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

John Hecht – JMP Securities Steven Laws – Deutsche Bank Amy DeBone – Compass Point Research and Trading Matthew Howlett - Macquarie Michael Sarcone – Sandler O’Neill Gage Poggi – FBR Daniel Furtado - Jefferies Lee Cooperman – Omega Advisors Wayne Cooperman – Cobalt Capital Joel Montgomery – Cobalt Capital

Good day, everyone, and welcome to the KKR Financial Holdings LLC third quarter 2011 earnings conference. Today’s call is being recorded. At this time, I would like to turn the conference over to Angela Yang. Please go ahead.

Thank you operator, and afternoon, everyone. I'm Angela Yang, part 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 third quarter ended September 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 at 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 some highlights for the quarter, followed by an update in the market and how KFN has posed to perform in this current environment. For purposes of this call, we will suggest you refer to the supplemental information packet, Angela described, which is available on your website as we’ll be pointing out several pages of that presentation in these remarks. First today, we announced that our Board of Directors declared an $0.18 cash distribution on our common shares. This distribution is payable on December 1 to shareholders of record on November 17. Despite continued strong cash generation in the quarter, we elected not this quarter to increase the distribution, to take advantage of some significant opportunities that emerged beginning in August and into September, as a result of the impact of the U.S. Debt fueling debate and the fall on [inaudible] European macro uncertainty. Before we go into specifics on our earnings and other key financial statistics, it is sometimes useful to look at where we stand today, relative to just three years ago, and how we have adapted and learned as a company. In October 2008, three years ago today, we were on our back foot with little available equity to take advantage of strong negative market technicals. Today, we’re on our front foot. While market movements we have recently experienced compacted mark-to-market value of our assets as of the end of the third quarter, they have presented a substantial opportunity to invest in assets we know and like, that we believe have the potential to drive much higher cash earnings in distributions in the future. Now for our quarterly results, which Mike will take you through in greater detail later on in this call. Net income for the quarter totaled 39.8 million or $0.22 per diluted share. This compares to $0.59 in earnings per diluted share for the second quarter of 2011, and $0.52 for the third quarter of 2010. This quarter’s net income was down from these prior periods due really primarily, to almost exclusively to unrealized losses driven by declines in asset prices, as well as losses due to changes in foreign currency rates net of hedging. However, our core earnings increased year-over-year with net investment income up 10.6% to 86.6 million for the third quarter of 2011, from 78.3 million for the third quarter of 2010. Additionally, net investment income less non-investment expenses increased 22.4% year-over-year to 68.7 million for the third quarter of 2011 from 56.2 million for the third quarter of 2010. We are pleased to continue to see such substantial growth in our top line. On a cash basis, run-rate cash earnings per share for the quarter totaled $0.28 per share, and total net cash earnings per share equaled $0.29 per share. Comparatively, run-rate cash earnings per share for the second quarter of 2011, just last quarter, totaled $0.36 and total net cash earnings per share were $0.35 per share. Total and run-rate cash earnings per share represent a 12% cash return on equity for this quarter. The quarter-over-quarter variance is primarily due to the semi-annual interest paid on our convertible notes during the third quarter, which totaled approximately $13 million or $0.07 per share. Run-rate cash earnings per share and total net cash earnings per share are two key non-GAAP metrics that we focus on as they represent cash that we can either distribute to our shareholders or retain for future growth. Really free cash flow generated to our common shareholders. [inaudible] and third quarter results reflected a decline, as I mentioned, in asset prices that led to unrealized mark-to-market losses during the quarter, and didn’t have an impact on either our cash flow generation or the underlining performance of the company. Counter intuitively, KFN ended the quarter in a better position than when the quarter started from the perspective of potential future earnings and free cash flow generation. Our CLOs remain quite strong. Despite a 6% decline in bank loan and high-yield prices on average during the quarter, we’re able to maintain or improve the over-collateralization ratios of CLOs, which demonstrates that our cash flow production is not dependent on swings and credit prices, or spreads. We did so while deploying 625 million of capital to purchase new assets during the quarter, particularly towards the end of the quarter, including discounted loans and bonds within our CLO structures at spreads that we have not seen since 2009. I would ask you to turn to Page 27 of our supplemental presentation, which shows the comparison of the over collateralization levels for our five traditional cash flow CLOs over time graphically, in addition to the period of September of 2008. On the previous Page 26, we highlight our newest CLO, CLO 2011-1, which during September we finished ramping at substantially higher yields than we originally modeled when we did the structure. Next, our special situation strategy. This strategy focuses on stressed and distressed opportunities including substantial asset price dislocations. With the market turmoil and resulting flight to treasury by risk of versed investors, we have seen an increasing shift in opportunities. Our special situation strategy enables us to benefit wider spread environment, focusing on equity-like rate to return funded off our balance sheet, and we focus on opportunities both in the U.S. and abroad. During the past quarter, this strategy deployed or committed to deploy nearly 50 million of capital to new opportunities; the majority of which were to European assets. We continue to see this opportunity to grow post-quarter end, and in the month of October we committed over 20 million opportunities in this strategy. Next, on to mezzanine. In the past quarters we discussed that our focus on mezzanine was predominately in Europe and Australia, as we didn’t see attractive risk compensation from U.S. opportunities due to the strength of the high yield market, and tightening credit spreads, and a playing field crowded with domestic mezzanine-focused investors such as BDCs. The backdrop has quickly changed with the virtual shutdown of the U.S. high-yield market, and we’re announcing the best and largest pipeline for U.S. mezzanine opportunities since the European debt crisis began over a year ago. I also want to provide you an update on our national resources strategy. As production increased in our working and royalty interest in oil and gas properties, we experienced a substantial increase in both earnings contribution and free cash flow from this strategy during the quarter. With respect to earnings, these investments including commodity hedges for our working interest, generated 7.5 million of income for the third quarter of 2011, as compared to a loss of $100,000 for the second quarter of 2011. Excluding the benefit of our commodity hedges totally 3.5 million for the third quarter and 400,000 for the second quarter, profit contribution from this strategy was 4 million for the third quarter against a loss of 500,000 just one quarter ago. On an annualized basis, our third quarter natural resources working in royalty interest generated a return on capital, an ROE, of 28% including hedges and 15% excluding the impact and benefit of those hedges. With respect to cash flow, run-rate cash earnings per share included nearly $6 million or $0.03 per share, from this strategy during the third quarter as compared to only 1.1 million or less than $0.01 per share for the second quarter. In addition to our direct production interest, this week we closed on the sale of our 10 million investment in Hilcorp Resources Holdings LP, made just over a year ago for 2.7 times our purchase price, as well as the sale of the small Eagleford Shale private equity investment we made a year ago for approximately two times our purchase price. We entered the fourth quarter with a robust pipeline of natural resource investments covering both proven developed, convention oil and gas, and proven undeveloped shale play resource opportunities. With respect to the right hand side of our balance sheet, price declines have had no negative impact on our financing, as we don’t have any mark-to-market debt as we’ve mentioned in previous calls. We don’t finance assets to repos or swaps, and we’re really insulation from market price volatility as a result. As discussed last quarter, we are focused on continued growth in our business, while maintaining high returns on invested capital. To that end, we’re happy to announce that we are now investment grade rated for the first time in our history. As announced in the press release – the press release issued today, we received a triple B rating from Fitch Ratings, triple B- from Standard & Poor’s. We thought to have KFN rated by both agencies to provide us with additional flexibility for capital while lowering the overall cost of our capital. Next, an update on the markets. While we only saw symptoms beginning in the second quarter, the third quarter was hit with pretty close to a full fledge blue. The S&P 500 fell over 15% and had 34 out of 64 trading days with inter price moves of over 2%. While credit markets initially lagged equities, they caught up within a matter of days. The Merrill Lynch High Yield Master II index, as an example, retreated 6.3%, and the S&P/LSTA Leveraged Loan Index cost nearly 4%. By the end of the quarter, leverage credit spreads had basically returned to beginning-of-year levels as high yield spreads widened 185 basis points to 835 basis points, for an absolute yield of 9.5%, and leveraged loan spreads widened by 224 basis points to 776 basis points. Like the equity markets, the credit markets were extremely volatile with typical daily swings of 1 to 2% in prices. Even accounting for the macro risk present in the current environment, we’re seeing very good risk return opportunities in the credit market, and it’s substantially increased our investment pace as a result. This year’s being driven by both fundamental and technical factors. Fundamentally, we see a low probability that global economy is heading for the type of downturn that would justify credit spreads on senior secured first lien loans approaching 800 basis points, and a high yield market trading 850 basis points wide of treasury. A disciplined focus on strong credit stories in defensive sectors should serve us well. With that, I will now turn the call over to Mike, to go through our financial results in more detail.

Thanks, Bill, and good afternoon everyone. Earnings per diluted share for the quarter totaled $0.22 which translates to a 9% return on GAAP equity, with a quarter investment income total of 134.4 million, which represent a 10% year-over-year increase, and that investment income totaled 86.6 million which represents a 11% year-over-year increase. Total investment income for the quarter includes 7.4 million of discount accretion from prepayments, as compared to 4.4 million for the corresponding prior year period. Other investment income for the quarter totaled 10.1 million and consist primarily of 10 million of income from both our working interest, overwriting royalty interest, and oil and gas property. The income generated by these natural resources holdings was offset by 5.9 million of related expenses during the quarter. As we continue to grow our natural resources holdings, we expect net revenue to steadily increase, as production increases through drilling of undeveloped properties. This quarter’s total other loss totaled 29.3 million compared to total other income of 62.6 million the second quarter, and 26.6 million from a year ago. The $29.3 million loss consists of realized gains that are offset by unrealized losses. Specifically, we had 34.1 million of realized gains primarily from sales of certain bond holdings during the month of July before we experienced the credit price backup that we saw in August and September. More than offsetting the realized gains were unrealized losses. The large component being 43.8 million or $0.24 per diluted common share, lower cost per market adjustment related to $500 million of corporate loans held for sale. This was directly attributable to the decline of loans that we priced that we witnessed during the quarter. While market conditions for corporate loans remain volatile during the month of October, we have witness a noticeable increase in asset prices. As of the end of October, we believe the weighted average estimated fair value of our corporate debt portfolio was 92% of PAR value, that’s compared to 89% of PAR as of September 30. During the quarter we had net unrealized losses from our private equity holdings, carried estimated fair value totalling 13.5 million. Primary in equity positioned we received through previously held debt instruction and had net unrealized losses from foreign exchange translation totaling 7.5 million. Our book value per-share as of quarter end was $9.14. The decline in book value is primarily attributable to $0.81 per share decline in other comprehensive income, a component of shareholders equity. The $0.81 decline consist of $0.58 per share decline as securities classify as available for sale, and a $0.23 decline in our interest rate swap, classified as cash flow hedges. As of the end of October, we have seen an estimated $0.35 per share recovery in the value of these combined holdings. The fair value of our corporate debt portfolio was 89%` of PAR value at the quarter end, compared with carrying value for GAAP purposes of 91% of PAR. Next, cash flows. Our cash flows for the quarter continues to remain strong with run-rate cash earnings of $0.28 per share with total net cash earnings of $0.29 per share. Run-rate cash earnings per share of $0.28 equates to 12% cash return on equity and is $0.08 lower than a $0.36 run-rate cash earnings per share for the second quarter. The primary contributor to the change in run rate cash earnings was the semi-annual interest payments remain in our convertible note during the third quarter, which happens semi-annually. This accounted for about $0.07 of that differential. Next the liquidity. We ended the quarter with 137.3 million of unrestricted cash, and we continue to have no borrowings outstanding under our $250 million revolving credit facilities. During the quarter, we repurchased 45.1 million of our 7% convertible notes maturing in July 2012, resulting in a remaining balance of 135.4 million as of September 30. As we have discussed over the past few quarters, we are currently focused on debt capital as a means to fund growth in the near term given our desire to continue to enhance earnings to cash flow per share, and lower our cost of capital. We recognize that withholding company leverage net of cash of 0.28 times has very low leverage, and we do have flexibility to add leverage to our balance sheet. As Bill mentioned, we have received investment-grade ratings from both Fitch and Standard & Poor’s, which we view as a key milestone in providing more options for us to issue [inaudible] debt transactions. All leverage is not created equal, and we are sensitive to leverage that contains mark-to-market of refinancing risk, as we’ve talked about many times in the past. As such, we have worked to obtain the ratings to provide us with the flexibilities to issue secured or unsecured bonds without having short-term refinancing or mark-to-market risk. We continue to see a value of debt financing options, especially in light of the July 2012 maturity of our convertible notes. Now I’m going to hand this back to Bill.

Thanks, Mike, and I know a number of you will have questions, but before opening it up to your specific Q&A, I wanted to provide some closing remarks regarding KFN in today’s volital environment. Although investors anxiously wait to see this chapter close, we will likely continue to operate in volatile economic environment as we watch the tenants of across the Atlantic and U.S. debt saga and debt problems play out. Despite the bipolar nature of the market environment, we are working on a pipeline of new opportunities that we believe will be accretive to shareholder value. We are firm believers in investing behind large and sustained supply and demand and imbalances. And everything we do is done following thorough analysis of such trends. Volatility is our friend by creating very interesting buying opportunities for our long-dated capital, especially an example in our special situation strategy. And we will continue to present an advantageous prospects for our strong teams. Lastly, we anticipate growing our natural resources and capital start commercial real estate assets, given today’s healthy pipeline of opportunities. These are the types of markets where one can drive differentiated outcomes. While we’ve under gone a significant transformation from the 2008 time period I referenced, there’s one thing that hasn’t changed, our investment in risk discipline, it only gets better. Our capital deployment decisions are based on convictions found through comprehensive efforts. And with focus on developing the competitive advantage that KKR brings to such ideas. With that, I’ll open this up for questions. Operator.

(Operator instructions). And we’ll take our first question from John Hecht with JMP Securities. John Hecht – JMP Securities: Good afternoon, guys. Thanks for taking my questions. My first question is related to GAAP financials versus small provision in the quarter. Is there any detail behind that?

That’s – John, that was done just to increase by a small amount on 2.5 million or unallocated reserve to keep our reserve level at approximately 3% of amortized cost per loan. There’s no other drivers behind that. John Hecht – JMP Securities: The 3% of the average of cost of the right number to look at?

That’s pretty much the range we’ve kept for the last several quarters considering the current credit environments, which we think, frankly, are pretty prudent reserved levels and anticipate the volital market that we’re in. But there were no under events in the portfolio that drove us to want to increase the provision.

Exactly. It didn’t come from the bottom up credit review, it was much more of a top-down adjustment relative to aggregate unallocated reserve relative to the size our loan portfolio, Jonn. John Hecht – JMP Securities: Okay. And on that, it’s a good topic. What are you guys seeing in your portfolio with respect to fundamental trends at this point?

You know, it’s interesting, we’ve – as a firm that just recently surveyed a bunch of the CEOs of our private equity portfolio in the context of what’s going on from a macroeconomic perspective in the U.S, Europe and Asia, and in summary, there has been not just what you’re seeing in terms of market volitility but a pronounced slowdown in a number of markets. A particular concern is Europe, not just in the context of what’s going on with Greece and the potential periphery sovereign debt issues, but also in terms of the microeconomic climate that businesses are operating in. We’ve seen a pretty steady downturn recently in the context of European demand, both not only at the consumer level, but also what had been recently strong, which is with the business-to-business level. On top of that, the emerging markets, which had been kind of the savior for a lot of companies that are selling to consumers or to other businesses as a means of topline growth, has waned particularly because of China’s access to credit. The one bastion of reasonable stability that we’re seeing is actually the U.S. market, which is at least being stable in the context of all the moving pieces. So you know, based upon all the [inaudible] data we’re seeing through portfolio company positions and other situations, we see a deceleration of any terms of growth, but we are seeing more stability in the U.S. relative to other markets. John Hecht – JMP Securities: Okay, that’s great. Nice color. Thanks. With respect to your investment-grade rating, how, and I think, Mike, you pointed out as it points to a debt-to-equity holding company, what kind of leverage would you strive for or would you be comfortable with the holding company?

You know, to start with, John, obviously, and I know you’ve heard this from us many times. It really goes back to what type of leverage. So we’re very focused on the tenor of the debt. For a business like this, you know, again, we recognize we have very low leverage on the balance sheet, which gives us a lot of flexibility. But at the same time, we’re focused on wanting to have debt. I think we will, over the next year or two, we got to a level of 0.5, we see that pretty reasonable. But I think getting to under 0.1 or less than one turn of leverage, the holding company level, would still be pretty conservatively level for the business. John Hecht – JMP Securities: Okay. Thank you. My last question, you’d mentioned you didn’t increase the dividend despite having pretty strong cash flows in the quarter because the investment opportunities had strengthened. In a balanced market where, you know, investment opportunities are neither strengthening or weakening, what would be a good payout ratio that you guys would be, you know, striving for or looking to get to over time?

That’s a good question, John. And we talked a little bit about this in the last quarter when we talked about the ability to do a special distribution at the end of each year as well. But I think our philosophy has been consistent now for the past three years, which is, in periods when we’re finding fewer opportunities that you continue to increase that payout ratio and then if we’re in a period where we really can’t find any opportunity and we have to stretch for risk to go to, you kow, our mid-teen incremental return on capital that we target, we’ll return more capital to shareholders either through substantially higher distributions of earnings or stock repurchases. But in periods where we’re seeing pronounced opportunities to accrete value to our shareholders much higher than that mid-teen internal rate, we’ll retain capital in the context of being able to do so. The third quarter is an example where we felt we had opportunities to drive a very high teens to low-20% rate of return to our equity holders with that cash. We feel it’s beneficial to shareholders to use that cash for that purpose by also still being sensitive to making sure our cash distributions cover tax liabilities for the average shareholder of the company. John Hecht – JMP Securities: I appreciate that. Thanks very much, guys.

Our next question will come from Steven Laws with Deutsche Bank. Steven Laws – Deutsche Bank: Hi. Good afternoon. Thanks for taking my question. I guess to follow up a little bit on the competitive landscape, you know, can you talk about anything you’re seeing out of your competitors, especially those that might be impacted by leverage restrictions, especially given the asset markdowns we’ve seen at 9/30, given valuations on that day. And is that cause to any of your competitors that do have that leverage restrictions to full back or be left active from that you can tell?

Yeah, basically, the question, I think it has had an impact and you’ve also seen a couple of situations some reasonably large B regs or [inaudible] competition of portfolio sales as a result of either leverage coming due or not being replaced. And so you know, all of those kind of market technical, you take a date like September 30th was actually the lowest point this year of credit prices in the highest credit spreads available in the market. And that being a covenant or test date for any situation that has market value leverage or a total rate of return swap using to finance the condition. It has a clear and demonstrable impact. I think the issue of where we’re seeing the least, the amount of competition going back to the market is really in the hedge fund space, predominately because it’s of concern of upcoming redemption from this current redemption cycle. So some of those players that competed with certain parts of our business have pulled back pretty pronounced. Steven Laws – Deutsche Bank: Okay. And then I apologize if I missed this in your prepared remarks or comment earlier. You know, did you comment at all about where NAV or book value might stand today versus at 9/30? I haven’t had a chance to fully look through the 30-some-odd paged supplemental data so I don’t know if it’s in there or not.

We did. We mentioned that book value in the quarter of 914. You know, those prices have come back a considerable amount during the month of October, but we based it on our – the values of our acts at the end of October, we saw about a $0.35 recovery on it. Steven Laws – Deutsche Bank: So we’re right at about 9 ½ then as of…

Including – excluding earnings for the month. Steven Laws – Deutsche Bank: Exactly.

That shock test on the portfolio, excluding earnings. Steven Laws – Deutsche Bank: Great. Just a snapshot value of the 9/30 portfolio at 10/31.

Exactly. Steven Laws – Deutsche Bank: Perfect. And then lastly, you know, and I’ll let somebody else as some questions. But you know, can you comment to the interest expense line item in the income statement? It seems like that that was lower than kind of what I was looking for and maybe give me an idea of what was going on there during the quarter?

Sure. You know, part of the driver of interest expense, I apologize, I’m just grabbing the interest statement now, is – if you take a look, you had – it was down a little, about 2.6 million. That is really driven by, as you know, three of our CLOs are out of reinvestment and as they have amortization of the senior bonds, that reduces the interest expense. Steven Laws – Deutsche Bank: Okay, great. That’s helpful. I appreciate your comments and thanks for the time to answer my questions.

Sure.

And we’ll hear our next question from Amy DeBone with Compass Point Research and Trading. Amy DeBone – Compass Point Research and Trading: Hi. Thank you for taking my questions, and congratulations on the quarter.

Thank you. Amy DeBone – Compass Point Research and Trading: So other interest income was still a little bit higher this quarter compared to the previous run rate. Was this elevated because of gains from natural resource investments or what was in this number?

Yeah, the other investment income of about 10.1 million was entirely natural resources. So as we talked about in our prepared remarks, you know, during – we made our first couple working interest investments and we’re prepared to be smaller, at the very end of 2010. And we made two larger acquisitions earlier to this. And there’s you know, a couple months lag to actually ramp up. And those investments are heavily focused around proving undeveloped reserves. So each month as more wells go on line and production increases, we see the increase in revenue from that. That’s why you’re seeing that big pickup to 10 million.

Basically, that’s the number [inaudible] the 28% return on invested capital on an annualized basis for the quarter. And you know, even holding commodity price is not – according to the futures curve, which is flat, that number will continue increase, as Mike mentioned, as product increases. Amy DeBone – Compass Point Research and Trading: Can you provide a little bit more detail on the yield pickup that you’re seeing, or no?

I’m sorry. Could you repeat that? We couldn’t quite hear you. Amy DeBone – Compass Point Research and Trading: Can you provide more detail on a yield pickup that you’re seeing and the CLOs that are that are still within the reinvestment period?

Yeah, I think Bill mentioned, you know, during the quarter you saw loan prices widen north of 200 basis points. So as we were making [inaudible] the purchases, specifically in August and September, we were able to benefit from that. As of quarter end specifically, you know, we would have expected with 11/1, you’re deploying that capital initially into a market that price is backing up so we picked up more of wider net spread than we anticipated on that deal, which increases our expectations on CLOs in general. Again, I think if you – and I don’t have the math in front of me of [inaudible] more yield than we expected entering the quarter.

And one way to think about it is if you just kind of exclude the effect of accelerated accretion, you know, as a result of refinancing transactions, which in periods of credit price deterioration, you typically have less of until you’ve made an apples-to-apples comparison say to the second quarter. Overall in our corporate debt portfolio, if you did the math, you would see an approximately 17 basis point in gross yield. On the overall portfolio, which has been driven by the capital deployed, particularly in the third quarter at much higher spreads, into [inaudible] the benefit once fully accounted for in future quarters in the overall growth yield across our platform. Amy DeBone – Compass Point Research and Trading: Okay, great. Thank you for taking my questions.

And we’ll hear next from Matthew Howlett with Macquarie. Matthew Howlett - Macquarie: Hello, guys. Thanks for taking my question. You know, with the volitility in the leveraged loan market this quarter, I think, you know, a lot of people feel really scrutinized to see lows. My question to you is, is there sort of level where the price decline, in particular, some of your triple C pockets and some of your CLOs, would jeopardize those CO? Could you remind us again how that would function if there was a drop in triple C buckets?

And if you go to Page 27, Matthew, on the context of the troubled maturity, you’ll see that there was a substantial price decline in triple C class. In fact, triple Cs in the third quarter would be, you know, would be assets that dropped, an average around 6% in terms of triple C leveraged loans. Even with that impact on the triple C part, it really had no impact. In a number of transactions we were able to increase over collateralization. So that by itself is a factor that we don’t worry much about. We worry much more about a period when you have declining prices and high defaults because that’s the issue that we want to basically make sure that we have insulated the cash flow productivity of the business to price declines by itself, we don’t care about that much.

And to Bill’s point, you know, if you look at Slide 27, we put I a few extra data points this quarter because we knew it was something that people wanted to understand and get a better handle around as price moves, what does it mean to our [inaudible]. If you look at that slide, what you’ll is what our CLOs OC impressions where when they were first issued, where they were at September 15th, 2008 really as we were just entering the dark phase of the credit crisis and you’ll see with the exception of one deal, all CLOs remain pretty below OC levels that they were at when they were first issued, where we were last quarter and where we are in September. And for September, we saw not only are all five CLOs well above the OC levels that they were first issued at, but three of the five actually increased OC during the quarter. That’s basically driven by, Matthew, Bill claims that you really need a trifecta in a very material fashion of downgrade, defaults and significant price compliance by significant, if you recall, during the fourth quarter of 2008, levered loans, you know, touched 58-59, which touched 89 or 90 as you saw in August and September and we didn’t have the same OC cushion we have today. So never say never, but we feel pretty comfortable that we have a lot of OC. Matthew Howlett - Macquarie: The performance looks strong. I just wanted to double check, I know one of the deals had like 20% triple C bucket, it was sort of bigger than we see on average and just, you know, I forget which one it was, but you just don’t see any really risk at that, you know, the cushion’s big enough where it could sustain a pretty substantial drop. Is that fair to say?

Look, I think, the exposure we have [inaudible]. Matthew Howlett - Macquarie: Right.

Is hanging in there. We’re not concerned about this. Matthew Howlett - Macquarie: Great. Okay.

It’s not as much about the number of triple Cs and more about the number of D. Matthew Howlett - Macquarie: Right. Thanks. Fair enough. And then just on the topic of CLOs, you’re fully deployed on 11/1? Was that something with the timing of that that, you know, we get the full benefit of that in the quarter? And then, going forward, I mean, what is the appetite for another CLO? Could you do it in today’s marketplace? I know I think you probably placed 11/1 and then the question is, how much of your ultimate capital base do you want to have in CLO equity? How do we look at deploy capital in terms of the strategies and the other strategies versus CLO equity?

All really good questions. In the case of CLO 2011-1, you know, the final ramp, as we mentioned in the remarks, occurred in September right at the end of the quarter, so whether it’s cash flow production from that transaction in the third quarter, it was not the full run rate, which you’ll start to see going forward into the fourth quarter, which we imagine from that one single transaction will be somewhere in the range of a 20% higher cash income production just based upon the ramp portfolio into the fourth quarter. On the question of how much capital is allowed to CLO equity, it really comes down to balancing where we’re seeing return opportunities, both in terms of probability of achieving a return outcome and both on the upside and on the downside relative to other investments that we make. And there’s been periods like we saw where we launched CLO 2011-1 and then upsized it when credit spreads were tight and there were fewer opportunities in some of these more kind of distressed or mezzanine assets where it was the best place to allocate capital for our shareholders in periods like now where CLO triple A spreads are wider than what we did on – for like adjusted basis by a material amount and CLO equity would be priced at something in the range of a 12 to 13% return, which is below our threshold for seeking opportunities outside of that asset class. And we also focus on risk management and diversification because we don’t want all of our shareholder’s capital and earnings and cash flow driven either by capitated asset classes in terms of return potential or in the context of how we think about how market risk is positioned across everything we do. Matthew Howlett - Macquarie: That’s helpful. Thanks for answering the questions.

We will hear next from Michael Sarcone with Sandler O’Neill. Michael Sarcone – Sandler O’Neill: Hey, good afternoon, guys.

Hi, Michael. Michael Sarcone – Sandler O’Neill: Can you give us any color on the timing of possible issuance of unsecured debt?

I think, Michael, it may be driven by the market opportunities. You know, we mentioned we have an on-tap revolver and we have cash, so we don’t feel left to do anything. We are conscious we are – the convert out there for next July and I [inaudible] that out of the way, that will give us more capital in the current environment. So I think when the market feels right, we would do something and that could be as soon as over the next few weeks, or out in a few months. It really depends on what’s going on in the bottom margins. Michael Sarcone – Sandler O’Neill: Okay. And then just on G&A, that came in lower this quarter than the prior. Does 8.5 million seem like a good run rate or is that, again, going to depend on the oil and natural resources?

You said it right there, Michael. The oddity of oil and gas GAAP accounting is you make an acquisition of properties, you actually have to expense all the costs related to that up front. So we’re – when we’re in a quarter where we’re actually expanding on slightly more property, [inaudible] expenses rather than capital and [inaudible]. So we didn’t purchase any incremental working interests this quarter, so we don’t have anything to expense. Michael Sarcone – Sandler O’Neill: Okay, thanks again.

And we’ll take our next question from Gabe Poggi with FBR. Gage Poggi – FBR: Hey, good afternoon, guys. Most of my questions have been answered. I just wanted to kind of as an all-things-being-equal kind of question, today, kind of where we sit after the validity in 3Q kind of little rally, you know, through October. Where would you guys, across your asset platform, where do you think is the best opportunity today to allocate capital?

We still believe, and we talked about this impending supply-demand challenge, imbalance that in special situations, particularly in the context of European asset dispositions, you know, we’ve done a bunch of research and think there’s a number of approximating 1.8 trillion euros of bank deleveraging transactions that will occur over the next 24 months. That is a big supply relative to the amount of capital available to take advantage of that, which means this location, which means pretty attractive rates of return available for those that can pick which of the 1.8 trillion are the good ones. And we feel pretty well positioned, both in terms of relationships with those institutions that are net sellers of assets and our ability to find that needle in the haystack to driver high returns. I’d put that at the top of the list. The other area where we continue to see supply demand imbalance is in the same thing we’ve done, which is the natural resources, either in the context of the 1 trillion of capital necessary to fund the shale play investments, which we would take advantage of in more of a mezzanine type opportunity or in the case of conventional oil and gas, which the majors are selling to fund their CapEx programs. That is still quite dislocated as evidenced by the 28% return in capital we’re able to generate in a couple months after deploying some. And there’s a larger supply of pipeline of opportunity than we’ve seen in a long time in that space. Gage Poggi – FBR: That’s helpful. Thanks, guys.

We’ll take your next question from Daniel Furtado with Jefferies. Daniel Furtado - Jefferies: Thanks for answering my question. Most of them have been answered. Just real quick, did I hear correctly you said 625 million for purchases this quarter?

That’s correct. Daniel Furtado - Jefferies: And then do you happen to have on hand the cost basis of kind of the pay downs or what burned off so I can look at kind of a net capital investment invested in the quarter?

Yeah, if you take a look at our par balances in our 10-Q, I don’t have that in front of me. Take a look at our 10-Q, you’ll see the par balances and the amortized cost for loans and bonds broken out. Daniel Furtado - Jefferies: Do you happen to have just kind of a ballpark? I mean, was that all predominately new growth there or …

No, there was fail through the quarter. I think the difference is we were able to sell out of sort of positions at a higher price. And we mentioned in July, we took advantage of higher prices before credit backed up, so out of a fair number of high yield positions, we invest that capital.

And you asked another one about position, in the position, we had to portray a position with some very well data assets that didn’t really participate in the market decline and we were able to trade out of those and by things we know and like that really participated in the asset decline. And so there’s a variety of actions we took in the August and September time period to increase shareholder value. Daniel Furtado - Jefferies: Great. All right, thanks a lot, guys.

Our next question comes from Lee Cooperman with Omega Advisors Lee Cooperman – Omega Advisors: Thank you. I have a bunch of questions. Would you prefer I give them all to you in advanced and go through them one at a time, or would you like me to ask them one at a time?

I kind of like it when you just give the list of the nine and then we go through them. Lee Cooperman – Omega Advisors: I only have seven. Number one, what is the significance of the recent S&P rating and your plan? Are we talking convertible debt or straight debt? Okay, and if it’s was straight debt, given your BBB rating, what kind of rate do you think you could pay for money today if you went ahead and did this deal? Or are you thinking convert? That’s question one. I guess I’m trying to figure out, to me, the most important numbers recurring cash earnings because that kind of lies the strength of the company. So should I take, last quarter was $0.35. It dropped to $0.29. If I hear correctly, the big reason for that decline was a semi-annual interest payment. So should I assume that if I just averaged 35 and 29, that your run rate of earnings at the end of Q3 was $0.32 a quarter of cash earnings or $1.28? And then, third, you have consistently said that even though we feel short last year, that we’re going to pay out sufficient distributions to cover tax liabilities. And then you talk about, well, you know, we’re going to keep more money in if we have great lending opportunities. But is the shareholder going to get, the average shareholder with the average cost is going to get sufficient money to pay their tax liability in 2011 when they pay Uncle Sam their money in April of 2012? Fourth, I just wanted to reaffirm, I think when you indicated the book value – I assume, you know, you could be more forthcoming, it wouldn’t hurt you, but you guys most close your books almost daily, so you kind of know what your book value is. But what I’m implying is maybe 9 ½ plus $0.10 a month in earnings, so maybe it’s 59, 60, something like that presently, or do you have a more precise number? Five, can you give us kind of any insight into the yield pickup? In other words, you’re taking your cash, you’re getting out of some lesser-yielding instruments into high-yielding instruments. What kind of yield pickup or what kind of money, or what I'm really trying to get at is what is your current run rate of earnings? Then six, what is your plan to get the stock to fair value? It’s interesting, I was just kind of checking as I was in the queue to ask questions, the Bloomberg High-Yield index on December 31 was 832. Today it’s 765. The Leveraged Loan Index was 9291 on December 31. It’s now 9178, hardly changed, yet our stock is down 13% this year. And I believe with the – you guys are doing a very good job. I have confidence in your ability. You project confidence, you project knowledge. I think a 13% to 14% return on book ought to sell at least book value, and I think your book value properly analyzed, it’s probably closer to 10, you know, you could even sell at a premium to book. So we’re selling at a discount to book, we’re 20% below what I think the real book is. We’re underperforming in an up market. We’re underperforming in the indexes that would measure, you know, kind of what paper we own. So clearly, people don’t understand us . So we either – is that structure or a failure to communicate? You know, like a Paul Newman, we got wrapped in the head and failure to communicate. Do we have a plan to get the stock to fair value? And is there any forward-looking comments you could make because you do a great job of analyzing the past, but you’re very candid, you know, very guarded in terms of kind of run rate of earnings looking out and so on and so forth. But you do project optimism. I’m not trying to be critical because you know I’ve been very complimentary to your performance. So is that enough questions or do you want some more?

Those are all good ones. And you know, in the typical fashion, we’ll answer them and we’ll probably create a couple more. Lee Cooperman – Omega Advisors: Good. I’ve got plenty of time.

In terms of difference of the ratings being investment grade, you know, I think we had foreshadowed in previous conversations with you all that our intent was to focus on creating an opportunity to lower our overall cost of capital to bring down the whack if you will, the average cost of capital in the business where we can continue to find the [inaudible] of opportunities we have even through the CLO marketplace with the other capital we’re allocating and driving even higher returns on capital to our shareholders to be able to grow what is a 12% real cash return on equity over time. And that’s not going to happen through issuing convertible debt just in the context of a yield-based business, that’s an expensive part of capital to raise because of how the dividend yield affects effectively the conversion premium. So the goal is to have no equity embedded warrants attached to the financing we raise. As Mike mentioned, make sure that we’re financing ourselves from a term perspective but we’re not taking maturity risk and have reasonable length of capital in order to take advantage of opportunities and keep that lower cost of capital for a long period of time. And from that perspective, you know, it depends on the context of the maturity as you kind of move out the swap curve as to what that cost is. And there’s periods of time when financial services is more inept to being able to adapt to capital markets than others. And you know, one of the things opportunistically we want to focus on is when’s the right time to tap those markets from both the perception of the underlying investors inability to get, again, the lowest weighted average cost to capital possible in the context of embedding the ability on the right hand side of the balance sheet to drive the left hand side of the balance sheet rate returns for our shareholders. And your second question, return cash earnings, you kind of did that math and $0.32, that assumes just on the weighted average that we didn’t accrete any cash flow production during the quarter. So you said $0.32 and yeah, I’d say that’s a little shy because hopefully we took some actions in August and September that would mean the run rate today is higher than that $0.32. But that’s a reasonable basis to do the math. In terms of your third question on paying out these distributions, you know, at the partnership level, you know, taking all the shareholders in the partnership, it is our intent, and we’ve made this clear, to make sure that we get enough cash either through the sum total of our regular quarterly distributions and/or the ability to do a special distribution in the first quarter of the following year to make sure our shareholders at the partnership level have effectively been treated with cash to pay any liabilities associated with the Federal or State government in which they reside. So that is still our stated objective. On book value, Mike went through the math. We’ve historically, for guidance, not provided a lot of forward-looking or up-to-date information. We actually push counsel a little bit in the context of this quarter to give you some more live real-time data. But it’s not our practice to be out publically stating every day what our book value is or earnings are until – you know, I understand why that’s important and relevant, but from our perspective, we’d rather be managing the business and not having to speak to investors everyday as to what those results are. And so, Mike pointed to the fact that book value is accretive substantially and that’s just on the basis of the available for sale instruments as well as securities in the context of high yield and the appreciation that’s occurred through the month of October. And you obviously have to add some level of earnings, and I think your math was reasonable in the context of how you described it. Your fifth question, in terms of yield pickup, we talked about, basically, on the gross yield side about an affect in the third quarter of about 17 basis points of yield during that quarter, but that’s not obviously a full run rate impact, so that number is higher in terms of gross yield on our corporate credit across special situations with our bank loans and high-yield finance and CLOs and the like, until our goal is even though we are paying down some liabilities through principal pay downs and certain of our CLOs that we’re accreting through a weighted-average higher spread than floors to offset – more than offset that impact like we’ve seen caught in this last quarter to continue from that part of our business a healthy cash flow while we’re driving cash flow through our natural resources special situations and the like. And then finally, in the context of your point, related to driving shareholder action and interest in the context of getting our stock to fair value as opposed to below fair value, you know, it’s definitely something we spend a lot of time thinking about, I do, as a shareholder. I think there’s two things that we’ve encountered this year and in particular the last quarter. One is being classified in the financial services space, which by its nature has not been a good place to be regardless of the financial performance earnings powering cash generation of the business. You get tagged with the black flag, if you will and there’s not much we can do about that other than continued to be transparent in the context of our balance sheet and our earnings and the context of discussions like this and financial reporting, and to reach out and have discussions with investors one-on-one and speak at conferences so they understand our business model to the extensive nature of certain aspects of things we do. And really what the real risks are that we worry about as opposed to the supposed risks and rumors that people sometimes get caught up in. And we’re focused on long-term shareholder value, you know. Obviously we know shareholders are impatient and want, you know, near-term stock price in their bank accounts. But you know, really, we want to be measured over a couple years in terms of how we produce that and how we communicate that. I know Mike and I talk about that a lot and we’ve stepped up our communications to shareholder to understand the method. I know the analysts that have participated in this call, we appreciate their coverage, but that is an ongoing effort. Lee Cooperman – Omega Advisors: Thank you. The answers were as good as the questions.

And we do have another question from Wayne Cooperman with Cobalt. Wayne Cooperman – Cobalt Capital: I’ll just stick to one question. Just what’s the size of the interest rate swap loss in the quarter? Is that a permanent impairment or temporary impairment and how does that affect – you know, jive with what we’re hedging against?

Yeah, the interest rate swap, there’s no P&L fact, all the way through, either comprehensive incomes or designated cash flow hedges. We mentioned OCI has come back about $0.35 since quarter end, the end of October. A decent part of that was those swaps. Again, not a monetized loss. Wayne Cooperman – Cobalt Capital: If OCI came back and it’s mostly due to the interest rate swap, I thought the marks on your loans would come back a lot too?

Wayne, the difference – the distinction is loans are not – don’t – are not carried at fair value, so they don’t go with the book. Book value is going to be the bonds and the interest rate swap. So it’s not most the interest rate swap, when I say it came back $0.35, a meaningful part of that was the interest rate swap. In other words. We swapped fixed rate to floating rate within our structures and so any sort of tightening of the ten-year treasury has an impact on book value and if ten-year treasury rates rise, that reversus for us. There’s no permanent impairment. Wayne Cooperman – Cobalt Capital: Right. Okay.

We do have another question. We’ll take that from Joel Montgomery with Cobalt Capital. Joel Montgomery – Cobalt Capital: Sorry, just one other question. During the quarter, Moody’s upgraded some of the notes in CLLO5Q to AAA. I was wondering if there’s any benefit to KFN from this, or to the potential earnings from that CLL?

Sure. Good question, Joel. The tranches have been upgraded. For our CLO’s what we call our restricted trading condition, which means for the CLOs, 05-1, 05-2 and 07-A, we try to reinvest in period, technically, subject to other tasks, we invest some unscheduled principal proceeds including proceeds from sales. For 05-2 and 07-A, [inaudible] for those two deals also have a weighted average life test that you’re restricted by, for a more practical standpoint, while there’s you know, there’s always a chance you may reinvest something, but it’s not likely. For 05-1, there’s probably a little more opportunity that would be dependent upon – it would be shorter data for that, but there would probably be some opportunities for [inaudible]. Joel Montgomery – Cobalt Capital: Okay. And also, you talked about the opportunity from over $1 trillion of potential European bank dispositions coming over the next year or two, and I’m sure those are going to come from across a number of asset classes and we’re just wondering if what you said, what you thought was most interesting was corporate credit or if it was something else and if you plant to focus on dollar denominated assets?

Yeah, in the 1.8 trillion euro asset disposition number that we researched, a good portion of that actually are dollar-denominated assets but not all. And so we’re just as comfortable as I think financials [inaudible] euro-denominated assets when we hedge back to $1 because we want to avoid making currency bets because that’s not, you know, I guess our core competence. So the answer is, a lot of those are corporate. Some of those are distressed real estate mortgage assets. Some of those are either whole business securitizations that have kind of a real estate and an operating company component all of which in a number of these cases are businesses, we as a firm know, and our manager knows really well. Joel Montgomery – Cobalt Capital: Okay, thanks for taking my questions.

And that is all the questions we have today. I’d like to turn the conference over to Bill Sonneborn for any additional closing remarks.

Thank you. And thank you all for listening today in the busy earnings season. We’ll get back to work and try to put together a good quarter for you. Thanks.

Once again, this does conclude today’s conference call. Thank you all for your participation.