Angela Yang - Head, IR Bill Sonneborn - CEO Michael McFerran - COO and CFO

Michael Sarcone - Sandler O'Neill Steven Kwok - Keefe, Bruyette & Woods Gabe Poggi - FBR John Hecht - JMP Securities Jasper Burch - Macquarie Amy DeBone - Compass Point Research & Trading Stephen Laws - Deutsche Bank Lee Cooperman - Omega Advisors Joel Montgomery - Cobalt Capital

Good day, everyone, and welcome to the KKR Financial Holdings LLC second quarter 2011 earnings conference call. At this time, I would like to turn the call over to Ms. Angela Yang. Please go ahead, ma'am.

Good afternoon, everyone. I'm Angela Yang, Head of Investor Relations for KKR Financial Holdings LLC. And joining me on the call today are Bill Sonneborn, our Chief Executive Officer, and Michael McFerran, our Chief Operating and Financial Officer. This afternoon's call is being webcast on our website at www.kkr.com in the Investor Relations section. There will be a replay of the call available as well. Our financial results for the second quarter ended June 30, 2011 were issued today. And as with prior quarters, a supplemental information packet is available in the Investor Relations section of our website. Before we get started, I would like to caution you that this conference call and webcast contains forward-looking statements that are based on the beliefs of the management team regarding the operations and the results of 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 Securities and Exchange Commission's website on www.sec.gov. KFN's actual results may vary materially from those expressed in the forward-looking statements. In addition, some of the discussion today will include references to non-GAAP financial measures. Information about these measures as well as their corresponding GAAP reconciliations may be found in the supplemental information packet available on our website. The supplemental information packet on our website includes information that we will be referring to on our call today. And we encourage you to have this information available during the call. With that, I will turn the call over to our CEO, Bill Sonneborn.

Thank you, Angela. And thanks to all of you for joining our call today. I'll begin my remarks with highlights of the quarter followed by an update on the business as we look ahead. And later on I will discuss how we believe we have positioned KFN to perform in the current macro environment. For the purpose of this call, we suggest you refer to the supplemental information packet Angela described, which is available on our website. We fortunately had a good quarter during a period that was in many ways a replay of the second quarter of last year, Greece dominating headlines combined with U.S. fiscal concerns, albeit a year ago, was focused on the municipal and not treasury markets or ISM numbers. I am pleased with the momentum across our different strategies where we continue to execute above expectations. And believe the capital we are continuing to deploy today will represent a substantial opportunity to generate significant value for our shareholders in the future. So with that, I'll start with the highlights of the quarter, which are listed on Page 2, of our supplemental presentation. We were able to produce another strong quarter of financial results. Specifically, we generated $0.59 in earnings per diluted share, representing a 24% return on equity. This compares to $0.51 of earnings per diluted share for both the first quarter of 2011 and second quarter of 2010. Earnings for the current quarter included income tax provision of $7.4 million, primarily related to an unrealized gain we took on a private equity investment, which we carry at estimated fair value that hold within a corporate blocker subsidiary. The accrued tax expense related to this investment represented a deferred tax liability that was a non-cash event during the quarter and reduced earnings per diluted share by approximately $0.04. Run rate cash earnings per share for the second quarter totaled $0.36 per share and total net cash earnings per share was $0.35 per share. Total and run rate cash earnings per share represented 14% cash return on equity. Run rate cash earnings per share and total net cash earnings per share are two key non-GAAP metrics that Mike and I focus on, as they represent cash that we could either distribute to our shareholders or retain and reinvest for future growth. Next on to our book value. As of June 30th, our book value per share was $9.91, which represents an increase of $1.83 per share or 23% from $8.08 per share a year ago. As contain in our earnings release filed today, on July 28th, our Board of Directors declared a cash distribution of $0.18 per common share. This represents our seventh consecutive quarterly increase in our cash distribution to shareholders and an increase of 50% from the $0.12 declared for the second quarter of 2010. Now, an update on our portfolio and targeted capital allocation. The excess in the fair value of our corporate debt portfolio with carrying value, equates today to about a $1.28 per share from the corporate debt portfolio. The $1.28 per share excess of our corporate debt portfolio, its fair value over carrying value as of June 30th, doesn't include changes in the values of our natural resource strategy non-financial assets, which consist of working and overriding royalty interests in various oil and gas properties. As of June 30th, we estimate the fair value of these holdings to be approximately $39.6 million higher than their carrying value or an additional $0.22 per share. With respect to our strategies, I'll start with our bank loan and high-yield strategy, which as you know, we primarily execute through CLO technology, as a funding mechanism. As previously announced, in early July, we upsized CLO 2011-1 from a $400 million secured financing transaction with $600 million secured financing transaction. CLO 2011-1 initially closed on March 31st and represented a private CLO transaction, executed between us and an unexcavated third party financial institution. We are pleased we were able to upsize this transaction, as it represents an all-in cost of financing that is lower than the tightest priced CLOs we have seen execute in the market, and provided the structure that provides less downside risk to us and our shareholders. Mike will take you through the specifics of this later in the call. A summary of the portfolio statistics has ramped through June 30th is contained on Page 22 of the supplemental material. Next, our natural resources strategy, which consist of deploying capital to oil and gas opportunities by acquiring working interest in conventional and unconventional producing properties. Royalty interest in both producing properties and unconventional resource developments and private equity, primarily oil and gas and mid-stream infrastructure related transactions. We are currently in an expansionary phase with our natural resource strategy and continue to focus on identifying future opportunities, broadly in the sector. During the quarter, we completed our acquisition of properties located in the Barnett Shale from Carrizo Oil & Gas totaling $55.4 million that's partially financed through an incremental borrowing of just shy of $20 million under our non-recourse oil and gas credit facility. The majority of the reserves acquired through this transaction are proved undeveloped or PUDs and are expected to be developed over the next two years. In addition to deploying incremental capital this quarter, our existing investments made in natural resources are generating positive results for the company. Specifically, we have entered into an agreement to sell our $10 million investment in Hilcorp Resources Holdings, made just over a year ago for 2.7 times of purchase price or $27 million to Marathon Oil Corporation. This sale was expected to settle during the fourth quarter. Additionally, at the quarter end, we estimated the fair value of our $55 million overriding royalty interest acquired during the first quarter of this year at a fair value of 1.7 times cost or $93.5 million. Our Mezzanine strategy continues to perform well. During the quarter we received repayment on a $7.2 million mezz investment in a U.S. retailer we made in late 2010 that generated over a 21% IRR. And during the quarter, we deployed no incremental capital to this strategy, but currently as a result of credit markets weakening, have a robust pipeline of very interesting potential investments in Europe, the U.S. and Australia. And we will keep you posted. Our special situation strategy continues to perform well. And during the quarter we deployed approximately $30 million to a mix of secondary market opportunities, predominately related to purchasing individual stress and distress positions from European bank balance sheets, as they accelerate this positions of non-core assets. As of June 30th, our portfolio of special situations investments has generated a gross IRR of approximately 20% over the past 18 months. Finally, I will conclude with our private equity strategy to which we primarily participate on a side-by-side basis with KKR's private equity funds in select investments. During the quarter, we committed to deploy an aggregate $20 million of capital. The KKRs buyout of Academy Sports + Outdoors, a premier sports outdoor and lifestyle retailer based in Texas; and Capsugel, a leading provider of pharmaceutical and dietary capsule, and an innovator in drug-delivery systems, and the acquisition of that business from Pfizer. In addition to these targeted asset classes, we are also actively pursuing a variety of opportunities for a commercial real estate strategy, and are currently evaluating specific opportunity for acquisitions of performing and underperforming European commercial mortgage assets from banks that are being required to divest to these holdings in a specified time period. We are optimistic about the return opportunities identified in these transactions, and will continue to provide you with updates on the strategy as it evolves. With that, I will now turn the call over to Mike.

Thanks, Bill, and good afternoon everyone. I'll begin my section of today's call with a review of our result. Earnings per diluted share for the quarter totaled $0.59, which translates to a 24% return on GAAP equity. For the quarter, investment income totaled a $135.8 million, which represents an 11% a year-over-year increase. And net investment income totaled $88.7 million, which represents a 16% a year-over-year increase. Total investment income to the quarter includes $12.3 million of discount accretion income, while prepayments as compared to $9.5 million for the corresponding prior-year period. Other investment income for the quarter totaled $11.1 million, and consists of $4.5 million of dividend income, primarily from a private equity investment. And $6.6 million of income from both our working interest and royalty interest in oil and gas properties. The income generated by these natural resource holdings was offset by $6.9 million of related expenses during the quarter, and comparatively higher level of expenses when measured against the revenues, it's primarily due to transaction expenses incurred in connection of the acquisition of oil and gas working interest, which are accounted for as business combinations under GAAP. And as a result, we acquired other transaction related cost we expensed rather than capitalized. As Bill mentioned, we are in an expansionary phase with our national resources strategy. With regards to our existing holdings, we expect revenues steadily increase, as production increases through drilling of underdeveloped or undeveloped properties, and related expenses to decrease at certain acquisition and transaction costs are non-recurring and expensed upfront. I do want to highlight that during periods of property acquisitions, higher expenses are to be expected. A significant driver of this quarter's net income was total other income of $62.6 million, which is a $39.4 million increase from total other income of $23.2 million for the second quarter of 2010. Total other income was primarily driven from realized gains totaling $52.6 million from the sales of certain holdings during the quarter. In addition, we had a $10 million unrealized gain related to the appreciation of value in our investment and Hilcorp, which as Bill mentioned, we've entered in an agreement to sell during the fourth quarter of this year. Our cash flows for the quarter were also strong with run rate cash earnings of $0.36 per share and total net cash earnings of $0.35 per share. Run rate cash earnings per share of $0.36 equates to a 14% cash return on equity, and is $0.09 higher than $0.27 of run rate cash earnings per share for the first quarter of this year. There are a few tiny differences that I do want to highlight related to cash earnings in order to put this increase in the context. First, during the first quarter we paid $12.8 million of semi-annual interest expense in our convertible notes, which is not included in our second quarter number. Second, interest expense from our CLOs was approximately $5 million higher than the first quarter, due to semi-annual bond payments received in our CLOs during the first quarter. Accordingly, on a normalized basis our run rate cash earnings per share is approximately $0.30. Next, our balance sheet and capital structure. As of June 30th, our book value per share was $9.91, which represents an increase of $0.18 per share from $9.73 per share as of March 31st, and an increase of $1.83 per share from $8.08 per share a year ago. One metric that Bill highlighted, I want to spend a minute on, is the fair value of our portfolio. As of June 30th, the weighted averaged estimated fair value of our corporate debt portfolio was 95% of the aggregate. $7.85 billion par value of our loan and bond holdings, which is $227.4 million higher than the weighted averaged carrying value of this holdings on our balance sheet for which our book value per share is based or is 92% of par. This differential results $1.28 of fair value per share, embedded in our balance sheet above our reported book value. Historical turning of our book value per share and the fair value of our corporate debt portfolio are detailed on Pages 4 and 5 of our supplemental presentation. The differential between the carrying value of our corporate debt portfolio and its estimated fair value is a consequence of lower accounting on our GAAP. Specifically, loans held for investments are carried at amortized cost less than allowance for credit losses. And loans held for sale are carried at the lower amortized cost or fair value. We ended the quarter with $281.7 million of unrestricted cash and similar to last quarter we have no borrowings outstanding under our $250 million revolving credit facility. The increase in cash from $129.3 million as of March 31 is due to proceeds received during the quarter from CLO 2011-1 and proceeds from the dispositions of certain corporate debt positions not held in CLOs during the quarter. As for our capital structure, last quarter we mentioned that given the current low-rate environment, we're exploring opportunities for incremental capital in the debt capital markets as an efficient way to allow weighted average cost of capital. As we have sufficient dry powder from cash and through our credit facility, we aren't pressed to do anything today, but rather our focus on value and strategic alternative for longer-term capital growth as we continue to invest in the business. In addition, we believe our liquidity position will enable us to meet near-term debt obligations, specifically the $180.6 million outstanding and to our 7% converts that mature in July 2012. With respect to capital management, we use CLOs as a primary mechanism to deploy capital to our bank loan and high-yield strategy. As previously announced, the upsized CLO 2011-1 after quarter-end from being a $400 million transaction to $600 million secured financing transaction. CLO 2011-1, already closed on March 31 of this year, is a $400 million transaction whereby we financed a portfolio of senior secured loans with 3-to-1 leverage provided by a senior investor at a rate of LIBOR plus 135 basis points. The $200 million upsize was structured through the senior investor, increasing their commitment to buy $150 million from $300 million to $450 million. And that increases our equity interest in the transaction from $100 million to $150 million. The additional increase in the size of CLO 2011-1, the amount of the transaction to allow sales of credit improved rather than just credit impaired loans and reduce the par value ratio test which is equivalent to the over-collateralization test for our other CLOs, 133.7% to 120% and last extend the maturity of the transaction from April to August of 2018. CLO 2011-1 is a uniquely structured transaction that we find to be structurally and economically beneficial, especially as compared to recent CLO transactions executed in the market. Specifically, our senior financing cost with returns of leverage priced higher than recent deals executed in the market with recent triple-A issues having a discount margin in the LIBOR plus 125 range. But in terms of leverage, these transactions have a cost of debt of approximately LIBOR plus 140. In addition to having a slightly tighter cost of financing CLO 2011-1 has comparatively lower transaction cost as compared to traditional CLOs which require higher expenses for book lenders, rating agencies, marketing road shows and account of letter. CLO 2011-1 had comparatively little or none of these expenses. And factoring the impact of these incremental transaction costs on the total financing cost of the transactions, CLO 2011-1 is economically advantageous compared to deals we're seeing in the market. Similarly, we find CLO 2011-1 to be structurally advantageous compared to structures we see executed today. Specifically, there are two key differences that provide us with a downside protection that we wouldn't have in traditionally structured CLO transaction. First, subject to maintaining compliance with the par value ratio test, we receive our pro rata share of all principle proceeds. This enables us to maintain a fairly constant IRR on our capital throughout the life of the transaction. Comparatively, in traditional CLOs, all senior debt is repaid prior to equity owners receiving principle-backed which results in a declining IRR profile. Second, we have the ability to call this transaction six months after the initial ramp period. This supports thus the flexibility to replace it as spreads and maturity tighten. Last, our CLO 2011 is comprised of static pool loans, because they'll be invested in period. These structured provisions give us the downside risk protection that we desire when we execute a transaction like this. If spreads widen, then low repayments should be low, and we'd be able to maintain a mid-teens IRR for the next several years. If spreads tighten while repayments will likely accelerate, we'll have capital returned to us without being pressured to reinvest at lower asset spreads of higher liability cost. As for the future, we do see structural features in traditional CLOs becoming more attractive in shorter non-call periods and longer reinvestment periods. We are continuously working on our future transactions whether they are private deals like CLO 2011-1 or traditionally weighted market CLOs like we had executed in the past. With that, I'm going to hand this back to Bill.

Thanks, Mike. Consistent with my remarks last quarter, our business has increasing momentum driven by a multi-faceted strategy for deploying in various areas and specific transactions where we see the best opportunities to generate attractive risk-adjusted returns and future cash flow to our shareholders. Needless to say, we're operating at an unstable economic environment as we witness the cross-Atlantic saga play out between the U.S. debt ceiling and deficit challenges and the sovereign debt issues in Europe combined with the continued inflationary pressures in emerging markets and the slowing U.S. economy. We expect most markets in which we operate will experience increasing volatility/ With that backdrop, we're well positioned to perform. This is a dramatic difference than it was in December 2008. Heading into that credit crisis and economic weakening, we're faced with asset class concentration, low liquidity, refinancing concerns and over $2 billion of mark-to-market liability risk requiring margin to be posted. KFN is different today and all us at KKR are working to realize the opportunity that KFN presents to us and to our fellow shareholders. With that, I'll open this call for questions. Operator, if you could please open it up for questions please.

(Operator Instructions) Our first question will come from Michael Sarcone with Sandler O'Neill. Michael Sarcone - Sandler O'Neill: How are free payments trending so far this quarter?

We've, as you've seen, credit backup a little bit. We've definitely seen a decline in prepayments than what we were experiencing late in the first quarter, early part of the second quarter. But it can be episodic at times for specific transactions. Michael Sarcone - Sandler O'Neill: Could you give us your current exposure to foreign currencies?

Yes, it's can be disclosed in our 10-Q which we'll be filing later this week. I think it's disclosed in our last 10-Q. A little less than 4% of our total balance sheet was denominated in foreign currency, and we do hedge most of that. While we continue to place some capital to foreign opportunities, as Bill referenced, especially sub-strategy, it doesn't make up a material portion of our total portfolio.

We're dollar based. So we hedge that risk. Michael Sarcone - Sandler O'Neill: I thought there was no loan loss provision this quarter. Any thought or change in thought on keeping the reserve level constant? I think it's around 3.4% as you grow the portfolio.

Obviously if you think about on a bottoms-up and top-down basis, every quarter as to what the prudent amount of what the loss reserves should be and whether or not an additional provision is warranted, and those kind of sometimes offset each other. Where top-down, you could be much more cautious than the bottoms-up, really drive in terms of results. So this particular quarter, you see no additional provision predominantly because bottoms-up credit risk in terms of looking at our underlying positions and where they stand feels really good, even though we had loan growth during the quarter.

Our next question comes from Steven Kwok with Keefe, Bruyette & Woods. Steven Kwok - Keefe, Bruyette & Woods: I guess first I want to touch upon the fair value. I was wondering decline in fair value, was that due to just the general mark-to-market or is there issues like credit or investments related?

It's really two things. One, there is a little bit of backing up in asset prices. And second, we did, as you'll see from our large realized gains during the quarter, we did divest a fair amount of bond holdings that were carried at a price well above par. Some of it was just related to realized and some of the higher price of assets.

We reduced our high yield exposure during the quarter just as part of risk management, which resulted in realized gains occurring and therefore the fair market value too, the carrying value spread reduced a little bit. Steven Kwok - Keefe, Bruyette & Woods: Last quarter, the difference between fair value and carrying value was close to like $2. In this quarter, it's $1.28. I was just wondering if fair value goes back towards what it was last quarter, would that gap narrow back to the $2 range?

It really depends on our specific assets. We're purchasing things now as a result of credit market's weakness. They directly shouldn't trade where they are based on the risk. And so theoretically, yes, the answer is that is possible. So you could revert to a carrying value, fair value adjustment. That was on the corporate debt portfolio. We talked about $0.22 roughly of fair value market value versus carrying value in our natural resources investments, which you can add to the number for the quarter. But when you think about the portfolio, we buy stuff when it trades down, and then it should revert to historical normal values and that should drive additional spread between fair value and carrying value. Steven Kwok - Keefe, Bruyette & Woods: I noticed that G&A was kind of high this quarter. I was wondering what's a more normal level of G&A? Can you talk about some of the one-time items that perhaps drove it this quarter?

I mean most notably it is related to, as we mentioned the call, the oil and gas working interest acquisitions. Most notably, we acquired $55.4 million of working interest. Under GAAP, we have to see expense, not capitalize all acquisition cost. So they are a bit episodic. I would expect that number probably running $2 million to $3 million higher than you would see in the quarter if those activities didn't occur. I believe I want to highlight that in periods where we make acquisitions, you're going to see some higher expense as a result. All that really helped the effect on us not having capitalized expenses, but be amortized during the life of the deal.

If we don't do an additional natural resource investment, you'll see decline in G&A and pickup in earnings from the strategy in future quarters.

Our next question comes from Gabe Poggi with FBR. Gabe Poggi - FBR: I wanted to ask you a kind of 20000-foot question. You guys both mentioned that you're in expansionary phase in the natural resources segment of your business. I assume that that means that's where you guys are finding the most relative value now. Is that a safe assumption? Or asked a different way, where are you guys finding the most relative value in a very volatile environment?

I think we've been in expansionary phase in the context of natural resources. We haven't done anything to decrease our transactions we announced at the end of last quarter. And I think that's indicative of seeing opportunities as a result of economic weakening and general credit price declines. But there is aspects within credit now which we find even more attractive than on which we're focused at the end of the first quarter. So that ebbs and flows. And so we've been deploying more capital both through our CLOs and credit as a result of new issue loan spreads kind of widening by around 100 basis points over the past four weeks, which drives some very attractive returns for our shareholders both in our legacy CLOs and in CLO 2011-1. Gabe Poggi - FBR: You guys talked about continue to having conversations in Europe regarding maybe commercial real estate investments there. Can you put a little more color around that? And specifically, is there a targeted exposure you'd like? I don't think you guys have mentioned this in the past. But just curious if an amazing deal came down the pipeline and KKR were to win that bid, would you be willing to make it a bigger number here, 5%, 8% of kind of your allocated capital?

We've had risk limits that we've instituted both in the context of underlying investment exposures, geographic exposures and the like, and that obviously also relates to commercial real estate. And our focus in commercial real estate in terms of the activities we're pursuing is predominantly in income-producing situations where we have high cash on cash returns to our shareholders as opposed to more private equity long-duration development type transactions. And specifically in Europe, where we are seeing opportunities, what we talked about last quarter which is the general bank deleveraging which is actually kind of accelerating even faster than we had anticipated as a result of sovereign exposure amongst number of the banks that we're in discussions with. And when you look at their portfolios, being inside and going through their book, a very large amount of exposures to commercial real estate assets both performing and non-performing loans. And so in conjunction with our real estate team at the manager, we are spending a lot of time taking advantage of the ability to look for those situations where on a proprietary basis as opposed to an auction format we can structure something that makes sense for our shareholders. Gabe Poggi - FBR: Are the assets you're looking at in CRE? Are the actual assets a combination of here domestically and also in Europe? Is there a mix?

Yes, generally there is a mix.

Our next question comes from John Hecht with JMP Securities. John Hecht - JMP Securities: First just to make sure I am clear, it looks like the Hilcorp gain you expect to take the realized gain in Q4, but have you already recognized $10 million of that on a fair valuation basis already?

That's exactly right, John.

That shows up as an unrealized gain in the financial statement as of the second quarter, and then that will be converted to cash in the fourth quarter, when Marathon's transaction closes. John Hecht - JMP Securities: The upsized CLO 2011 already deployed with the upsides, or have you already deployed all the capital?

We're pretty far along in that. It's not done, but we are getting pretty close. John Hecht - JMP Securities: What is the character of assets that you're finding for the CLO?

It's a senior secured loan named U.S. loans, similar to what you see in other CLOs. John Hecht - JMP Securities: Obviously, the counterparty appreciates working you wanted to increase the size. Can you then engage in that kind of activity with them depending on the opportunities you find?

Whether with them or other counterparties, we definitely think there is opportunities to keep exploring these private CLO-type transactions. We're receiving a lot of interest in it. John Hecht - JMP Securities: You have talked about the opportunities that you're waiting for in Europe, and it sounds like they're CRE-focused. How would you finance that? Would the bank facility be the primary vehicle initially for that?

No, we don't think of our credit facility as something to finance longer-duration assets. So any of those type of portfolio transaction is to be financed independently, whether through a CLO-type structure with seller-based term financing or the like.

Our next question comes from Jasper Burch with Macquarie. Jasper Burch - Macquarie: Just a couple of quick questions; first, on the CLO 2011-1. Looking at it, just wanted to make sure does the reinvestment period still end on 9/30? And then second, the $70 million of bank loans that you have on your balance sheet, do those not fit into that CLO, or can you sell them into it?

Some of the assets you saw on our balance sheet at quarter-end are going over to it as a small amount. And the rest are going to be held for future transactions. As far as the ramp-up period, it'll be done by September 30. Jasper Burch - Macquarie: And then on 2005-1 and 2005-2, it looked like more premiums on this specifically. I'm looking at when you might call them. And then also, it looked like the OC on 2005-1 came down slightly. Was there anything going on there that we should think about?

No, I mean those CLO '05 like the '05-1 OC is still well in excess of where it was when we did the deal. So we feel very, very comfortable with the OC level. That's just more a function of buying and selling of assets; and sometime, especially assets we had bought towards the end of the crisis in the low to mid-80s. We maybe divesting other times which eats a little bit of that OC, but nothing that we're uncomfortable with. As far as calling those two deals, and they are both generating now high-teens low-20 cash IRRs, we're very pleased with their performance. And as prepayments in the lower market feel pretty slow at the moment, I don't think there is anything in the near term that needs to be done.

Our philosophy on that, Jasper, today has been consistent. The returns to our shareholders dropped kind of from high-teens, as Mike mentioned, down to mid-teens would be to call and refinance or amended expense. Jasper Burch - Macquarie: It looks like the allowance for loan loss and your corporate loans actually came down for the second consecutive quarter. And if you're looking at that on a bottoms-up basis, I was just wondering were there specific transactions that improved in credit quality, and why did you decrease that allowance?

Notably, it's about 3.1% this quarter-end and I think a little closer to 3.4% last quarter. As we said in the last few quarters, the portfolio is performing very well. We have what we consider as very prudent reserve that we think frankly provide from a combination as we've grown the portfolio a bit. There is nothing to cause a concern. We did divest some amounts of holdings that we had a little more concern around compared to others.

If you look at Page 15 and you compare it to the supplemental materials in the last quarter and you do a compare and contrast the general largest holdings this quarter versus last quarter, and to Mike's point, you'll see that it moved to available-for-sale and therefore charged up against the reserve a number of our large concentrated positions to the point where our top 50 holdings as a percent of our total is at the lowest point since the early 2005.

Our next question will come from Amy DeBone with Compass Point Research & Trading. Amy DeBone - Compass Point Research & Trading: Can you give a quick update on any yield pickup that you're seeing in the two legacy CLOs that are still within the reinvestments periods?

As we're seeing opportunities to redeploy capital from principal repayment, we're seeing more deals clearly in the prime areas which has slowed down quite a bit with LIBOR floors, which continues to benefits the CLOs. And prices have come, backed up a little a bit to, Bill mentioned, that 100 basis range. So we are seeing some yield benefit. Amy DeBone - Compass Point Research and Trading: Okay. And then also just to clarify in terms of the reason that the loan portfolio declined this quarter is because you were moving loans to available-for-sale, correct?

The allowance for loan losses, because we moved some incremental loans from held-for-investment to held-for-sale, the overall loan portfolio actually increased during the quarter.

And we'll go next to Stephen Laws with Deutsche Bank. Stephen Laws - Deutsche Bank: I wanted to touch on I guess kind of looking at Page 16. I know just referenced 15 in the supplemental deck. As we look at how this shifts a little bit, it looks like more activity in healthcare, education, chemicals and plastics and I guess retail and a couple of sectors, and it looked like their mix has decreased over the last three months. Is that really a function more of the pipeline on the OCC, or is that a conscious decision you guys are making to target specific industry investments and possibly avoid others? And if that's the case, can you may be shed a little light on that please?

Steven, we don't really topic from a macro perspective the broad, we'll call it, S&P GICS industry classifications other than to look at them to make sure that we're diversified from a risk perspective. So within each of these broad industry classifications, there are so many different sub-sectors and sub-industries that have completely different correlations to one another. That's really where the rubber meets the road. And so we're looking at issuer-specific risk and their individual sub-sector industry relative to other opportunities and other specific industries and trying to create diversity across each of these industry classifications and their ultimate sub-classifications; and then look at it as we build that up as to what that overall risk exposure is, both directly and indirectly to things relating to such as commodities or to government procurement either domestically or abroad to the consumer in terms of discretionary and the like. So hope that answers your question. Stephen Laws - Deutsche Bank: Can you maybe take a second and just look at some of the larger macro issues both here with debt ceiling and then obviously in Europe with some sovereign debt concerns over there. And maybe talk to how those larger macro risk factors kind of what you guys do day-to-day or as far as how you're managing a portfolio to take into consideration those kind of large micro events?

Certainly, I think we're generally trying to stay away, because of the growth of our security programs globally spreading from Europe now into the U.S. government, as the safety source of expense to drive the economy. And moving more into business-to-business type of risk where, we actually see some pretty descent held. We remain somewhat cautious on consumer discretionary, because until you start to see more stabilization, particularly in the U.S. and this is true also internationally in Europe of residential real estate. We think there'll be a cautious consumer, particularly from a discretionary perspective. And we're starting to see some positive signs there. You see that in U.K. today, particularly in the London market. And we are starting to see that in places for field from New York and San Francisco, for some stabilization in U.S. residential real estate, and particularly on the rental side and now in the home-owner side. That's when we start to get a little more bullish on a consumer discretionary. But generally speaking, we think austerity as it's kind of laid out will have a dampening effect on global economies, reflect interest rate to stay relatively low for at least the next 18 to 24 months through the election cycle. We don't think anything draconian necessarily is going to happen. But we've built-in enough tail hedge protection in how we've designed the balance sheet in our portfolio to sleep well at night regardless of what happens. Stephen Laws - Deutsche Bank: Yes, you guys have done a good job with that. And I guess lastly kind of round that out, maybe if you can touch on any discussion or even no concerns or worries with your credit facilities in order to really small number here for the quarter. But just any discussion you had given general concerns in the market in the U.S. for the last few weeks about financing availability. Just any general comment on that, although I know you guys really don't use any recourse financing. But any discussion you had with your counter parties?

Yes, we definitely benefit in new highlight of this from not using short-term, and especially it's not short-term mark-to-market financing. But frankly with the amount of cash we have and our underlying credit facility, we feel pretty comfortable. We don't need half in short-term people or swap markets for financing. As Bill alluded to earlier, other more strategic asset purchases, whether they're down from our national resources strategy or from commercial real estate, have financing embedded either through a non-recourse facility that entered into simultaneous with the acquisition of the investment or by seller provided financing. That's what the banks are thinking from lending, I'd have to differ to them.

Our next question comes from Lee Cooperman with Omega Advisors. Lee Cooperman - Omega Advisors: Perhaps, three questions. In terms of looking at the company from top-down picture, the run rate of cash earnings is somewhere in the $0.35 to $0.36 area. So that $1.40 plus run rate, the div you just declared is $0.72, I guess it is 18 times for $0.76. So you roughly were paying out 50% earnings or retaining 50%. Is the model that you are looking at presently is something like we have a stock yielding between 7% and 8%, and we think we can grow this enterprise to retain the earnings by another 7?

That's correct. Lee Cooperman - Omega Advisors: There was a number thrown at $0.30. What was the difference between $0.30 and $0.36?

Lee, what we said was there's a bit of volatility in that cash earnings number. It's related to debt service. So while we said, run rate earnings this quarter was $0.36 on a normalized basis. And we've wanted to caution people, it's really a $0.30 number. Michael R. McFerran: I think it's actually in between that once we take out the converts next year. We're earning nothing on cash, we think 7% on the converts that we're paying off in the year. Lee Cooperman - Omega Advisors: That's my second question. If you take $180.6 million out of the equation, if you took your unemployed capital or underemployed capital and your unrestricted cash, and subtract it. Let's say you're minimum required cash that you would have in mind to run the business and you took that sum of money and you applied your current marginal lending rate. How much additional earnings do you think you it could be generating? I don't know, do you followed the question?

We do. I mean we think about it as, I'll let Bill talk about how he thinks about strategically. But I mean we deploy capital with a strategy, so whether it's the CLOs natural resources, commercial real estate or otherwise, we get strategy allocations. We end up the quarter with just under $285 million of cash, assuming some nominal amount of cash held after we take out the convert, if the converts are $180 million. So unless we refinance those that takes you to a $100 million of cash, I'm going to assume you hold some portion about for working capital, as you know, we target mid-teens for the difference.

And that's a way we're going to regain capital between now and the convert take out date. And some total of that at a mid-teens expected rate of return of which we expect a little over half of it to be cash, like realized current consistent cash and some may either have an accrual in terms of a discount accretion concept, or some other total rate of return component. That's how we think about modeling the business. Lee Cooperman - Omega Advisors: And lastly, what is the strategy, mentioned briefly. But the likelihood of status of the company issuing straight debt, which would benefit the equity holders, is that something that you'll like to become a reality in the next 12 months?

That's something we mentioned in the last quarter. Strategically, our next capital market transactions we're focused on is, one which we could have term financing at the holding company. Our leverage has continued to decline materially at the holding company to the point where we're 7.3 levered on a recourse basis at the holding company. And so lowering our cost of capital is clearly something that's high in our priority, until we've been very much working on that project. And I think that sometime in the next 6 to 12 months we'd like to achieve something.

And our last question will come from Joel Montgomery from Cobalt Capital. Joel Montgomery - Cobalt Capital: Can you elaborate on what generated the $7.4 million income tax expense? Was that entirely related to the $10 million gain you recognized this quarter on Hilcorp?

No, it wasn't. There was another private equity investment that we held at unrealized gain, so just a mark-to-market unrealized gain percentage (inaudible) as a result of it being a closer entity, which is a PTP. Therefore, we needed to structure it and hold that investment in a C corp locker sub of the company. Corresponding with the write-up of the fair market value, we recorded a differed tax liability, representing corporate tax rate on that unrealized gain that we recorded pursuant to its increase in fair market value.

And Joel, that's also, as Bill had mentioned on the call, a non-cash, so this is a temporary difference between GAAP and tax, based on the ultimate disposition of that and the related assets that would impact the tax provision amount and we end up same.

Thank you. And that concludes today's question-and-answer session. I'd like to turn the conference back over to Mr. Sonneborne for any closing or additional remarks.

Thank you all. We appreciate your continued interest and trust. We'll get back to our working on the next quarter. Have a good evening.

And this concludes today's conference. Thank you for your participation.