KKR Financial Holdings has delevered four of its CLOs to boost liquidity, and the company projects a quarterly profit, it said Tuesday.

KKR Financial sold some of its own higher-priced holdings in CLO 2009-1 on the secondary loan market and used the proceeds to repay investors in the CLO’s senior notes. It retired the entire tranche of senior notes, which at the end of March totaled $561 million.

Prior to the sale, an affiliate of the company held a 20% interest in the CLOs subordinate notes, which were retired in exchange for a 20% interest in each of the remaining assets in the CLO.

Following the deleveraging and distribution of assets to the affiliate, the firm now owns roughly $317 million of the CLOs corporate loan assets, with an estimated fair market value of $242 million, along with $15 million of cash and receivables assets.

KKR Financial also cancelled $298 million in mezzanine and junior notes previously issued by three other CLOs, two from 2005 and another from 2006. The notes were cancelled and the debt forgiven.

Without this debt, these three CLOs have enough assets to pass overcollateralization tests, enabling investors holding the remaining mezzanine and subordinate notes to regain cash flows from these vehicles.

Many CLOs have been failing overcollateralization tests as the corporate debt that the vehicles hold is hit by rising bankruptcies.

KKR Financial also said it expects to make a profit of 11 cents to 19 cents a share in the quarter that ended June 30. The firm is due to report results on Aug. 6. The firm said it does not expect to make cash distributions to shareholders for the quarter. It had an unrestricted cash flow of $114 million on June 30.

The firm’s shares jumped 23% to $1.79 Tuesday morning following the deleveraging announcement. The stock had previously slumped more than 90% since 2007.

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