Pam Testani – Head, IR Mike McFerran – CFO and COO Bill Sonneborn – President and CEO

Scott Valentin – FBR Capital Markets Daniel Furtado – Jefferies John Hecht – Stephens Lee Cooperman – Omega Advisors

Good day ladies and gentlemen and welcome to KKR Financial Holdings LLC First Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will be given at the time. As a reminder this conference call is being recorded. I would now I like to turn the conference over to your host Pam Testani, Head of Relations of KKR, LLC. You may begin.

Thank you, Mercy. Welcome to our first quarter 2013 earnings call. I am joined by Bill Sonneborn our CEO and Mike McFerran our COO and CFO. We’d like to remind everyone that we’ll be discussing forward-looking statements based on management’s beliefs on today’s call, we don’t guarantee future events or performance and they’re subject to substantial risks that are described in greater detail both in our SEC filings and in the supplemental information presentation posted to our website. Actual results may vary materially from today’s statements. We’ll also be referring to non-GAAP measures which are reconciled to GAAP figures in the supplements. I’ll start the call with some first quarter highlights and then Mike will discuss our financial performance and Bill will go over the market backdrop and our strategy activity and performance. So seeing from our earning release that this is the first quarter we’re reporting results that factor in distributions on our main perpetual preferred shares. Now there are two net income lines on our income statement. Net income, which is before preferred distributions that are declared in a given quarter and then net income available to common shareholders which adjusts for the distribution. The later one is what our per share earnings figures are now based on. Today we reported first quarter net income available to common shareholders of $92 million or $0.46 per diluted common share an increase of 19% from last quarter’s net income available to common shareholders. Adjusted for one-time non cash charges of $24 million associated with retiring our 7.5% convert net income available to common shareholders increased 50%. We also generated an 18% return on equity which makes us our sixth consecutive quarter of delivering greater than our target return of 10-year treasury plus the 1000 basis points. Our book value per common share decreased $0.15 or 1% to $10.16 from December to March 31st primarily because our 7.5% convertible notes were converted into $26.1 million common shares during the quarter. In connection with this quarter’s earnings yesterday our Board of Directors declared a cash distribution of $0.21 per common share. This represents a 95% payout ratio on run rate and a 64% payout on total cash earnings per share if you normalize cash earnings for semiannual interest payments on our convert and that’s prior to their conversion. The distribution is payable on May 28th to common shareholders of record as of May 14th. Finally we’re holding our annual shareholder’s meeting at 9 AM Pacific today. Guideline details are available on our website at kkr.com under events and presentation. And I’ll pass things to Mike.

Thanks, Pam, and good morning, everyone. This morning we announced first quarter net income available to common shareholders of $92 million or $0.46 per diluted common share. This compares to $77 million of net income or $0.40 per diluted common share for the fourth quarter of 2012. The largest driver of this increase was realized and unrealized gains on investments which have benefited and continued strong performance in both the equity and debt benefits. First quarter net income consisted of $140 million of total revenues, $81 million of total investment cost, $74 million of other income and $35 million of other expenses. Our total revenues increased 5% from the fourth quarter the biggest drivers here were oil and gas and other revenue which increased $3.5 million $2.7 million respectively from last quarter. Other revenues primarily consisted of dividends from a combination of special situations real estate and opportunistic energy investments. Oil and gas revenue benefited from two things increased production from the joint strategy investments we made in 2012 and higher realized prices across our drilling and royalty strategies. Total investment costs for the first quarter increased 12% for the fourth quarter at $81 million most of this resulted from the $11 million increase in our provision for loan losses we thought it was prudent to add a little allowance which now stands at 3.5% of the advertise cost basis of our loans held for investments. Other income almost doubled from the fourth quarter to $74 million in the first quarter. This positive impact was mostly from $95 million of realized and unrealized investment gains with the majority coming from realized gains on loans and unrealized gains on the equity investments (for much) markets. Partially offsetting those benefits were realized and unrealized losses on foreign exchange and derivatives mostly unrealized losses on our commodity hedges. It may seen counter-intuitive the rise in natural gas prices to be a negative for us from an earnings standpoint. And the part of our hedge is essentially locking a guaranteed sales price for a portion of the commodities we produce on our current or expected sales prices surpass that guaranteed price we experience on the loss on the value of our hedge. Marks on our hedges are offset by the assets favorable tax since we don’t market our energy investments to market under GAAP. This quarter’s results also include $24 million of one-time non-cash charges as a result of the extinguishment of our 7.5% converts that Pam described so, both of this came through other income as a $20 million loss on debt extinguishment. The other $4 million was a write off of deferred financing fees that flow through interest expense. We’ve been amortizing the deferred financing fees over the life converts so the write off that accelerates the amortization we expected to incur over the next few years. The debt extinguishment charge is a difference between the fair value of the debt component of the converts when we did the conversions and while we are carrying the debt – as of year end. While other increments and the big driver of earnings over the last year is important to remember that this large drive and gains on exits and market-to-market on the assets we account for it and estimated fair value. Both of these are highly variable with asset prices so other incomes more volatile and therefore less predictable. Finally other expenses totaled $35 million for the first quarter up $21 million from the fourth quarter the increase was almost entirely attributable to higher management and incentive fees. The management fees rose because of the new preferred common equity reissued while incentive fees were a function of the strength of this quarter’s earnings. Collectively these results drove $0.19 of run rate cash earnings per share for the first quarter including this last semiannual interest payment on the 7.5% convertible notes we eliminated straight-line in that payment as that for quarterly we generate a normalized $0.22 of run rate cash earnings per share for a 9% annualized cash return on equity. This was down from a normalized $0.26 in the fourth quarter. Looking at total cash earnings per share which includes cash gains we generate $0.03 or $0.33 normalized from that last convert payment I mentioned. This is down from a normalized amount of $0.36 from the fourth quarter. I do want to highlight that our cash earnings figures on the per share basis so they are impacted by the 15% increase in our common share count resulting from the retirement of our 7.5% convertible notes. We’re pleased to continue deliver returns at these levels despite having them over $700 million of cash on our balance sheet at quarter end. On our last quarterly call we discussed some actions we took in the first quarter capitalizing today’s historically low rates and create meaningful long term value for our shareholders. Specifically issuing perpetual preferred shares and as I mentioned terminating the conversion rights on our 7.5% converts. Having to please us our balance sheet today is now particularly strong we have no market-to-market debts our next maturity is 23 years from now and were only levered 0.3 times on the debt to equity basis. Of course leverage isn’t just a measure of percentage of equity. (inaudible) and churns are actually most important in tight spending environments like we’re witnessing today would be easy to use short-term leverage to enhance returns on lower market yields. This could have the intended effective increase in earnings in the short term but also introduces meaningful downside risk. 30 year unsecured bonds perpetual preferred equity on the core opposite end of the risk spectrum from short term total rate of return swap financing and when risk-on it goes to risk off that distinction is very evident. We’ve positioned this company have a debt structure that is insulated from short-term market volatility coupled with ample drypowder, this should enable to us to be opportunistic (inaudible) be under defensive. Bill.

Thanks, Mike. We’re having best features in the balance sheet Mike just described is the liquidity we have today. We ended the quarter with over $700 million of cash, that’s an addition to our $150 million revolver and mez notes we could sell out of our CLO position. The obvious question is why set on so much cash? We think it’s critical because of the environment we find ourselves in. As you can tell from our Q1 results 2013 began like the last few years with markets expiring and also there is for risk assets. And this was despite some less than favorable news, for example out of Europe including European unemployment statistics that didn’t even make the markets (pledge). Asset prices have been overpowered by the magnitude and demand for yield and that demand has led the loosening lending standards, this gives us pause. In a quarter full of records, record issuance, record highs we kept our focus on disciplined capital deployment that makes us contrarian in today’s world. In the credit market specifically the world record came up a lot this quarter not surprisingly the continued combination of technical and optimistic sentiment kept loan and bond yields near record, record lows of just north of 5.5% in Q1. Demand is seemingly never been stronger, CLOs had another post crisis quarterly issuance record of $28 billion in Q1 and retail inflows in the loan bonds regularly surpassed prior records in the back half of the quarter. And unfortunately all of the demand has outstretched supply given a relatively lengthy period of little global M&A volume. The majority of Q1’s record aggregate loan and high yield issuance has stemmed from refinancing, 79% of loan and 69% of bond volume reflected either refinancing or re-pricing as opposed to truly new paper within the market. So it’s a little wonder what that incremental capital deployment to our biggest strategy historically bank loans and high yields financed through CLOs was more muted this quarter. We continued ramping CLO 2012-1 to 97% at March 31, so we actually didn’t (print) at CLO in Q1. That said we did start to purchase assets earmarked for a potential new CLO. Since we don’t have any CLOs we have to ramp by a certain date, we can be patient selecting specific assets, which is increasingly important as lower quality issuers have gained access to the market. It’s easy to lose side of credit quality in today’s risk-on environment but our process and discipline have lend themselves to quality asset selection over time. Just to give you a sense we only had one high yield bond default in the company’s eight year history of investing within high yield. At times like this when risk across asset classes is been priced so aggressively we really benefit from our flexibility. Our structure led us take advantage of the breadth of opportunities sourced by our manager which we did in Q1. Much of our recent activity is been in more liquid strategies. We think these provide attractive risk-adjusted returns today not only because they have a less transparent pricing mechanism but also because the market’s current focus on liquidity makes them relatively less interesting or accessible to the marginal investor. These situations are less dependent on market technicals, and KKR can work one-on-one with the company seeking capital to set terms specific to the circumstance and their needs. Let me walk through our strategies to give you a sense of how this type of flexibility is played into what we’ve been doing. Any returns I mentioned are specific to those to common equity. Our first quarter return on average on net equity was 18% across all our strategies up from 17% last quarter. Excluding gains our run rate return on capital was 10%. In bank loans and high yields financed, generated through CLOs we generated 16% run rate and a 34% total return on equity for the quarter. The Natural Resources our second largest strategy by average net equity exposure we generated an 8% run rate and 4% total loss on equity for the quarter reflecting the mark-to-market impacted our hedges that Mike referenced. In special situations we are able to create value in loans and securities through active restructuring efforts including at EDMC and Travelport. Collectively this activity contributed to a 12% run rate and a 56% total return on capital in special situations. Our focus is remained on private opportunities and we have an active pipeline of these globally. Most recently we deployed nearly $30 million through a financing of Spanish building materials manufacturer Uralita for a private loan through its subsidiary URSA helping the company to repay current lenders and develop European information business, which has very little Spanish exposure and significant leverage to growth markets in Eastern Europe. Our mezzanine strategy generated a 21% run rate and a total return on equity in Q1. We feel we’ve been quite disciplined in building this portfolio over the last couple of years, underwriting quality credits and avoiding venturing of the risk spectrum as the lending market (inaudible). This paid off in Q1 the form of completed or announced realizations of several positions, including RBS WorldPay, IMCD and a portion of our investment in Stork. From a deployment perspective we continue to be very careful in providing mezzanine capital. On the opposite end of this spectrum from an opportunity perspective is commercial real estate. This is an area where we’ve seen the most activity since we last spoke. Our targets here our properties where we have a competitive advantage that goes beyond just the acquisition of real estate specifically in retail, hospitality, and healthcare. These are industries where KKR has an exceptionally long private equity track record and well-connected resources that can help us form a (inaudible) market areas, assets, regulation and specifically within retail tenants. These are also some of the most operationally intensive industries in real estate. We can be a differentiated buyer into the KKR’s ability to bring operational professionals and capabilities to these relevant properties. And these real estate subset sectors are also fragmented which gives us maximum optionality in terms of exits. In the quarter we committed four new transactions, the first is Legends Outlets, which is an outlet bond in Kansas City that we acquired out of foreclosure but we think we can improve the leasing profile of the company substantially. Second with Sentio Healthcare Properties a non-listed healthcare-focused REIT where we’ve committed to a 7.5% convertible preferred equity security to help that company reach scale. Third with Colonie Center a super-regional mall in Albany which we acquired from a special servicer at a substantial discount to its replacement cost. And the last was a 360-key hotel in the Midwest which we plan to substantially renovate and move up market. We expected to deploy an aggregate 90 million to 130 million to these opportunities over time over 80 million of which has been deployed as of today. On our existing real estate portfolio we generated a 72% total return on equity for the quarter and private equity we earned 37% total return on equity in Q1 greater than 12% appreciation in the first quarter. Across our strategies we remain focused on finding windows of opportunity to put our cash to work. Across all markets we’ve been looking in areas where supply demand disconnects are the greatest, often these areas are in our core strategies, sometimes they are adjacent. For example in financial services, European (bank key) leveraging has made available not just assets but even interesting businesses, for example like large ticket lending or leasing property, casualty, life insurance or annuity operations. They are no longer core to these banks but have highly attractive cash flow profiles and longer term business dynamics that are attractive. Many asset classes have begun the year on a strong note that’s why we are happy we are limited to any one of them. It’s exactly this type of environment when return is hard to earn without taking excessive risk that proves out the benefits of KFN’s flexible structure. We don’t have to buy in the private markets, KFN’s adaptability means we can get it elsewhere out of (retried) valued holdings and undervalued assets or businesses to have a cap of the work as we did this quarter. We believe that this is what distinguishes our company and it is ultimately what will drive the value we will create for you as our shareholders. Thanks for joining us this morning. We are happy to take any questions you have. Operator if you could open up for questions.

Thank you. (Operator Instructions) Our first question is from Scott Valentin from FBR Capital Markets. Your line is open. Scott Valentin – FBR Capital Markets: Good morning everyone and thanks for taking my question. Just with regard to dividend and the run rate and how we think about it going forward the dividend is $0.21 the run rate this quarter exist the convert came in was $0.22 so pretty close. Just wondering how you think about kind of the total revenue line the run rate line given selling off some of the interest earning assets like mezz and high yielding bank loan and replacing what other maybe less applicable assets. Just wondering how you think about the growth of that total revenue line and maybe that the dividend payout ratio so to speak going forward.

Sure. If you when you think about total revenue clearly a bigger growing part of our earnings over time it has been or continue to be what you see coming to other income as we do moderate capitals deployed to assets that will have more episodic gains and cash flow activity especially through what you see in our special situation strategy well you are not holding those assets as long-term yield replace you are holding them to work through a situation but exist hopefully in attractive multiple where you head in a situation. So I think when we think about looking forward on revenue we are conscious that run rate albeit important as one piece not the whole puzzle. Second Bill talked about where we stood with the point capital and commercial real estate those we’ve entered into forward transactions since our last earnings call there similar to our national resources strategy usually when you enter into one of these assets you’re going through a period of development or renovation of the asset you acquire. There is a bit of a J-curve why you are deploying some capital to prepare that assets for future run rate then you actually start to seeing some beautiful cash flows at some point in the future. So I think in reference we’ve made to-date and the capital we’ve committed should result in a revenue by increasing or else been equal.

Just add to what Mike said Scott that when you start $713 million of cash at quarter end that was basically earnings no income redeploying that into a income oriented assets will be material in terms of run rate on a going forward basis. Scott Valentin – FBR Capital Markets: Okay. Thanks guys that was helpful. And then you mentioned I guess you are collecting assets for CLO. Could you have any insight and maybe to have how much you’ve collected so far?

We’ve entered into the amount at this point is significant so it’s common was we’re being selective and taking our spots with them. The right thing is we’re in a clearly a very high price environment to really focus on identifying the assets that we really ignore him Mike without the fields and how to make a rush what you shouldn’t if win the next fields in hand obviously we’ll be ramping on a more accelerated basis. Scott Valentin – FBR Capital Markets: Okay. Thank you very much.

Thank you. Our next question is from Daniel Furtado from Jefferies. Your line is open. Daniel Furtado – Jefferies: Thank you for the opportunity. My first question is you mentioned a comment regarding taken provision higher as the prudent thing to do. Do you mind I guess just providing some additional color I mean in terms of what you have seen on the credit for in the portfolio and in essence what’s triggered the provision and I get it it’s down pretty massively year-over-year but still just looking for some color there?

Thanks. I appreciate it Daniel. We had a good quarter and we did the bottom up fundamental analysis credit by credit that we typically do and feel very comfortable with our portfolio where it stands today but the same time we also know where we are in a risk on environment in the growth of covenant why issuance increased leverage of a number of businesses due to dividend recaps in the life generally across the market but just feeling that it top down adjustments back to 3.5% allowance to our loans held for investment was prudent. Daniel Furtado – Jefferies: So I guess the way to revisit that you are targeting the 3.5 it’s not in reaction to specific performance in the book?

That’s correct. Daniel Furtado – Jefferies: Excellent. And then my second question and I appreciate that this could be difficult but in terms of the total the first question be what was the total dollars investment proceeds deployed in the quarter and then what has been committed over the course of the first quarter. And then how should we think about that the timing of putting this capital to work I get it that you are focusing a little bit more on commercial opportunities but I assume there is some lead time between the announcement of the opportunity and when we’ll start to see it impact the income statement. So aggregate dollar amount the timing and then just I assume T plus 1000 is the way to think about the returns there but just want to double check? Thank you.

So we always thought it was the dollar amount we deployed growth dollars a little over $150 million actually cash out the door during since year end. As far as commitments we talked about a range commercial real estate, total commitments we entered in the quarter was to be in the results of capital going out somewhere in the range of $170 million to just a little over $200 million. Daniel Furtado – Jefferies: Okay.

And the answer to your follow-up question is yes we are targeting minimum expected returns of 10-year Treasury plus 1000. Daniel Furtado – Jefferies: And then timing I guess between the deployment of the capital going out the door and see that reflect on the financial statements?

It’s really going to be a function of which assets on the commercial real estate strategy which represented the majority of our activity this quarter. I would expect probably run rate income on a blended basis for those assets usually starting to six to 12 months after you make the investments clearly if you make any private equity investments or depending on what you are doing in the especial situations again is less focus on run rate and then any debt instruments we buy obviously starting yielding assets left again.

Exactly it’s a mix bag and the year lead investment that we made during are committed to just recently as of example when asked or begin showing up in the P&L immediately. Daniel Furtado – Jefferies: Excellent. Thank you for the color.

Thank you. Our next question is from John Hecht from Stephens. Your line is open. John Hecht – Stephens: Good morning guys. Thanks for taking my questions. Most of them have been asked actually but one question is can you have the dollar amount per share of the carrying value versus the fair value at this point?

We do John it’s actually.

The H13 of the supplemental materials. John Hecht – Stephens: Okay. I can get that.

You see that carrying value as of quarter end so where our balance sheet book value is $0.93 and the dollar of our corporate debt portfolio with the fair market value of north of $0.95 across all of our corporate debt. So, basically two points below fair market value. John Hecht – Stephens: Okay. I can figure that on a per share basis. And then what if the you mentioned that you consider selling the mezzanine CLO assets to create liquidity. What are you returns in those right now?

They are yielding to us from the yield maturity perspective sub 8% and the cash on cash portion of that yields is sub 3% and so redeploying that into Treasury plus 1000 would be accretive to our shareholders as we find opportunities going forward. John Hecht – Stephens: Okay. Thanks and last question is what are you looking for what should we be looking for I guess to kind of shake the market and cost risk spreads to widened to a point where we think that opportunities to go for your guys the point capital would become substantial rather than just looking for opportunities and the mix at this point?

Well we are always looking John for supplying the band amounts for capital deployment we’ve been consistent in view of how much risk we are willing to take and there are areas when you want to be on your front foot and won and areas when you want to be cautious. And so we expect over as we kind of entered the seventh ending of the credit cycles of example continue to find opportunities from European bank de-leveraging some of the challenges going on in that continent we expect volatility increases the capital deployment pace will increase logarithmically. John Hecht – Stephens: Okay, great. Thanks very much.

Our last question is from Lee Cooperman from Omega Advisors. Your line is open.

Good morning, Lee. Lee Cooperman – Omega Advisors: Good morning, good morning. Congratulations guys doing a terrific job. I guess you conservative world is not too conservative these days but nothing wrong with that. Just state me some brain damage I think the question may have been answered already but if you look at our earnings on our normal like a run rate to taking out usual things which I think is what the board will look at as regards to the recurring quarterly dividend is fair to say that the run rate is around $0.22 or is that understating the current run rate of earnings.

I think it’s probably all of Lee this quarter we had well the normalized amount that was $0.22 but also reflected onetime tax payment equates about $0.02. So again every deals been normalized for the quarter probably would have been around $0.24. Lee Cooperman – Omega Advisors: Okay.

And that’s including the cash drag impact on the run rate. Lee Cooperman – Omega Advisors: With that I’ll get to my second question. So you are seeing 1000 over treasuries, you have $700 million cash, you got a revolver and use of $150 million. What would you think given the fact you have no maturities for a very long period of time. What would be a minimal cash that you would want to hold to operate the business?

One benefit we recall we placed our revolver with a credit facility that’s not based on a sort of asset base that we borrow against so we’ve got a $150 million credit facility is untapped and that was up to give back to working capital really whenever we need. The amount of cash we would actually need to sit down with the current quarter to run the business and service debt is frankly de minimis. Lee Cooperman – Omega Advisors: Right. So..

Which is better – we’d be contend to point just about all this capital to the wide opportunities. Lee Cooperman – Omega Advisors: Right. So we could say $700 million divide that by $197.2 million shares is theoretically there is $0.35 in earnings out there on an annualized basis that we could grab once we see prudent lending opportunities?

Yeah and plus you have the reinvestment of the mezz notes and the credit facility that we deployed into earning assets as well. Lee Cooperman – Omega Advisors: Got you, alright. This might be ahead of myself but in terms of the board view of the dividend, are you guys trying to be like Corporate America and bump this thing every July assuming the fundamental outlook is favorable and we feel comfortable I think, if the Board will review the dividend in a favorable way in July?

The Board did have a discussion on the dividend this quarter, we were roughly $0.21 and we will obviously have a big discussion with Board in our next meeting and will report back to you with the outcome of that is. Lee Cooperman – Omega Advisors: Okay, good one. It looks through like in a July pattern but alright good luck, you’re doing a very good job and we all appreciate that.

Thank you, Lee. I appreciate as well.

We have a follow-up from Daniel Furtado from Jefferies. Your line is open. Daniel Furtado – Jefferies: Thanks again for the follow-on opportunity. I just want to clarify something I thought I heard a comment earlier about some interest expense in the quarter that won’t be recurring or did I just misunderstand I guess should I say, should we be thinking about a different run rate interest expense for Q2 or was that just mean missing something?

No, we did. We talked about we had a $24 million one-time non-cash charge related to taking out of converts, of that amount $4 million was for interest expense which was a write-off of deferred finance cost that was a one-time amount. Daniel Furtado – Jefferies: Excellent. Thank you for the clarity. And then my final question and I get it it’s speculative, but what’s your baseline scenario for (QE3) paper, what you expect to see in the fixed income markets and how is your strategy today in that setting you up for that expectation? Thank you.

We expect the Federal Reserve particularly for the duration this year to keep short-term rates quite low. We do think that the change of the Federal Reserve Chairman no matter what direction President Obama goes will be more (dervish) than what we have today. We expect in 2014 long-term rates particularly focused on the tenure to appreciate substantially going from somewhere in the range of 1.65% up to three or higher as a result of kind of the curve adjusting. We think there is short-term impacts not only because of the (QE) on the 85 billion monthly purchases but also the end devaluation and Japanese investors putting $2 based assets is a defensive mechanism. Daniel Furtado – Jefferies: Thank you for the opportunity everyone.

Thank you. I would now like to turn the conference over to Bill Sonneborn for closing remarks.

Well thank you all for letting us go through the quarter with you. We’ll get back to work and look forward to talk to those of you that have dialed into the shareholder meeting coming up here in a little bit. And hopefully we will have a good quarter this coming quarter. Thank you very much.

Ladies and gentlemen this does conclude today’s conference. You may now disconnect. Everyone have a great day.