transaction have a weighted average yield to maturity of approximately 14% as of year end and that doesn’t include any equity upside we have from warrants in some of those transactions. In summary, we have a lot of earnings power from our existing liquidity that we have on balance sheet and combined with our $250 million of availability on credit facility. In addition, our earnings power could be positively impacted from other items. First, our CLOs, where we continue to recycle capital, higher yielding assets as evidence by the increase in net interest spread of our CLOs was 3.93% for the first quarter to 4.22% for the second quarter. Second, as we’ve described in the past, the fully year rate nature of our assets and liabilities, these are small rates by approximately $1.6 billion. Take into account LIBOR 4 is our portfolio today, an increase of LIBOR 3% will increase our run rate by just over $0.13 per year, an increase of 5% will increase our run rate by just over $0.33 per year. Last topic I want to cover for you is leverage. As of June 30th, pro forma for the pay down outstanding borrowings on our credit facility, we have $628 million of recourse debt outstanding. About 40% of this is the 30year trust preferred securities that don’t start maturing until 2036. Hence we have $353 million of debt maturing before 2036, consistent of convertible notes with about half maturing in 2012, another half maturing in 2017. Take in to account all of our hot core debt we have just under half churn of leverage. Excluding our trust preferred securities, we have just over one churn of leverage on our balance sheet. Our holding company leverage today is lowest it has ever been since inception of KFN, yet we delivered an operating earnings, excuse me, from an earnings perspective we delivered an ROE of approximately 18% for the quarter, which is higher than historical level. In summary, we are generating attractive returns to our shareholders and less risk as measured by leverage. Our liquidity access to capital and low leverage as our balance sheet well positioned to support growth as we continue to execute on our business strategy. With that, I again, thank you for joining our call today, and Bill and I look forward to answering any questions you may have. Operator?

Thank you. (Operator Instructions) And we’ll take our first question from Michael Sarcone with Sandler O'Neill. Michael Sarcone – Sandler O'Neill: Hi, guys.

Hi Michael. How are you? Michael Sarcone – Sandler O'Neill: Good. Thanks. How are you?

Good. Michael Sarcone – Sandler O'Neill: Do think, walk us through the previously capitalized interest expense again related to your prior credit facility?

The dollar amount? Michael Sarcone – Sandler O'Neill: Yeah.

Yeah. It was $6.5 million that we wrote off from it last or $0.04 per share. Michael Sarcone – Sandler O'Neill: Okay. And then can you give us euro or pound exposure net of the hedges?

The hedge at the end of the quarter was $50 million drawn in euro under our credit facility offset by the $150 million of the asset exposure so it was net long $100 million of euros and about $18 million of pound sterling. Michael Sarcone – Sandler O'Neill: All right. Thanks guys.

And our next question comes from Gabe Poggi with FBR. Gabe Poggi – FBR: Hey. Good afternoon, guys.

Hi, Gabe.

Hi, Gabe. Gabe Poggi – FBR: A few questions here. What -- from an opportunity standpoint going forward, I assume that the boom in the issuance in July and August helps keep the CLO machine humming, Bill, Mike, is there anything specifically or any areas you’re focusing on maybe outside of the CLOs kind of in the Harden Ambaya avenues that you guys are looking at going forward. Can you think you can talk about there? And then, Mike, specifically, can you, I didn’t catch up, you are going right fast and you talked about dollar operating cash flow run rate was at annualized?

Yes. It was. Gabe Poggi – FBR: Okay.

Yeah. Gabe Poggi – FBR: Got it. That’s all guys. Those questions.

Just in terms about our opportunities, Gabe, the answer to your question, of course, well, we have talked about during the first quarter earnings and then, now continues in terms of our ability outside the CLOs and in particular in the context of private equity transactions starting to occur particularly third-party, sponsors both in U.S. and Europe for our ability to deploy capital and some interesting opportunities that generate kind of whole rate returns outside of our CLOs, that are equity like which we’ve talked about, which is targeting kind of greater than 14% to 15% expected returns in an unleveraged passion outside of our unsecuritization vehicle. Gabe Poggi – FBR: Okay. Thank you. Good quarter guys.

Thanks Gabe.

Thanks Gabe.

We’ll take our next question from John Hecht with JMP Securities. John Hecht – JMP Securities: Afternoon guys. Thanks for taking my questions.

Hi John. John Hecht – JMP Securities: Hi. How are you?

Good. John Hecht – JMP Securities: So we can quantify the potential recovery in high yield market since the quarter end what that might mean to book values using at your statement. Can you tell us my agency recovery on some of the swaps as well and how to think about those?

You mean the swaps really try to what their interest rate curve looks like and if you kind of look at it from a duration perspective of roughly 7 to 10 years. If you see any increase in rates from where they were 73% at the end of the quarter, you will see a reverse of GAAP affecting the swap. John Hecht – JMP Securities: Okay. That’s a good figure to look at. Your credit profile improved lot during the quarter, your non-accruals down lot from this -- last quarter you default is nearly zero now. I wonder if you can comment on -- comment on what were the biggest holdings that may be flowed out of those categories. And given the strong credit performance in the pipeline, is there any chance for you guys to recapture some of your reserve at this point back in the book value?

I mean their reserve is just shy of 3% of our loan held from investment last year and to your second question, first, we do a bottoms-up analysis as well as the top down and certainly, for a bottoms-up perspective, we’re getting much more comfortable with the cost of risk effectively on our balance sheet. That being said, we’re also focused from our prudency perspective on having from a top down perspective of reasonable reserve for unforeseen issues that may pop up, down the road. So while there is always a chance that reserves could get reversed particularly in discussions with how GAAP works. It’s not management objective to push that.

Sorry, John. As far as your question on what change non-accruals, a couple of things. We licensed our holdings after entering the quarter at price points that we light. We also reduced our exposure to [Lime] and Dell, similar situation, both of which had been in default previously. And we had third position in (inaudible) Fire but actually paid of at part during the quarter.

And one way to think about that John is if you’re looking at our supplemental material that are our largest holdings and you compare that this quarter versus last quarter, you will see some of the more high risk positions aren’t any longer on that list. That’s because we took advantage of the strong market at the end of the first quarter into early April to dispose of a number of higher risk positions at attractive prices which both had the effective reducing kind of the risk profile, also helped their CLOs in terms of over OC compliance test and just from our prudency perspective taking advantage of the strengths of the market at that point in time. John Hecht – JMP Securities: Great. And final question, you talked about $35 million in cash flow from the quarter. I wondered how much of the quarter was 07-A following the equity fully and then how much in the quarter were you getting, you sum the components of the payments from the 07-1 to some of the securities you are holding that and just kind of stacking.

I’ll just clarify John. The 35 million we referenced was the cash flow, not the total cash flow of the company. It was our cash enclosed from our CLO holdings. John Hecht – JMP Securities: Yeah. Understood.

That’s just about half of our capital

About -- if you look at 07-A, I think it’s chewed about 5 million during the quarter. 07-1 contributed about 8 million. 07-A in its most recent payments finished off paying off those thick notes. 07-1 is going to keep doing that for the next one or two quarters. As I have placed our remarks in the call. Notes that are left to picked are the most junior notes in the capital structure while we own same amount of share, but we own of the sub notes. So with effect, that number, start trading close really at last quarter, 75 million to 80 million annually just for 07-1.

So it will pick up going forward and then it will be stable there and thereafter. John Hecht – JMP Securities: Yeah. Great. Okay. Thanks for the color.

And our next question comes from Leon Cooperman with Omega Advisors Incorporated. Leon Cooperman – Omega Advisors Incorporated: Thank you. Hello everybody.

Hi Lee. How are you? Leon Cooperman – Omega Advisors Incorporated: I’m good. Thank you. I have four or five questions, may be I discuss them and you take them anywhere you want. You guys must close your book, I guess, daily, lets say namely monthly. So here we are in August, I guess fourth. Do you have a book value number for the seven months ended July, question one. Question two, what was the taxable income in the quarter since it’s a partner LLC. I’d be curious as to that number. Third, I look if its better dollar per share run rate. Is it dollar per share cash generated by the company as an annualized rate as a run rate? And is it -- where we are today going forward, was it the second quarter annualized? So little bit more color on that? So the differential between the 90, 91% of the par, the accounting portfolio in par, rest of them I looked that was roughly 800 million. Is that a much different number now that discount from par about 800 million. And if you have any color on the performance of the mortgage portfolio, whether we might have any equity there or a hidden bombs there?

Okay. Leon Cooperman – Omega Advisors Incorporated: So I sure have all the questions but would stop here.

I’ll take up. This is Mike. Lee, we do close our books daily but we have only disclosed publicly and we’ll only disclose publicly information as of quarter end as oppose to get into a monthly reporting cycle of burning their book value. But as you can think about in the context of book value, the most sensitive aspect in book value is how the high yield market performs. That will drive the aspects of volatility up or down in terms of book value per share in any one quarter. Leon Cooperman – Omega Advisors Incorporated: Well, could you -- would you speak, willing to say that the book value in the month of July regained everything you lost in the second quarter.

Yeah. We say in the opening remarks of this call, we talked about the book value recovering from the high-yield component during the month of July, the aggregation that that occurred during the second quarter. Leon Cooperman – Omega Advisors Incorporated: Got you. Okay.

The other question on taxable income, we -- it's so hard to kind of figure out taxable income because every single shareholder has a different taxable income. So we can really say for the quarter. We do think that based upon looking at shareholders, it helped the shares for a long period of time with a distribution rate of $0.12 per share. We’re at a run rate where every one’s going to get enough cash to pay their taxes to the best of our belief but it’s subject to a lot of variables that are out of our control. But at least we’ve gotten now to that point but we’ll continue to retain capital to reinvest. You want to talk about the $1 per share basis. Leon Cooperman – Omega Advisors Incorporated: What does that represent basically?

Lee, that’s -- if you take a snapshot of our portfolio as of June 30 including the CLOs and again every deal has been static, that will be our annualized operating cash inflows and just give you some color around that number. First, again it is operating inflow. So it doesn’t include any one-off fees that we receive but we don’t model as well as any principal payments. Those are excluded from that. So if you keep in mind that some of the commentary we gave in call is focused around where is the earning power as in our balance sheet to increase that number, one be in the 90 million of cash we have available to deploy, two as we have $250 million of volume capacity, LIBOR plus 325. If you do math but if you borrowed 250, investors are say in the mid teens, cost of financing of [Alpha 325], you can pick up a nice revenue. Leon Cooperman – Omega Advisors Incorporated: I guess, that’s in derivative, that’s kind of what I’m thinking. In other words, you mentioned you made some very attractive investments in July, you’re less leveraged with an 80% ROV than any time in your history. So I’m assuming that we have a lot of runway to improve that dollar per share run rate of cash earnings.

And that’s what we’re focused on. Right, we’re focused on driving cash earnings per share, book vale per share and distributions per share. Leon Cooperman – Omega Advisors Incorporated: And the question of distribution per share with a new bankline if you get right to go up to 65% of earnings. So I will assume that we’re on a steady trajectory of a rising dividend and the question is what is the slope of the rise of the board, we’d like to see among our management.

That’s the question and how much capital we want to retain based upon our ability to find exciting investment opportunities. Those are variables exactly that you debate and discuss. Then you had another question on discount… Leon Cooperman – Omega Advisors Incorporated: About the further discount between 99 and 1% of par and par was roughly about 800 million. I don’t know what it is now.

It’s about the same. Leon Cooperman – Omega Advisors Incorporated: Got it. Good job. Good work. Thank you very much.

On mortgages, you leave…. Leon Cooperman – Omega Advisors Incorporated: Mortgages, right, right.

We took a big mark down in the fair value of our mortgages as we disclosed in the fourth quarter of last year. Our mortgage performance drew their first half of 2010 extract better than their expectation when we set and did that right often in the fourth quarter. So we don’t expect any negative news or shocks in the context. Leon Cooperman – Omega Advisors Incorporated: Positive news must be optimistic.

I think we still early in -- early on we want the portfolio smartly. We’ve not seen any trends of demonstrating that mortgage performance as grapy change and to our end, while it’s kind of meeting or exceeding our near-term expectations. It’s going to be a little while that the outside may be on the back end.

It’s a $100 million so it’s not a… Leon Cooperman – Omega Advisors Incorporated: Right. You did come to across, I think, I’m reading it right that the back up in the market has created some interesting opportunities for you to put this capital that you have to work good returns.

That’s correct. Leon Cooperman – Omega Advisors Incorporated: Thank you very much. You guys are doing very fine job. I appreciate that.

Thank you, Lee.

We’ll take our next question from [Edward Ripley with CP Harlot Investments]. Edward Ripley – CP Harlot Investments: Gentlemen and congratulations on a great job.

Thanks Edward. Edward Ripley – CP Harlot Investments: I have a, well people call it fast steady so any event, I do have some happy customers that are very pleased with the performance in the stock and of course, increasing dividend is always pretty welcome. I have a question that’s just puzzling me. As the people have asked me, if this company is a real estate investment process, organized under those rules?

KKR Financial is not a real estate investment trust. It’s organized as a publicly traded partnership. In May of 2007, it was at that point from it’s formation to May 2007, a REIT but it converted from a REIT to a publicly traded partnership that was driven to increase flexibility for the business to make investments outside of it’s mortgage holding which is why our mortgage portfolio now is a very modest amount of our assets and capital. Edward Ripley – CP Harlot Investments: That’s the answer to the question and again thanks for the terrific performance.

Thanks Edward.

We’ll take our next question from Robert Schwartzberg with Compass Point. Robert Schwartzberg – Compass Point: Good afternoon, gentlemen. I have three questions. One, that the $6.7 million of debt issuance cost, is that a deduction to your net investment income or you loan interest revenues.

Yes. On that what pay was included in interest expense in the quarter. Those are reduction in net investment income. Robert Schwartzberg – Compass Point: Okay.

Operating earnings were $0.36 for that basis because it reduces net interest income. If you add it back, it will be $0.40 for the quarter. Robert Schwartzberg – Compass Point: Right. I would have expected with the increase in your net spread, all things being equal and even adjusting for that your net investment income might have increased. Is there -- there are lot of assets come on towards the end of the quarter.

A lot of it is about timing. Robert Schwartzberg – Compass Point: Right.

When assets come on and come off, and as well as when pay a awhile, there has been much long utility of LIBOR has – it did not jump a little over about 50 bits, we trace a little bit. So when assets reassess versus LIBOR as we said, we are going to have a small amount of what I would short-term wide volatility that kind of trends itself during the following three months. Robert Schwartzberg – Compass Point: Right. Because the net investment income in the last quarter was $83.3 million, so even if you add back the $6.5 could be about flat and I would have expected that number maybe to increase.

One other point to highlight for you is we have a couple of holdings on a full status. That continue to make interest payments but because there are non accrual. One of them is a fairly decent sized holding. We actually book that income on a cash basis and they pay sum annually. So that was the payment we received in the first quarter end and that I’m going to expect in the third quarter.

So we may have certain divisions where you’ve taken a specific reserve in terms of our allowance on and then put effectively for accounting purposes on non-accruals. Now, they continue to perform and we expect them to continue to perform in terms of interest payments and so we just didn’t organized those until cash is received. Robert Schwartzberg – Compass Point: Your non-equivalence went down by a far amount, right?

Correct. Although that that amount still – for example, those position I was referring to represented I say close to $0.4 in the first quarter. So it’s meaningful. Robert Schwartzberg – Compass Point: Right. So, I mean all things being equal, one might be able to expect an increase in our net investment income in the next three months.

Yeah.

We would expect that.

We’ve increased 7% sequentially and the net interest margin in our CLOs that should show up and increase operating earnings in future quarters. Robert Schwartzberg – Compass Point: Right. And then if could asked two other questions. Do you have a breakout of – on the net realized versus unrealized gains, how much was realized versus unrealized?

If you look in our footnotes charts financial statements, specifically, the loans note and the securities note, it gives you the breakdown of actual realized amounts from the quarter. I will tell you that to put some color on that number. Of our realized versus unrealized, the majority of our results this quarter were realized. We had said, we took a $33.8 million lower of cost from market adjustment, loans out for sale. That is unrealized loss but that was offset by upwards – just under $60 million of realized gains and that we had unrealized gains of about $5 million. So most of the quarter were realized Robert Schwartzberg – Compass Point: Mostly realize gains, actually much larger realized gains than but then it really appears on the surface.

Yeah. Robert Schwartzberg – Compass Point: And then my last question is – there has been some discussion about reopening of the CLO market, do you have any thoughts about that and specifically how it might relate to your company?

Sure. We continue to – I will add to this. We continue to pay attention to the market. As you described in our last – our past calls, we evaluate opportunities to deploy capital to CLOs against other opportunities we see. We don’t view CLOs necessarily as the sole source of growth. That said, we continue to evaluate. We’ve seen a handful of transactions done, but they’ve been very few. And the one and the most recently last week, was more of a repack in new issue.

And they haven’t – They had instructions that we have talked with the markets still are not at terms, that we think are prudent for shareholders. It’s getting closer as we talked about. It continues to get closer. There’s more market appetite person, creative idea. There were evaluating and we have accumulated $150 million that Mike discussed in his remarks of CLOs eligible collateral on our balance sheet. In fact, the warehouse – because the market may open up and a very near future to our thresholds of returns. Robert Schwartzberg – Compass Point: I’m sorry. How sparse is that number?

It will be about $150 million of few eligible collateral on our balance sheet outside of our CLOs warehoused. Robert Schwartzberg – Compass Point: What do you see as the – like a minimum size that you would need in order to make it cost effective?

So that’s unlevered. So I mean – you put leverage against that to that – 150, would in fact would be your equity in a $500 million deal of three to one leverage. Robert Schwartzberg – Compass Point: Okay.

Where we stand – we’ve got assets there. We mentioned and going back to a prior question, when we said those assets are actually only earning just over 6% today. So it’s their interest. Cash yield to that capital we are sitting on, on our way into – move opportunistically into a transaction that makes sense because they are patient in doing so. Robert Schwartzberg – Compass Point: Right. Okay. Bill, great. Thank you very much.

Thank you.

We will take our next question with Sandro Naf with Capital Four. Sandro Naf – Capital Four: Hi. I have a question regarding the loss in book value. If I do the math I get about, with the $0.51 and the $0.12 dividend, it implies decrease of about write-off of $0.60. That will be around 100 million on – about 160 million shares. Could you kind of go through, explain this said decrease, again, I think you mentioned it quickly on introduction and then I have a couple of follow-up questions.

Go ahead, Mike.

On the book value I guess Bill mentioned, is upon is most sensitive too our changes in higher yield bonds, so you are right. We had $0.51 of income during the quarter that’s offset by $0.10 dividend we paid during the quarter, estimates $0.41. In addition, we had about 60 center client in OCI from high yield bonds and cash flow hedges. What do you think about our earnings, who are offset by the OCI and SLOP impact our unrealized perspective in book value, just mark to market effects of declining high yielding interest rates and then you factor into $0.10 dividend distribution on top of that. Sandro Naf – Capital Four: And then – just a one sec, comment on the recovering bond prices in July, would that imply that we are going to get a big part of the $0.60 bank, all most equal.

Yeah. Its interest rates and bonds prices set extra, but everything else being equal or be equivalent in September to what they were in March. You would see that $0.60 reverse itself. That is accurate. Sandro Naf – Capital Four: Okay. The other question is going back to this run rate estimates. If I have to kind of do a normalized as total revenue and then I take the net investment income, which now has been 76, it might be a little higher going forward. We have a relatively big volatile line on the net realized and unrealized gains on the investment. Would you say this is over time or long period of time, netting each other at zero or do you think it continues to add income on unrealized gains on investments?

The unrealized gains that we’ve realized in our income statement, it could fluctuate. But if you look at other comprehensive on our balance sheet, you will see a effective embedded gain that is reflected in OCI. That gain has not come through our income statement yet. So to extend, we were to sell this positions at maturity and then effectively would growth rate seen in July and you would see that effect and so. You can compare OCI, the positive aspect of OCI quarter-to-quarter relative to that gain number in our income statement. Sandro Naf – Capital Four: So then what would you protect that line – it will be for the 2010 period and going forward, what would you expect in quarter to come?

Sandro. Just to be fair in two points. First is when we actually don’t give forecasted guidance. The second around realized and unrealized gains and investments both fund its volatile, it depends on when we decide to monetized either through exiting the position because something changed with the asset or sales and asset. But those things are lumping and this really is not east to model in, as you may have a quarter where it makes sense to hedge much positions in other quarter where it doesn’t. Sandro Naf – Capital Four: Exactly. We are investors. We try to buy things cheap and then sell them when they are expensive. And sometimes that can take years to for it actually come to a position and we have to be patient to that – once the assets point intrinsic value, we’ll sell it. And then it become a realized gain but we can predict how that works in the context of future quarters as they share future years. Sandro Naf – Capital Four: Okay. And then just to finalize in this run rate issue. And so if I take – if I’m very conservative and say, I’m haircutting to 28, it very easy to come off with an annualized as net income that is 200 to 250 a year. And if you can pay out 65% dividend, that’s – you’re getting very close to a bulk dividend share.

Just to be fair Sandro -- We say to pay out 65% dividend, it’s of our estimated taxable income which over the long-term does, they’ll pay up with reported but numbers we reported on GAAP, which are very different because they include non-tax income such as accretion on assets, unrealized gains and unrealized asset losses. So I would necessary view the GAAP income numbers as a near-term proxy. The best – as far a GAAP run rate, we articulated that for the quarter, our operating income was $0.40. I would use that as your best estimate.

Sandro, I pardon. We actually do want to get some other questions, but feel reach to it. Sandro Naf – Capital Four: Okay. Thanks for answering those questions.

Thank you.

And we will now take a follow up question from Lee Cooperman with Omega Advisors Inc. Lee Cooperman – Omega Advisors Inc.: I was very impressed you guys try to buy low sale high. You would fit in Omega, if you are ever looking for a job, I like that philosophy.

We have a long way to get your records. Lee Cooperman – Omega Advisors Inc.: I got that. Anyways, I haven’t taken eligible calculus for so long I can’t remember. But do you guys have at the top of your ahead with the $0.12 dividend with the conversion price will be on the new convert.

I don’t have – it is partially a function of the average trading at the stock we up to it. I know at the $0.10 we had the conversion price was between $8.10 -- $8.11. Lee Cooperman – Omega Advisors Inc.: $8.11, okay.:

So I probably assume, kind of pays off that. Lee Cooperman – Omega Advisors Inc.: Okay. Thanks again.

Thank you. I will thank you all for participating today on the call and we hope you have a good rest of your summer. We look forward to touching basis with you next quarter. Thank you.

Thank concludes. Thank you for your participation.