KKR Financial, a San Francisco-based specialty finance real estate investment trust is launching an asset-backed commercial paper program to chase yield and continue to fund its mortgage loan business. The vehicle, called KKR Atlantic Funding, will issue up to $5 billion in secured liquidity notes.

It will then use the funds to buy repurchase agreements secured by agency-backed ARMs and HMS, as well as Moody's Investors Service Aaa'-rated private label mortgage loans. Increasing interest rates will likely set the stage for KKR Financial to execute more profitable repo trades, say industry sources. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, however, most likely gave KKR Financial even more incentive to launch the conduit program. Under the old bankruptcy law, issuers in a repurchase agreement reserved the right to liquidate, accelerate or terminate the agreement if a counter party went bankrupt. That provision, however, applied only to situations where the counter party and issuer dealt with government securities as collateral.

Under the new bankruptcy law, a myriad of other securities qualify as collateral in repo agreements, including mortgage related securities, mortgage loans, interests in mortgage-related securities or mortgage loans, eligible bankers' acceptances and in some cases, qualified foreign governments securities, according to a special report from Moody's.

Given the broader definitions of repo collateral, KKR Financial is allowed to act as a repo counterparty to KKR Atlantic Funding Trust, and to its first ABCP program, KKR Pacific Funding Trust. KKR Pacific was launched in September 2005, before the bankruptcy code was passed. Previously, KKR relied on another of its corporate entities to act as the repo counter party. Given the change in the bankruptcy code, KKR Financial might not need to rely on the depositor entity as a repo counter party.

"The conduit is at least partially replacing [traditional] repurchase lines as a funding source," for KKR Financial, said a market professional.

Most of KKR Financial's loans are to prime and super-prime credits, although the company invests in unrated and nonconforming assets. KKR Atlantic Funding is its second partially supported SLN program. KKR Financial was among several mortgage companies that established ABCP programs and used repo agreements to fund their mortgage portfolios, according to Moody's. The others are Arlington, Va.-based Friedman, Billings Ramsey and Thornburg Mortgage, of Santa Fe, N.M. The conduits issue extendible notes, instead of having bank liquidity lines. If the conduit cannot reissue CP at its maturity date, the ABCP investors are repaid when the counter party repurchases the securities. If the counter party fails to repurchase the securities, the securities can be sold during the extension period, and the funds can be used to pay investors.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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