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.

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