- Prospectus filed pursuant to Rule 424(b)(5) (424B5)
May 04 2010 - 5:02AM
Edgar (US Regulatory)
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TABLE OF CONTENTS
TABLE OF CONTENTS
Table of Contents
Filed Pursuant to Rule 424(b)(5)
Registration No.: 333-143451
The information in this preliminary prospectus supplement is not complete and may be changed. This
preliminary prospectus supplement and the accompanying prospectus are neither offers to sell nor solicitations of offers to buy these securities in any jurisdiction where the offer or sale thereof is
not permitted.
Subject to Completion
Preliminary Prospectus Supplement dated May 3, 2010
PROSPECTUS SUPPLEMENT
(To Prospectus dated March 3, 2009)
25,000,000 Shares
KKR Financial Holdings LLC
Common Shares
We are offering 25,000,000 common shares of KKR Financial Holdings LLC.
Our
common shares are traded on the New York Stock Exchange, or NYSE, under the symbol "KFN." The closing price of our common shares on May 3, 2010 was $9.19 per share.
Ownership
of our shares by any person is generally limited to 9.8% in value or in number of shares, whichever is more restrictive. In addition, our operating agreement contains other
limitations on the ownership and transfer of our shares. However, pursuant to our operating agreement, our board of directors may, under certain circumstances, terminate these limitations on ownership
and transfer of our shares or grant exemptions to certain persons. For additional information on the ownership and transfer restrictions on our shares, see "Description of SharesCertain
Provisions of the Operating AgreementRestrictions on Ownership and Transfer" in the accompanying prospectus.
We
are externally managed and advised by KKR Financial Advisors LLC (the "Manager"). The Manager is an indirect subsidiary of Kohlberg Kravis
Roberts & Co. L.P. ("KKR"). KKR holds a controlling interest in the parent of KKR Capital Markets LLC, an underwriter in this offering. See "Underwriting" beginning on
page S-20 of this prospectus supplement.
Investing in our common shares involves risks. See "Risk Factors" beginning on page S-5 of this prospectus supplement.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to us
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$
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$
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Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this
prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.
The
underwriters may also purchase up to an additional 3,750,000 common shares at the public offering price, less the underwriting discounts and commissions, to cover
over-allotments, if any, within 30 days of the date of this prospectus supplement. If the underwriters exercise this option in full, the total underwriting discounts and commissions
will be $ , and our total proceeds, before expenses, will be $ .
The
underwriters are offering the common shares as set forth under "Underwriting." Delivery of the common shares will be made on or about May , 2010.
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Joint Book-Runners
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BofA Merrill Lynch
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Citi
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Deutsche Bank
Securities
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KKR
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Morgan Stanley
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Co-Managers
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FBR Capital
Markets
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JMP Securities
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Keefe, Bruyette &
Woods
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Sandler O'Neill +
Partners, L.P.
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The date of this prospectus supplement is May , 2010.
Table of Contents
TABLE OF CONTENTS
Unless
otherwise expressly stated or the context otherwise requires, the terms "we," "our company," "us" and "our" and similar terms refer, as of dates and for periods on and after
May 4, 2007, to KKR Financial Holdings LLC and its subsidiaries and, as of dates and for periods prior to May 4, 2007, to our predecessor, KKR Financial Corp., and its
subsidiaries; "Manager" means KKR Financial Advisors LLC; "KKR" means Kohlberg Kravis Roberts & Co. L.P. and its affiliated companies (excluding portfolio companies that
are minority or majority owned or managed by funds associated with KKR); "management agreement" means the amended and restated management agreement (as heretofore
amended) between KKR Financial Holdings LLC and the Manager; "operating agreement" means the amended and restated operating agreement of KKR Financial Holdings LLC (as heretofore
amended); "common shares" and "preferred shares" mean common shares and preferred shares, respectively, representing limited liability company interests in KKR Financial Holdings LLC;
references to "our shares" (and similar references) mean common shares and preferred shares of KKR Financial Holdings LLC; and references to "$" and "dollars" mean United States dollars.
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ABOUT THIS PROSPECTUS SUPPLEMENT
This document consists of two parts. The first part is this prospectus supplement, which describes the specific terms
of this offering. The second part is the accompanying prospectus, which describes more general information, some of which may not apply to this offering. You should read both this prospectus
supplement and the accompanying prospectus, together with additional information described under the headings "Where You Can Find More Information" and "Incorporation by Reference" below.
If
the description of the offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information in this prospectus supplement.
Any
statement made in this prospectus supplement or in a document incorporated or deemed to be incorporated by reference in this prospectus supplement will be deemed to be modified or
superseded for purposes of this prospectus supplement to the extent that a statement contained in this prospectus supplement or in any other subsequently filed document that is also incorporated or
deemed to be incorporated by reference in this prospectus supplement modifies or supersedes that statement. Any statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this prospectus supplement. See "Incorporation by Reference."
We have not authorized anyone to provide any information or to make any representations other than those contained or incorporated by reference in this prospectus
supplement, the accompanying prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other
information that others may give you. This prospectus supplement, the accompanying prospectus and any such free writing prospectus is an offer to sell only the common shares offered hereby, but only
under circumstances and in jurisdictions where it is lawful to do so. You should not assume that the information in this prospectus supplement, the accompanying prospectus, any related free writing
prospectus or any document incorporated or deemed incorporated herein by reference is accurate as of any date other than the date of this prospectus supplement. Also, you should not assume that there
has been no change in the affairs of our company since the date of this prospectus supplement. Our business, financial condition, results of operations and prospects may have changed since that
date.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC") a registration statement on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"), of which this prospectus supplement is a part, with respect to the securities to be sold pursuant to
this prospectus supplement. This prospectus supplement does not contain all of the information set forth in the registration statement and exhibits to the registration statement. For further
information with respect to us and the securities to be sold pursuant to this prospectus supplement, reference is made to the registration statement, including the exhibits to the registration
statement. Statements contained in the prospectus, this prospectus supplement and in the documents incorporated and deemed to be incorporated by reference herein or in any free writing prospectus as
to the contents of any contract or other document do not purport to be complete and, where that contract or document is an exhibit to the registration statement or an exhibit to a document
incorporated or deemed to be incorporated by reference in the registration statement, each statement is qualified in all respects by reference to the exhibit to which the reference relates. Copies of
the registration statement, including the exhibits to the registration statement, and other documents we file with the SEC may be examined without charge at the public reference room of the SEC,
100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the public reference room may be obtained by calling the SEC at
1-800-SEC-0300. Copies of the registration statement, including the exhibits, and the other documents we file with the SEC can be obtained from the public reference
room of the SEC upon payment of prescribed fees. Our SEC filings, including our registration statement, are also available to you for free on the SEC's website at
http://www.sec.gov.
You may also
inspect information that we file with the NYSE at the offices of the NYSE at 20 Broad Street, New York, New York 10005.
We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and file periodic reports, proxy statements and other information
with the SEC.
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SUMMARY
This summary highlights selected information contained elsewhere or incorporated or deemed incorporated by
reference in this prospectus supplement and the accompanying prospectus and does not contain all of the information you should consider when making your investment decision. We urge you to carefully
read all of this prospectus supplement, the accompanying prospectus and the documents incorporated or deemed incorporated by reference, including our consolidated financial statements and accompanying
notes, to gain a fuller understanding of our business and the terms of our shares, as well as some of the other considerations that may be important to you, before making your investment decision. You
should pay special attention to the "Risk Factors" section of this prospectus supplement and the documents incorporated or deemed incorporated by reference to determine whether an investment in our
shares is appropriate for you.
KKR Financial Holdings LLC
We are a specialty finance company with expertise in a range of asset classes. Our core business strategy is to leverage the
proprietary resources of our Manager with the objective of generating both current income and capital appreciation. We primarily invest in financial assets including below investment grade corporate
debt, including senior secured and unsecured loans, mezzanine loans, high yield corporate bonds, distressed and stressed debt securities, marketable equity securities and credit default swaps.
Additionally, we have made or may make investments in other asset classes including natural resources and real estate. The corporate loans we invest in are primarily referred to as syndicated bank
loans, or leveraged loans, and are purchased via assignment or participation in either the primary or secondary market. The majority of our corporate debt investments are held in collateralized loan
obligation ("CLO") transactions that are structured as on-balance sheet securitizations and are used as long term financing for these investments. The senior secured notes issued by the
CLO transactions are primarily owned by unaffiliated third party investors and we own the majority of the subordinated notes in the CLO transactions. We execute our core business strategy through
majority-owned subsidiaries, including CLOs.
We
are externally managed and advised by KKR Financial Advisors LLC, our Manager and an affiliate of KKR, pursuant to the management agreement between us and our Manager. Our
Manager was formed in July 2004. All of our executive officers are either employees or members of our Manager or one or more of its affiliates. The executive offices of our Manager are located at
555 California Street, 50th Floor, San Francisco, California 94104 and the telephone number of our Manager's executive offices is (415) 315-3620.
Recent Developments
On May 3, 2010, we, together with certain of our subsidiaries (collectively, the "Borrowers"), entered into a Credit Agreement
(the "2010 Credit Agreement") with Citibank, N.A., Bank of America, N.A., Deutsche Bank AG New York Branch and Morgan Stanley Bank, N.A. The 2010 Credit Agreement provides for a four-year
$210 million asset-based revolving credit facility. The facility is subject, among other things, to the terms of a borrowing base derived from the value of eligible specified financial assets.
The borrowing base is subject to certain caps and concentration limits customary for financings of this type. The Borrowers may obtain additional commitments under the facility so long as the
aggregate amount of commitments at any time does not exceed $600 million.
The
Borrowers have the right to prepay loans under the facility in whole or in part at any time. All amounts borrowed under the 2010 Credit Agreement must be repaid on or before
May 3, 2014. Initial borrowings under the 2010 Credit Agreement are subject to, among other things, the substantially
concurrent repayment by the Borrowers of all amounts due and owing under our existing credit facility and such facility's effective termination.
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Loans
under the 2010 Credit Agreement bear interest, at the Borrowers' option, at a rate equal to the London interbank offered rate ("LIBOR") plus 3.25% per annum or an alternate base
rate. Ongoing extensions of credit under the 2010 Credit Agreement are subject to customary conditions, including sufficient availability under the borrowing base. The 2010 Credit Agreement contains
customary negative covenants applicable to the Borrowers and their subsidiaries, including negative covenants that restrict the ability of such entities to, among other things, (i) incur
additional indebtedness, (ii) allow certain liens to attach to such entities' assets, and (iii) make distributions to our shareholders in excess of 65% of our annual taxable income or
make certain other restricted payments. In addition, the 2010 Credit Agreement also includes financial covenants, including requirements that we:
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maintain adjusted consolidated tangible net worth (as defined in the 2010 Credit Agreement) of at least
$700 million plus an amount equal to 25% of the net proceeds received from the issuance and sale of any of our or our subsidiaries equity interests (as defined in the 2010 Credit Agreement);
and
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not exceed a leverage ratio (as defined in the 2010 Credit Agreement) of 2.00 to 1.00 computed on a basis that generally
excludes the debt of variable interest entities that we consolidate under GAAP.
The
2010 Credit Agreement also includes other covenants, representations, warranties, indemnities and events of default, that are customary for facilities of this type, including events
of default relating to a change of control.
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The Offering
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Issuer
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KKR Financial Holdings LLC
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Common Shares Offered by Us
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25,000,000
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Overallotment Option
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3,750,000
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Common Shares to Be Outstanding After this Offering
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183,359,757 (or 187,109,757 shares if the underwriting overallotment is exercised in full)
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Restrictions on Ownership
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Our operating agreement contains restrictions on the number of our shares that a person may own that are intended
to assist us in maintaining the qualification of any REIT subsidiary of ours as a REIT under the Internal Revenue Code of 1986, as amended, or the "Code." Among other things, the operating agreement provides that, subject to exceptions, no person may
beneficially or constructively own shares in excess of 9.8% in value or number, whichever is more restrictive, of our outstanding shares, excluding shares not treated as outstanding for U.S. federal income tax purposes. In addition, the operating
agreement, subject to exceptions, prohibits any person from beneficially owning our shares to the extent that such ownership of shares would result in any REIT subsidiary of ours being "closely-held" under Section 856(h) of the Code (without
regard to whether the ownership interest is held during the last half of a taxable year) or would otherwise cause any REIT subsidiary of ours to fail to qualify as a REIT. For more information about these restrictions, see "Description of
SharesCertain Provisions of the Operating AgreementRestrictions on Ownership and Transfer" in the accompanying prospectus.
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Trading
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Our common shares are listed on the NYSE under the symbol "KFN."
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Material U.S. Federal Income Tax Considerations
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You should read carefully the section "Additional Material U.S. Federal Income Tax Considerations" in this
prospectus supplement and the section "Material U.S. Federal Income Tax Considerations" in the prospectus, as well as the tax risk factors that are included and incorporated or deemed incorporated by reference herein, for certain U.S. federal income
tax considerations relevant to our common shares.
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Use of Proceeds
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We estimate that the net proceeds from the sale of the 25,000,000 common shares in this offering, after deducting
the underwriters' discount and estimated offering expenses, will be approximately $219,411,250 (or approximately $252,322,938 if the underwriters' overallotment option is exercised in full). We expect to use the net proceeds from this offering to
acquire assets in accordance with our core business strategy and for general corporate purposes.
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Risk Factors
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You should read carefully the "Risk Factors" beginning on page S-5 of this prospectus supplement, as well as the risk
factors that are described in the documents incorporated or deemed incorporated by reference in this prospectus supplement, for certain considerations relevant to an investment in our common shares.
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Conflicts of Interest
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An affiliate of KKR Capital Markets LLC owns a controlling interest in our Manager. As a result, KKR Capital
Markets LLC may be deemed to have a "conflict of interest" under the applicable provisions of Rule 2720 of the Financial Industry Regulatory Authority. For more information, see "Conflicts of Interest."
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The
number of common shares to be outstanding immediately after this offering is based on 158,359,757 common shares outstanding as of April 22, 2010 and
excludes:
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an aggregate of approximately 21,139,705 common shares issuable upon conversion of our outstanding 7.50% Convertible
Senior Notes due 2017 at an applicable conversion price of $8.16 per common share, which includes an adjustment to the conversion price as a result of the Company's distribution paid to its common
shareholders through the date hereof;
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an aggregate of approximately 5,825,064 common shares issuable upon conversion of our outstanding 7.00% Convertible Senior
Notes due 2012 at an applicable conversion price of $31.00 per common share;
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1,932,279 common shares issuable upon the exercise of options outstanding as of March 31, 2010, having a
weighted-average exercise price of $20.00 per share;
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1,942,200 common shares authorized, but not yet issued under our 2007 Incentive Share Plan; and
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279,624 common shares reserved, but not yet issued under our Non-Employee Directors' Deferred Compensation and
Share Award Plan.
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RISK FACTORS
Investing in our common shares involves risks. You should carefully review the following risk factors and the
risks discussed under the caption "Risk Factors" in our Annual Report on Form 10-K filed with the SEC on March 1, 2010, which is incorporated by reference in this prospectus
supplement, in our Quarterly Report on Form 10-Q filed with the SEC on April 29, 2010, or any similar caption in the documents that we subsequently file with the SEC that are
deemed to be incorporated by reference in this prospectus supplement and the accompanying prospectus, and in any free writing prospectus that you may be provided in connection with the offering of
common shares pursuant to this prospectus supplement and the accompanying prospectus. You should also carefully review the other risks and uncertainties discussed in this prospectus supplement and the
accompanying prospectus, the documents incorporated and deemed to be incorporated by reference in this prospectus supplement and in any free writing prospectus. The risks and uncertainties discussed
below and in the documents referred to above, as well as other matters discussed in this prospectus supplement and in those documents, could materially and adversely affect our business, financial
condition, liquidity and results of operations and the market price of our common shares. Moreover, the risks and uncertainties discussed below and in the foregoing documents are not the only risks
and uncertainties that we face, and our business, financial condition, liquidity and results of operations and the market price of our common shares could be materially adversely affected by other
matters that are not known to us or that we currently do not consider to be material risks to our business.
Risks Related to Ownership of Our Shares and the Offering
The market price and trading volume of our common shares may be volatile.
The market price of our common shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume
in our common shares may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common shares will not fluctuate or decline significantly in the
future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common shares include those set forth in this "Risk Factors"
section, under "Cautionary Note Regarding Forward-Looking Statements" in the accompanying prospectus and in the information incorporated and deemed to be incorporated by reference herein, as well
as:
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actual or anticipated variations in our quarterly operating results or business prospects;
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changes in our earnings estimates or publication of research reports about us or the real estate industry;
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an inability to meet or exceed securities analysts' estimates or expectations;
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increases in market interest rates;
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hedging or arbitrage trading activity in our common shares;
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capital commitments;
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changes in market valuations of similar companies;
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adverse market reaction to any increased indebtedness we incur in the future;
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additions or departures of management personnel;
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actions by institutional shareholders;
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speculation in the press or investment community;
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changes in our distribution policy;
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general market and economic conditions; and
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future sales of our common shares or securities convertible into, or exchangeable or exercisable for, our common shares.
Many
of the factors listed above are beyond our control. These factors may cause the market price of our common shares to decline, regardless of our financial condition, results of
operations, business or prospects. It is impossible to assure you that the market prices of our common shares will not fall in the future.
Future sales of a significant number of our common shares in the public markets, or the perception that such sales could occur, could depress the market price of our common
shares.
Sales of a substantial number of our common shares or other equity-related securities in the public markets, or the perception that
such sales could occur, could depress the market price of our common shares and impair our ability to raise capital through the sale of additional equity securities. The issuance of these shares may
also have the effect of reducing our net income per share to unexpected levels and could reduce the market price of our common shares unless revenue growth or cost savings sufficient to offset the
effect of such issuance can be achieved. We cannot predict the effect that future sales of our common shares or other equity-related securities would have on the market price of our common shares or
the trading price of our shares.
Certain provisions of our operating agreement will make it difficult for third parties to acquire control of us and could deprive holders of our common shares of the
opportunity to obtain a takeover premium for their shares.
Our operating agreement contains a number of provisions that could make it more difficult for a third party to acquire, or may
discourage a third party from acquiring, control of us. These provisions include, among others:
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restrictions on our ability to enter into certain transactions with major holders of our shares or their affiliates or
associates modeled on certain limitations contained in Section 203 of the General Corporation Law of the State of Delaware;
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allowing only our board of directors to fill newly created directorships;
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requiring that directors may be removed only for cause (as defined in the operating agreement) and then only by a vote of
at least two-thirds of the votes entitled to be cast in the election of directors;
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requiring advance notice for holders of our shares to nominate candidates for election to our board of directors or to
propose matters to be considered by holders of our shares at a meeting of holders of our shares;
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our ability to issue additional securities, including, but not limited to, preferred shares, without approval by holders
of our common shares;
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a prohibition on any person beneficially or constructively owning shares in excess of 9.8% in value or number of our
outstanding shares, excluding shares not treated as outstanding for U.S. federal income tax purposes, whichever is more restrictive;
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the ability of our board of directors to amend the operating agreement without approval of the holders of our common
shares except under certain specified circumstances; and
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limitations on the ability of holders of our common shares to call special meetings of holders of our common shares or to
act by written consent.
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These
provisions, as well as other provisions in the operating agreement, may delay, defer or prevent a transaction or a change in control that might otherwise result in holders of our
common shares obtaining a takeover premium for their shares.
Certain
provisions of the management agreement also could make it more difficult for third parties to acquire control of us by various means, including limitations on our right to
terminate the management agreement and a requirement that, under certain circumstances, we make a substantial payment to the Manager in the event of a termination.
We may issue additional debt and equity securities that are senior to our common shares as to distributions and upon our dissolution, which could materially adversely affect
the market price of our common shares.
In the future, we may attempt to increase our capital resources by entering into additional debt or debt-like financings
that are secured by all or some of our assets, or issuing debt or equity securities, which could include issuances of secured liquidity notes, medium-term notes, senior notes, subordinated
notes or preferred and common shares. In the event of our dissolution, liabilities of our creditors, including our lenders and holders of our debt securities, would be satisfied from our available
assets in priority to distributions to holders of our common or preferred shares. Any preferred shares may have a preference over our common shares with respect to distributions made at the discretion
of our board of directors, which could further limit our ability to make distributions to holders of our common shares. Because our decision to incur debt and issue shares in any future offerings will
depend on the terms of our operating agreements, market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings or our
future debt and equity financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future, including, but not limited to, issuing
common shares at a discount to market value. Accordingly, holders of our shares and of any securities we may issue whose value is linked to the value of our shares will bear the risk of our future
offerings reducing the value of their shares or any such other securities and diluting their interest in us. In addition, we can change our leverage strategy and investment policies from time to time
without approval of holders of any of our shares, which could adversely affect the market price of our shares.
Our board of directors has broad authority to change many of the terms of our common shares without the approval of holders of our common shares.
Our operating agreement gives our board of directors broad authority to effect amendments to the provisions of our operating agreement
that could change many of the terms of our common shares without the consent of holders of our common shares. As a result, our board of directors may, without the approval of holders of our common
shares, make changes to many of the terms of our common shares that are adverse to the holders of our common shares.
Our board of directors has full authority and discretion over distributions on our common shares and it may decide to reduce or eliminate distributions at any time, which
may adversely affect the market price for our common shares and any other securities we may issue.
Our board of directors has full authority and sole discretion to determine whether or not a distribution will be declared and paid, and
the amount and timing of any distribution that may be paid, to holders of our shares and (unless otherwise provided by our board of directors if and when it establishes the terms of any new class or
series of our shares) any other class or series of shares we may issue in the future. Our board of directors may, in its sole discretion, determine to reduce or eliminate distributions on our common
shares and (unless otherwise so provided by our board of directors) any other class or series of shares we may issue in the future, which may have a material adverse effect on the market price of our
shares, any such other shares and any other securities we may issue. In addition, in computing U.S. federal income tax liability for a taxable year, each holder of our
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shares
will be required to take into account its allocable share of items of our income, gain, loss, deduction and credit for our taxable year ending within or with such holder's taxable year,
regardless of whether such holder has received any distributions. As a result, it is possible that a holder's U.S. federal income tax liability with respect to its allocable share of these items in a
particular taxable year could exceed the cash distributions received by such holder.
In
addition, as discussed under the caption "Risk FactorsRisks Related to our Organization and StructureThe terms of our indebtedness may restrict our ability
to make future distributions and impose limitations on our current and future operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, our
credit facility includes covenants that restricts our ability to make distributions on, and to redeem or repurchase, our shares, including a prohibition on distributions on, and redemptions and
repurchases of, our shares if an event of default, or certain events that with notice or passage of time or both would constitute an event of default, under the credit facility occur and a requirement
that we maintain a specified minimum level of consolidated tangible net worth. Our 2010 Credit Agreement, initial borrowings of which are subject to, among other things, the substantially concurrent
repayment by the Borrowers of all amounts due and owing under our existing credit facility, also includes similar covenants and restrictions on our ability to make distributions on, and to redeem or
repurchase, our common shares. In addition, the 2010 Credit Agreement contains a covenant which limits our ability to make distributions to our shareholders in an amount in excess of 65% of our annual
taxable income.
Our failure to pay quarterly distributions to holders of our common shares could cause the market price of our common shares to decline significantly.
On November 29, 2009, our board of directors declared a cash distribution of $0.05 per common share that was paid on
December 21, 2009 to common shareholders of record as of December 7, 2009. On February 4, 2010, our board of directors declared a cash distribution of $0.07 per common share. The
distribution was paid on March 4, 2010 to common shareholders of record as of the close of business on February 18, 2010. On April 29, 2010, our board of directors declared a cash
distribution of $0.10 per common share. The distribution will be paid on May 28, 2010 to common shareholders of record as of the close of business on May 14, 2010.
Our
ability to pay quarterly distributions will be subject to, among other things, general business conditions, our financial results, the impact of paying distributions on our credit
ratings, and legal and contractual restrictions on the payment of distributions, including restrictions imposed by our existing credit facility as well as the terms of our 2010 Credit Agreement. Any
reduction or discontinuation of quarterly distributions could cause the market price of our common shares to decline significantly. Our payment of distributions to holders of our common shares may in
certain future quarters also result in upward adjustments to the conversion rate of our 7.50% Convertible Senior Notes due 2017 and our 7.00% Convertible Senior Notes due 2012. Moreover, in the event
our payment of quarterly distributions is reduced or discontinued, our failure or inability to resume paying distributions could result in a persistently low market valuation of our common shares.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 25,000,000 common shares in this offering, after deducting the underwriters'
discount and estimated offering expenses, will be approximately $219,411,250 (or approximately $252,322,938 if the underwriters' overallotment option is exercised in full). We expect to use the net
proceeds from this offering to acquire assets in accordance with our core business strategy and for general corporate purposes.
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CAPITALIZATION
The following table sets forth our consolidated capitalization as of March 31, 2010:
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on an actual basis; and
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as adjusted to reflect the offering of our common shares (based on an assumed offering price of $9.19 per share, the
closing price on the NYSE on May 3, 2010) and the application of the net proceeds as described under "Use of Proceeds," assuming that the underwriters do not exercise their option to purchase
additional common shares.
This
table should be read in conjunction with the information contained herein under the heading "Use of Proceeds," and under the heading "Management's Discussion and Analysis of and
Financial Condition and Results of Operations" and in our consolidated financial statements and notes thereto, included in our Annual Report on Form 10-K for the year ended
December 31, 2009 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2010, and incorporated by reference in this prospectus supplement. In
addition, you should read this table together with the information appearing above under "SummaryRecent Developments."
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
Actual
|
|
As adjusted
|
|
|
|
(Unaudited)
(Dollars in thousands)
|
|
|
Cash and cash equivalents(1)
|
|
$
|
240,529
|
|
$
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
Collateralized loan obligation senior secured notes
|
|
$
|
5,631,866
|
|
$
|
5,631,866
|
|
|
Collateralized loan obligation junior secured notes issued to affiliates
|
|
|
380,343
|
|
|
380,343
|
|
|
Senior secured credit facility
|
|
|
150,000
|
|
|
150,000
|
|
|
Convertible senior notes
|
|
|
343,303
|
|
|
343,303
|
|
|
Junior subordinated notes
|
|
|
283,517
|
|
|
283,517
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
6,789,029
|
|
|
6,789,029
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding at March 31, 2010
|
|
|
|
|
|
|
|
Common shares, no par value, 500,000,000 shares authorized, and 158,359,757 shares issued and outstanding at March 31, 2010, actual; 183,359,757
shares issued and outstanding at March 31, 2010, as adjusted
|
|
|
|
|
|
|
|
Paid-in-capital
|
|
|
2,576,501
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
170,413
|
|
|
170,413
|
|
Accumulated deficit
|
|
|
(1,431,294
|
)
|
|
(1,431,294
|
)
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
1,315,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
8,104,649
|
|
$
|
|
|
|
|
|
|
|
|
-
(1)
-
Assumes
that the net proceeds from the offering will be held initially as cash and cash equivalents.
S-10
Table of Contents
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
Our common shares have been listed on the NYSE under the symbol "KFN" since the time of the conversion transaction on May 4,
2007. The common stock of KKR Financial Corp., our predecessor, was traded on the NYSE from June 24, 2005 until the effectiveness of the conversion transaction. As of April 22, 2010, we
had 158,359,757 common shares outstanding. The following table sets forth, for the periods indicated, the high and low sales prices per share of the common shares as reported on the NYSE.
|
|
|
|
|
|
|
|
|
|
Share Prices
|
|
|
|
High
|
|
Low
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
Second Quarter (through May 3, 2010)
|
|
$
|
9.49
|
|
$
|
8.20
|
|
First Quarter ended March 31, 2010
|
|
|
8.50
|
|
|
5.55
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
Fourth Quarter ended December 31, 2009
|
|
$
|
5.95
|
|
$
|
4.10
|
|
Third Quarter ended September 30, 2009
|
|
|
5.25
|
|
|
0.75
|
|
Second Quarter ended June 30, 2009
|
|
|
2.35
|
|
|
0.78
|
|
First Quarter ended March 31, 2009
|
|
|
2.64
|
|
|
0.40
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
Fourth Quarter ended December 31, 2008
|
|
$
|
6.99
|
|
$
|
0.57
|
|
Third Quarter ended September 30, 2008
|
|
|
11.34
|
|
|
5.15
|
|
Second Quarter ended June 30, 2008
|
|
|
13.72
|
|
|
10.28
|
|
First Quarter ended March 31, 2008
|
|
|
16.78
|
|
|
10.12
|
|
The
following table sets forth the cash distributions declared per common share for fiscal years 2008, 2009 and 2010. We did not declare any cash distributions in the fourth quarter of
fiscal year 2008 or during the first three quarters of fiscal year 2009.
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Cash Distribution Declared Per
Common Share
|
|
February 15, 2008
|
|
February 29, 2008
|
|
$
|
0.50
|
|
May 15, 2008
|
|
May 30, 2008
|
|
$
|
0.40
|
|
August 15, 2008
|
|
August 29, 2008
|
|
$
|
0.40
|
|
December 7, 2009
|
|
December 21, 2009
|
|
$
|
0.05
|
|
February 18, 2010
|
|
March 4, 2010
|
|
$
|
0.07
|
|
May 14, 2010
|
|
May 28, 2010
|
|
$
|
0.10
|
|
S-11
Table of Contents
DISTRIBUTION POLICY
In light of the economic conditions that prevailed through the later part of 2008 and into the third quarter of 2009, we suspended
making distributions to the holders of our common shares during such period. On November 29, 2009, our board of directors declared a cash distribution of $0.05 per common share that was paid on
December 21, 2009 to common shareholders of record as of December 7, 2009. On February 4, 2010, our board of directors declared a cash distribution of $0.07 per common share. The
distribution was paid on March 4, 2010 to common shareholders of record as of the close of business on February 18, 2010. On April 29, 2010, our board of
directors declared a cash distribution of $0.10 per common share. The distribution will be paid on May 28, 2010 to common shareholders of record as of the close of business on May 14,
2010. However, we cannot assure you that similar, or any, distribution will be made to holders of our common shares during future periods.
Our
board of directors has full authority and sole discretion to determine whether or not a distribution will be declared and paid, and the amount and timing of any distribution that may
be paid, to holders of our common shares and (unless otherwise provided by our board of directors if and when it establishes the terms of any new class or series of our shares) any other class or
series of shares we may issue in the future. Our board of directors may, in its sole discretion, determine to reduce or eliminate distributions on our common shares and (unless otherwise so provided
by our board of directors) any other class or series of shares we may issue in the future, which may have a material adverse effect on the market price of our common shares and any such other shares.
As a result, distributions to holders of our shares will depend on a number of factors, including:
-
-
our financial condition;
-
-
general business conditions;
-
-
our results of operations;
-
-
our available capital and leverage;
-
-
our debt service requirements;
-
-
cash distributions to us from our subsidiaries;
-
-
our operating expenses;
-
-
our taxable income;
-
-
our liquidity requirements;
-
-
our distribution yield relative to our peers;
-
-
restrictions under Delaware law;
-
-
any contractual, legal and regulatory restrictions on the payment of distributions by us to holders of our shares or by
our subsidiaries to us; and
-
-
other factors our board of directors in its discretion deems relevant.
Our
existing credit facility as well as our 2010 Credit Agreement, initial borrowings of which are subject to, among other things, the substantially concurrent repayment by the Borrowers
of all amounts due and owing under our existing credit facility, include covenants that could restrict our ability to make distributions on our common shares and any other class or series of shares we
may issue in the future, including a prohibition on distributions on our shares if an event of default, or certain events that with notice or passage of time or both would constitute an event of
default, under the applicable credit agreement occur and a requirement that we maintain a specified minimum level of consolidated tangible net worth.
S-12
Table of Contents
OWNERSHIP LIMITATIONS
Our operating agreement contains restrictions on the number of our shares that a person may own that are intended to assist us in
maintaining the qualification of any REIT subsidiary of ours as a REIT under the Code. Among other things, the operating agreement provides that, subject to exceptions, no person may beneficially or
constructively own shares in excess of 9.8% in value or number, whichever is more restrictive, of our outstanding shares, excluding shares not treated as outstanding for U.S. federal income tax
purposes. In addition, the operating agreement, subject to exceptions, prohibits any person from beneficially owning our shares to the extent that such ownership of shares would result in any REIT
subsidiary of ours being "closely held" under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or would otherwise
cause any REIT subsidiary of ours to fail to qualify as a REIT. The operating agreement generally provides that any attempted transfer which, if effective, would result in a violation of the foregoing
restrictions will cause the number of shares causing the violation (rounded up to the nearest whole share) to be automatically transferred to a charitable trust. The operating agreement further
generally provides that, if the transfer of shares to a charitable trust would not be effective for any reason to prevent a violation of the foregoing restrictions, then, to the fullest extent
permitted by law, the transfer of that number of shares that would otherwise cause that violation shall be void ab initio. For further information about these and other related provisions of our
operating agreement, see "Description of SharesCertain Provisions of the Operating AgreementRestrictions on Ownership and Transfer" in the accompanying prospectus.
S-13
Table of Contents
ADDITIONAL MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion supplements the discussion under the heading "Material U.S. Federal Income Tax Considerations" in the
accompanying prospectus. The following is a summary of certain material U.S. federal income tax considerations relating to the acquisition, ownership and disposition of our common shares.
This
discussion does not purport to be a complete analysis of all the potential tax considerations relating thereto. The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations, the legislative history of the Code, current administrative interpretations and practices of the Internal Revenue Service, or the IRS, including its
practices and policies as endorsed in private letter rulings, which are not binding on the IRS (except with respect to the taxpayer that received the ruling), and existing court decisions. Future
legislation, regulations, administrative interpretations and court decisions could change current law or adversely affect existing interpretations of current law. Any change could apply retroactively.
It is possible that the IRS could challenge the statements in this discussion, which do not bind the IRS or the courts, and that a court could agree with the IRS.
This
summary deals only with common shares held as "capital assets" (within the meaning of Section 1221 of the Code) and does not address tax considerations applicable to an
investor's particular circumstances or to investors that may be subject to special tax rules, including, without limitation, financial institutions (including banks), insurance companies, dealers in
securities or currencies, persons subject to the mark-to-market rules of the Code, persons that will hold our common shares as a position in a hedging transaction, "integrated
transaction," "straddle" or "conversion transaction" for tax purposes, persons who are, or who hold common shares through, entities treated as partnerships for U.S. federal income tax purposes, U.S.
Holders (as defined below) that have a "functional currency" other than the U.S. dollar, persons subject to the alternative minimum tax provisions of the Code and, except as expressly indicated below,
tax-exempt organizations and non-U.S. Holders (as defined below).
In
addition, if a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a holder of our common shares, the tax treatment of
a partner in the partnership will generally depend upon the status of the partner and upon the activities of the partnership. Holders that are partnerships, and partners in such partnerships, should
consult their tax advisors about the U.S. federal income tax consequences of purchasing, holding and disposing of our common shares.
Investors considering the purchase of our common shares should consult their tax advisors with respect to the application of the U.S. federal income tax laws to
their particular situations as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction or under any applicable tax treaty.
As
used herein, the term "U.S. Holder" means any beneficial owner of our common shares, that is, for U.S. federal income tax purposes, (i) a citizen or resident, as defined in
Section 7701(b) of the Code, of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the
laws of the United States, any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or
(iv) in general, a trust subject to the primary supervision of a U.S. court and the control of one or more U.S. persons or a trust that was both treated as a domestic trust on August 19,
1996 and in existence on August 20, 1996 and has made a valid election to be treated as a U.S. person. As used herein, the term "non-U.S. Holder" means a beneficial owner of our
common shares (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder. The term "holder" includes both a U.S.
Holder and a non-U.S. Holder.
S-14
Table of Contents
U.S. Federal Income Tax Consequences of the Ownership and Disposition of Our Common Shares
The following is a summary of certain additional U.S. federal income tax considerations related to the ownership and disposition of our
common shares.
Disposition of Our Common Shares.
The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must
combine
those interests and maintain a single adjusted tax basis for all those interests. Upon a sale or other disposition of less than all of those interests, a portion of that adjusted tax basis must be
allocated to the interests sold using an "equitable apportionment" method, which generally means that the adjusted tax basis allocated to the interests sold equals an amount that bears the same
relation to the partner's adjusted tax basis in all of the partner's interests in the partnership as the value of the interests sold bears to the value of all of the partner's interests in the
partnership. Notwithstanding the requirement set forth in the IRS ruling, if a holder sells fewer than all of its common shares, we generally will report to the holder the amount of gain treated under
Section 751(a) of the Code as ordinary income based on the assumption that the first common shares purchased were also the first common shares sold, which is sometimes referred to as a
"first-in, first-out" method. See "Material U.S. Federal Income Tax ConsiderationsU.S. Federal Income Tax Consequences of the Ownership and Disposition of Our
SharesDisposition of Interest" in the accompanying prospectus. We generally use the same assumption to make basis adjustments to our assets required as a result of our election under
Section 754 of the Code. See "Material U.S. Federal Income Tax ConsiderationsU.S. Federal Income Tax Consequences of the Ownership and Disposition of Our SharesTax
Elections" in the accompanying prospectus. This assumption is for administrative convenience only and is not consistent with the IRS's ruling that a partner must maintain a single adjusted tax basis
in its partnership interest. A holder should inform us if the holder uses a method other than "first-in, first-out" to determine its basis for any common shares disposed.
In
addition, Treasury Regulations under Section 1223 of the Code allow a selling holder of our common shares who can identify common shares transferred with an ascertainable
holding period to elect to use the actual holding period of the common shares transferred. Thus, although according to the IRS ruling discussed above, a holder of our common shares will be unable to
select high or low basis common shares to sell as would be the case with corporate stock, such holder may, according to these Treasury Regulations, designate specific common shares sold for purposes
of determining the holding period of common shares transferred. A holder electing to use the actual holding period of common shares transferred must consistently use that identification method for all
subsequent sales or exchanges of common shares. A holder considering the purchase of additional common shares or a sale of common shares purchased in separate transactions is urged to consult the
holder's own tax advisor as to the possible consequences of this IRS ruling and application of the Treasury Regulations.
Cancellation of Indebtedness Income.
We have recognized and may recognize in the future cancellation of indebtedness income upon the
retirement of
our debt at a discount. Although there is no direct authority addressing the issue, we believe that our cancellation of indebtedness income will constitute other income derived from our business of
investing in stocks and securities and thus, will be qualifying income for purposes of the qualifying income exception described in "Material U.S. Federal Income Tax ConsiderationsU.S.
Federal Income Tax Consequences of the Ownership and Disposition of Our SharesClassification of KKR Financial Holdings LLC" in the accompanying prospectus.
Allocation of Profits and Losses.
The monthly convention that we apply pursuant to which our taxable income and losses is determined
annually and
prorated on a monthly basis, see "Material U.S. Federal Income Tax ConsiderationsU.S. Federal Income Tax Consequences of the Ownership and Disposition of Our SharesAllocation
of Profits and Losses" in the accompanying prospectus, is in accordance with recently proposed Treasury Regulations, on which existing publicly traded partnerships may currently rely.
S-15
Table of Contents
"Anti-Stapling" Rules.
Currently, we have several subsidiaries that could be subject to a significant tax liability under the
"anti-stapling" rules, including one subsidiary taxed as a REIT (KFH II), three foreign corporate subsidiaries (KKR TRS Holdings Ltd., KKR Financial Holdings, Ltd. and KFH
III Holdings, Ltd.), and four domestic corporate subsidiaries (KFN PEI VII, LLC, KFH PE Holdings I LLC, KFH PE Holdings II LLC and KKR Financial Holdings, Inc.). See
"Material U.S. Federal Income Tax ConsiderationsU.S. Federal Income Tax Consequences of the Ownership and Disposition of Our Shares"Anti-Stapling" Rules" in the
accompanying prospectus.
Withholding Taxes.
For payments made after December 31, 2012, a U.S. withholding tax at a 30% rate will apply to distributions
that constitute
"withholdable payments" and proceeds of sale in respect of our common shares received by U.S. Holders who own their stock through foreign accounts or foreign intermediaries or received by certain
non-U.S. Holders, in each case if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. If payment of withholding taxes is required, non-U.S.
Holders that are otherwise eligible for an exemption from, or reduction of, U.S. withholding taxes with respect to such distributions and proceeds will be required to seek a refund from the IRS to
obtain the benefit or such exemption or reduction. In addition, for
payments made on or after September 14, 2010, U.S. withholding tax will apply to "dividend equivalent payments" made pursuant to certain securities lending or notional principal contract
transactions allocable to non-U.S. Holders. We will not pay any additional amounts to holders in respect of any amounts withheld.
Medicare Tax.
For taxable years beginning after December 31, 2012, certain U.S. Holders who are individuals, estates or trusts and
whose
income exceeds certain thresholds will be required to pay a 3.8% Medicare tax. The Medicare tax will apply to, among other things, interest, dividends and other income derived from certain trades or
business and net gains from the sale or other disposition of certain interests in a partnership, subject to certain exceptions. Our income will generally be the type of income that is subject to the
Medicare tax and any gain from the disposition of our common shares will be the type of gain that is subject to the tax.
Tax Consequences of Investments in Natural Resources.
As referenced above, we may make certain investments in natural resources. Income
and gains
derived from certain activities related to minerals and natural resources are treated as "qualifying income" for purposes of the "qualifying income exception" applicable to publicly traded
partnerships. We expect that our investments in natural resources would generally generate "qualifying income" for purposes of this exception. See "Material U.S. Federal Income Tax
ConsiderationsU.S. Federal Income Tax Consequences of the Ownership and Disposition of Our SharesClassification of KKR Financial Holdings LLC" in the accompanying
prospectus. It is likely that the income from such investments would be treated as effectively connected with the conduct of a U.S. trade or business with respect to non-U.S. Holders of
our common shares. See "Material U.S. Federal Income Tax ConsiderationsU.S. Federal Income Tax Consequences of the Ownership and Disposition of Our SharesNon-U.S.
Holders" in the accompanying prospectus for a discussion of the treatment of U.S. trade or business income. Moreover, under the Foreign Investment in Real Property Tax Act ("FIRPTA"), a
non-U.S. Holder may be subject to FIRPTA withholding on the disposition of our common shares if (1) the non-U.S. Holder owned (directly or constructively applying
certain attribution rules) more than 5% of our common shares at any time during the five-year period ending on the date of such disposition (a "5% non-U.S. Holder") and
(2) the fair market value of our investments in U.S. real property interests represented more than 10% of the total fair market value of our assets at any time during the applicable testing
period. Currently, we believe we do not hold any U.S. real property interests, but certain of our future investments in real estate and natural resources may be treated as U.S. real property
interests. No assurance can be provided that our future investments in U.S. real property interests will not cause us to exceed the 10% threshold described above, in which event any 5%
non-U.S. Holder would be subject to 10% withholding tax on the gross proceeds from the disposition of our common shares. Income or loss from our investments in natural resources is
expected to be treated as income or loss from passive activities, and to the extent
S-16
Table of Contents
that
it is so treated, will be subject to the rules described in "Material U.S. Federal Income Tax ConsiderationsU.S. Federal Income Tax Consequences of the Ownership and Disposition of
Our SharesLimitation on Deductibility of Certain of Our Losses" in the accompanying prospectus. In addition, investments in natural resources may produce unrelated business taxable income
for tax-exempt holders of our common shares. To the extent that such income is unrelated business taxable income, it will be subject to the rules described in "Material U.S. Federal Income
Tax ConsiderationsU.S. Federal Income Tax Consequences of the Ownership and Disposition of Our SharesUnrelated Business Taxable Income" in the accompanying prospectus.
Tax Consequences of Investments in Real Estate.
We do not currently have any investments in real estate. As referenced above, we may
make investments
in real estate in the future. We intend generally to make any future investments in real estate through one or more REIT subsidiaries. See "Material U.S. Federal Income Tax
ConsiderationsMaterial U.S. Federal Income Tax Considerations Relating to Investments in REITs" for a discussion of the tax consequences of our ownership of REIT subsidiaries.
New Legislation or Administrative or Judicial Action.
The rules dealing with U.S. federal income taxation are constantly under review
by persons
involved in the legislative process, the IRS and the Treasury, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other
modifications and interpretations. No assurance can be given as to whether, or in what form, any proposals affecting us or our shareholders will be enacted. The IRS pays close attention to the proper
application of tax laws to partnerships. The present U.S. federal income tax treatment of an investment in our common shares may be modified by administrative, legislative or judicial interpretation
at any time, and any such action may affect investments and commitments previously made. For example, the U.S. federal income tax rules relating to publicly traded partnerships are currently under
review by Congress, and certain legislative proposals have been made that would affect the tax treatment of publicly traded partnerships. While we believe that the current legislative proposals would
not adversely affect the manner in which we will be taxed, no assurance can be given as to whether, or in what form, such proposals will ultimately be enacted, or whether they will have an effect on
us. We and holders of our common shares could be adversely affected by any such change in, or any new, tax law, regulation or interpretation. Our organizational documents and agreements permit the
board of directors to modify the operating agreement from time to time, without the consent of the holders of common shares, in order to address certain changes in U.S. federal income tax regulations,
legislation or interpretation. In some circumstances, such revisions could have a material adverse effect on some or all of the holders of our common shares.
S-17
Table of Contents
CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the context of the Plan's particular circumstances before authorizing an investment in our common shares.
Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with its fiduciary
responsibilities, and the documents and instruments governing the Plan.
In
addition, we and certain of our subsidiaries and affiliates may be each considered a party in interest within the meaning of ERISA, or a disqualified person within the meaning of the
Code, with respect to many Plans, as well as other arrangements subject to Section 4975 of the Code, including individual retirement accounts and Keogh plans (such arrangements also referred to
herein as "Plans"). Prohibited transactions within the meaning of ERISA or the Code would likely arise, for example, if our common shares are acquired by or with the assets of a Plan with respect to
which we or any of our subsidiaries or affiliates is a party in interest, unless the transaction qualifies for an exemption from the prohibited transaction rules of ERISA and the Code. A violation of
these prohibited transaction rules could result in an excise tax or other liabilities under ERISA and/or Section 4975 of the Code for such persons, unless exemptive relief is available under an
applicable statutory or administrative exemption.
Exemptive
relief from the prohibited transaction rules under ERISA and the Code may be available for direct or indirect prohibited transactions resulting from the purchase, holding or
disposition of our common shares. Those exemptions include Prohibited Transaction Class Exemption ("PTCE") 96-23 (for certain transactions determined by in-house asset
managers), PTCE 95-60 (for certain transactions involving insurance company general accounts), PTCE 91-38 (for certain transactions involving bank collective investment funds),
PTCE 90-1 (for certain transactions involving insurance company separate accounts), and PTCE 84-14 (for certain transactions determined by independent qualified asset
managers). In addition, the exemption under Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code provides exemptive relief for certain arm's-length transactions with a person
(other than a fiduciary or an affiliate of a fiduciary that has or exercises discretionary authority or control or renders investment advice with respect to the assets involved in the transaction)
that is a party in interest solely by reason of providing services to Plans or being an affiliate of such a service provider (the "Service Provider Exemption"). However, there can be no assurance that
any of these class exemptions, the statutory exemption or any other exemption will be available with respect to any particular transaction involving our common shares.
Because
we or our affiliates may be considered a party in interest or disqualified person with respect to many Plans, our shares may not be purchased, held, converted or disposed of by
any Plan, any entity whose underlying assets include plan assets by reason of any Plan's investment in the entity (a"Plan Asset Entity") or any person investing plan assets of any Plan, unless such
purchase, holding, conversion or disposition is eligible for exemptive relief, including relief available under PTCE 96-23, 95-60, 91-38, 90-1, or
84-14 or the Service Provider Exemption, or such purchase, holding, conversion or disposition is otherwise not prohibited. Any purchaser, including any fiduciary purchasing on behalf of a
Plan, transferee or holder of our common shares will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding of our common shares that either
(a) it is not a Plan or a Plan Asset Entity and is not purchasing such common shares on behalf of or with plan assets of any Plan or with any assets of a governmental, church or foreign plan
that is subject to any federal, state, local or foreign law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code or (b) (i) its
purchase, holding, conversion and disposition of our common shares will not constitute or result in a non-exempt prohibited transaction or will satisfy the conditions required for
exemptive relief under a prohibited transaction exemption and (ii) such purchase, holding, conversion and disposition are not otherwise prohibited by ERISA or Section 4975
S-18
Table of Contents
of
the Code (or in the case of a governmental, church or foreign plan, any substantially similar federal, state, local or foreign law).
Under
ERISA, assets of a Plan may include assets held in the general account of an insurance company which has issued an insurance policy to such plan or assets of an entity in which the
Plan has invested. Accordingly, insurance company general accounts that include assets of a Plan must ensure that one of the foregoing exemptions is available. Due to the complexity of these rules and
the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries or other persons considering purchasing our
shares on behalf of or with "plan assets" of any Plan consult with their counsel regarding the availability of exemptive relief under PTCE 96-23, 95-60, 91-38,
90-1 or 84-14, the Service Provider Exemption or another exemption.
Purchasers
of our common shares have exclusive responsibility for ensuring that their purchase, holding, conversion and disposition of our common shares do not violate the prohibited
transaction rules of ERISA or the Code or any substantially similar regulations applicable to governmental or church plans, as described above.
S-19
Table of Contents
UNDERWRITING
We are offering the common shares described in this prospectus supplement through a number of underwriters. Citigroup Global Markets
Inc., Deutsche Bank Securities Inc., KKR Capital Markets LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated are the representatives of the underwriters named
below. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering
price less the underwriting discount set forth on the cover page of this prospectus supplement, the number of common shares listed next to its name in the following table:
|
|
|
|
|
|
Underwriter
|
|
Number of
Common Shares
|
|
|
|
$
|
|
|
|
|
|
|
Citigroup Global Markets Inc.
|
|
|
|
|
Deutsche Bank Securities Inc.
|
|
|
|
|
KKR Capital Markets LLC
|
|
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
|
|
Morgan Stanley & Co. Incorporated
|
|
|
|
|
FBR Capital Markets & Co.
|
|
|
|
|
JMP Securities LLC
|
|
|
|
|
Keefe, Bruyette & Woods, Inc.
|
|
|
|
|
Sandler O'Neill + Partners, L.P.
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
The
underwriters are committed to purchase all the common shares offered by us if they purchase any shares. The underwriting agreement also provides that if an
underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.
The
underwriters propose to offer the common shares directly to the public at the public offering price set forth on the cover page of this prospectus supplement and to certain dealers
at that price less a concession not in excess of $ per share. After the public offering of the shares, the offering price and other selling terms may be changed by the
underwriters. The
underwriters have an option to buy up to additional common shares from us to cover sales of shares by the
underwriters which exceed the number of shares specified in the table above.
The underwriters have 30 days from the date of this prospectus supplement to exercise this over-allotment option. If any shares are purchased with this over-allotment
option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional common shares are purchased, the underwriters will offer the
additional shares on the same terms as those on which the shares are being offered.
At
our request, the underwriters have agreed to reserve up to 1% of the common shares for sale in this offering to our executive officers at the offering price.
The
underwriting fee is equal to the public offering price per common share less the amount paid by the underwriters to us per common share. The underwriting fee is $ per
share. The following table shows the per share and total underwriting discounts to be paid to the underwriters, assuming both no exercise and full exercise of the underwriters' option to purchase
additional shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
No Exercise
|
|
Full Exercise
|
|
Public offering price
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Underwriting discount
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Proceeds, before expenses, to us
|
|
$
|
|
|
$
|
|
|
$
|
|
|
S-20
Table of Contents
We
estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the
underwriting discounts, will be approximately $ .
This
prospectus supplement and the accompanying prospectus may be made available in electronic format on the web sites maintained by one or more underwriters, or selling group members,
if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet
distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.
We
have agreed that for a period of 60 days after the date of this prospectus supplement, we will not (i) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act relating to, any common shares or any securities convertible into or exercisable or exchangeable for common
shares, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the common shares or any such other securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of
common shares or such other securities, in cash or otherwise, without the prior written consent of the representatives of the underwriters; provided that:
-
-
we may issue and sell the common shares to the underwriters pursuant to the underwriting agreement,
-
-
we may issue and sell common shares or securities convertible into, or exercisable or exchangeable for, common shares
pursuant to any employee or director stock option plan, stock ownership plan or distribution reinvestment plan in effect on the date of this prospectus supplement,
-
-
we may issue common shares issuable upon the conversion of securities or the exercise of warrants outstanding on the date
of this prospectus supplement,
-
-
we may file a registration statement on Form S-3 (but we may not issue shares under any such
Form S-3) or Form S-8, and
-
-
subject to prior approval by the Compensation Committee of our Board of Directors, we may issue common shares, restricted
common shares or any securities convertible into, or exercisable or exchangeable for, common shares, pursuant to our 2007 Share Incentive Plan or our Non-Employee Directors' Deferred
Compensation and Share Award Plan.
In
addition, each of our directors and executive officers has agreed that, without the consent of the representatives of the underwriters, he or she will not, during the period ending
60 days after the date of this prospectus supplement, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any common shares or any securities convertible into or exercisable or exchangeable for common
shares (including without limitation, common shares or such other securities which may be deemed to be beneficially owned by such director or executive officer in accordance with the rules and
regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant), or publicly disclose the intention to make any offer, sale, pledge or disposition,
(2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common shares or such other securities, whether any such
transaction described in clause (1) or (2) above is to be settled by delivery of common shares or such other securities, in cash or otherwise or (3) during the lock-up
period, make any demand for or exercise any right with respect to, the registration of any common shares or any
S-21
Table of Contents
security
convertible into or exercisable or exchangeable for common shares; provided that the foregoing provisions of this sentence shall not apply to:
-
-
transfers of common shares or such other securities as a bona fide gift or gifts;
-
-
transfers of common shares or such other securities by will or intestate succession;
-
-
any transfer of common shares or such other securities to any trust, partnership or limited liability company for the
direct or indirect benefit of such director or executive officer or the immediate family (as defined below) of such director or executive officer so long as such transfer does not involve a
disposition for value;
-
-
if such director or executive officer holds his or her shares through a holding company, any distribution of common shares
or such other securities to a wholly-owned subsidiary of such holding company or any distribution of common shares or such other securities to the direct or indirect members or partners, as the case
may be, of such holding company, so long as, in any such case, such distribution does not involve a disposition for value; and
-
-
any transfer or distribution of common shares or such other securities to a nominee or custodian who holds such common
shares or such other securities on behalf of a person or entity to whom such transfer or disposition would be permissible under one of the above exceptions, so long as such transfer or distribution,
as the case may be, is made in a transaction and otherwise in a manner permitted by such exception;
provided,
further, that it shall be a condition to any transfer or distribution pursuant to any of the above exceptions that (I) prior to or contemporaneously with such transfer or
distribution, as the case may be, the transferee, distributee, nominee or custodian, as applicable, shall sign and deliver to the representatives of the underwriters a written lock-up
agreement and (II) such transfer or distribution, as the case may be, is not required during the lock-up period to be reported in, and is not during the lock-up period
reported in, any public report or filing with the SEC or otherwise and neither such director or executive officer nor any such transferee, distributee, nominee or custodian, as applicable, otherwise
voluntarily effects any public filing or public report regarding such transfer or distribution. For purposes of the foregoing restrictions, "immediate family" means any relationship by blood, marriage
or adoption not more remote than the first cousin.
We
have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.
Our
common stock is listed on the NYSE under the symbol "KFN."
In
connection with this offering, the underwriters may engage in stabilizing transactions, which involve making bids for, purchasing and selling common shares in the open market for the
purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common
stock, which involves the sale by the underwriters of a greater number of common shares than they are required to purchase in this offering, and purchasing common shares on the open market to cover
positions created by short sales. Short sales may be "covered" shorts, which are short positions in an amount not greater than the underwriters' over-allotment option referred to above, or
may be "naked" shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their over-allotment option, in
whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open
market compared to the price at which the underwriters may purchase shares through the over-allotment option. A naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the
underwriters create a naked short position, they will purchase shares in the open market to cover the position.
S-22
Table of Contents
The
underwriters have advised us that, pursuant to Regulation M promulgated by the SEC, they may also engage in other activities that stabilize, maintain or otherwise affect the
price of the common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing transactions or
to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
These
activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as
a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any
time. The underwriters may carry out these transactions on the NYSE, in the over the counter market or otherwise.
In
addition, in connection with this offering certain of the underwriters (and selling group members) may engage in passive market making transactions in our common stock in the over the
counter market or otherwise prior to the pricing and completion of this offering. Passive market making consists of displaying bids no higher than the bid prices of independent market makers and
making purchases at prices no higher than these independent bids and effected in response to order flow. Net purchases by a passive market maker on each day are generally limited to a specified
percentage of the passive market maker's average daily trading volume in the common stock during a specified period and must be discontinued when such limit is reached. Passive market making may cause
the price of our common stock to be higher than the price that otherwise would exist in the open market in the absence of these transactions. If passive market making is commenced, it may be
discontinued at any time.
Other
than in the U.S., no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus supplement in any jurisdiction
where action for that purpose is required. The securities offered by this prospectus supplement may not be offered or sold, directly or indirectly, nor may this prospectus supplement or any other
offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus supplement comes are advised to inform themselves about and to observe any
restrictions relating to the offering and the distribution of this prospectus supplement. This prospectus supplement does not constitute an offer to sell or a solicitation of an offer to buy any
securities offered by this prospectus supplement in any jurisdiction in which such an offer or a solicitation is unlawful.
Other Relationships
Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time
in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received
and may continue to receive customary fees and commissions. Certain of the underwriters have acted as initial purchasers or underwriters in certain of our securities offerings. In addition, from time
to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short
positions in our debt or equity securities or loans, and may do so in the future.
Affiliates
of Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are lenders under our Credit Agreement dated November 10, 2008.
Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Bank of America, N.A. and Morgan Stanley & Co. Incorporated, or their affiliates, served as lenders under the revolving
credit facility of KKR Private Equity Investors, L.P., one of our affiliates. Merrill Lynch, Pierce, Fenner & Smith Incorporated served as mandated arranger under a term loan due 2013
provided to a portfolio
S-23
Table of Contents
company
of KKR L.P. Bank of America, N.A. and Banc of America Securities LLC, each an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, served as administrative agent and
arranger, respectively, under our credit facility due 2011. Morgan Stanley & Co. Incorporated or its affiliates served as lender under several credit facilities of KKR L.P.'s various portfolio
companies.
We
entered into a management agreement with KKR Financial Advisors LLC, an affiliate of KKR Capital Markets LLC, on May 4, 2007 whereby KKR Financial
Advisors LLC was appointed as our manager. Pursuant to the terms of the management agreement, KKR Financial Advisors LLC has provided us assistance with various operational and other
services. KKR Financial Advisors LLC has been paid a base monthly fee as well as quarterly incentive compensation in connection with such services. KKR Financial Advisors LLC has also
been reimbursed for certain expenses incurred on our behalf. In addition, an affiliate of KKR Capital Markets LLC provides management services to certain of our subsidiaries for which it
receives a management fee and expense reimbursement.
We
entered into a standby unsecured revolving credit agreement with KKR Financial Advisors LLC and Kohlberg Kravis Roberts & Co. (Fixed Income) LLC. On
November 5, 2009, our board of directors agreed to terminate this facility. Kohlberg Kravis Roberts & Co. (Fixed Income) LLC is an affiliate of KKR Capital
Markets LLC.
Selling Restrictions
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member
State"), each underwriter represents, warrants and agrees that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the "Relevant
Implementation Date") it has not made and will not make an offer of common shares which are the subject of the offering contemplated by the prospectus supplement to the public in that Relevant Member
State other than:
(a) to
legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to
invest in securities;
(b) to
any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year, (2) a total balance sheet of more
than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;
(c) to
fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the
representatives for any such offer; or
(d) in
any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided
that no such offer of common shares shall require us or the underwriters to publish a prospectus pursuant to Article 3 of the Prospectus Directive.
For
the purposes of this provision, the expression an "offer of common shares to the public" in relation to any common shares in any Relevant Member State means the communication in any
form and by any means of sufficient information on the terms of the offer and the common shares to be offered so
as to enable an investor to decide to purchase or subscribe the common shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State
and the expression "Prospectus Directive" means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
This prospectus supplement and the accompanying prospectus are only being distributed to, and is only directed at, persons in the
United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive that are also (i) investment professionals falling within
S-24
Table of Contents
Article 19(5)
of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (ii) high net worth entities, and other persons to whom it may lawfully be
communicated, falling within Article 49(2)(a) to (d) of the Order (each such person being referred to as a "relevant person"). This prospectus supplement and its contents are
confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that
is not a relevant person should not act or rely on this document or any of its contents.
Neither this prospectus supplement nor any other offering material relating to the common shares described in this prospectus
supplement has been submitted to the clearance procedures of the
Autorité des Marchés Financiers
or of the competent
authority of another member state of the European Economic Area and notified to the
Autorité des Marchés Financiers
. The
common shares have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. Neither this prospectus supplement nor any other offering material
relating to the common shares has been or will be: released, issued, distributed or caused to be released, issued or distributed to the public in France; or used in connection with any offer for
subscription or sale of the common shares to the public in France. Such offers, sales and distributions will be made in France only: to qualified investors (
investisseurs
qualifiés
) and/or to a restricted circle of investors (
cercle restreint d'investisseurs
), in each case investing
for their own account, all as defined in, and in accordance with, articles L.411-2, D.411-1, D.411-2, D.734-1, D.744-1,
D.754-1 and D.764-1 of the French
Code monétaire et financier
; to investment services providers authorized to
engage in portfolio management on behalf of third parties; or in a transaction that, in accordance with
article L.411-2-II-1°-or-2°-or
3° of the French
Code monétaire et financier
and article 211-2 of the General Regulations
(
Règlement Général
) of the
Autorité des Marchés
Financiers
, does not constitute a public offer (
appel public à l'épargne
). The common shares may
be resold directly or indirectly, only in compliance with articles L.411-1, L.411-2, L.412-1 and L.621-8 through
L.621-8-3 of the French
Code monétaire et financier
.
We have not and will not register with the Swiss Financial Market Supervisory Authority (FINMA) as a foreign collective investment
scheme pursuant to Article 119 of the Federal Act on Collective Investment Scheme of 23 June 2006, as amended (CISA), and accordingly the common shares being offered pursuant to this
prospectus have not and will not be approved, and may not be licenseable, with FINMA. Therefore, the common shares have not been authorized for distribution by FINMA as a foreign collective investment
scheme pursuant to Article 119 CISA and the common shares offered hereby may not be offered to the public (as this term is defined in Article 3 CISA) in or from Switzerland. The common
shares may solely be offered to "qualified investors," as this term is defined in Article 10 CISA, and in the circumstances set out in Article 3 of the Ordinance on Collective Investment
Scheme of 22 November 2006, as amended (CISO), such that there is no public offer. Investors, however, do not benefit from protection under CISA or CISO or supervision by FINMA. This prospectus
supplement and any other materials relating to the common shares are strictly personal and confidential to each offeree and do not constitute an offer to any other person. This prospectus supplement
may only be used by those qualified investors to whom it has been handed out in connection with the offer described herein and may neither directly or indirectly be distributed or made available to
any person or entity other than its recipients. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in Switzerland or from
Switzerland. This prospectus supplement does not constitute an issue prospectus as that term is understood pursuant to Article 652a and/or 1156 of the Swiss Federal Code of Obligations. We have
not applied for a listing of the common shares on the SIX Swiss Exchange or any other regulated securities market in Switzerland, and consequently, the information presented in this prospectus does
not necessarily comply with the information standards set out in the listing rules of the SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss
Exchange.
S-25
Table of Contents
This document relates to an exempt offer in accordance with the offered common shares or such other securities Rules of the Dubai
Financial Services Authority. This document is intended for distribution only to persons of a type specified in those rules. It must not be delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with exempt offers. The Dubai Financial Services Authority has not approved this document nor
taken steps to verify the information set out in it, and has no responsibility for it. The common shares which are the subject of the offering contemplated by this prospectus supplement and the
accompanying prospectus may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the common shares offered should conduct their own due diligence on the common shares.
If you do not understand the contents of this document you should consult an authorized financial adviser.
CONFLICTS OF INTEREST
An affiliate of KKR Capital Markets LLC owns a controlling interest in our Manager. As a result, KKR Capital Markets LLC
may be deemed to have a "conflict of interest" under the applicable provisions of Rule 2720 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc., or FINRA.
Accordingly, this offering will be made in compliance with the applicable provisions of Rule 2720 of the Conduct Rules. In accordance with Rule 2720, KKR Capital Markets LLC will
not make sales to discretionary accounts without the prior written consent of the customer.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Simpson Thacher & Bartlett LLP, Palo Alto, California. Richards,
Layton & Finger, P.A., our special Delaware counsel, will pass upon the validity under Delaware law of our common shares. Hunton & Williams LLP, our special tax counsel, will pass
upon certain U.S. federal income tax matters. Dechert LLP, our special 1940 Act counsel, will pass upon certain 1940 Act matters. Certain partners of Simpson Thacher &
Bartlett LLP, members of their families and related persons have an interest representing less than 1% of our common shares. Certain legal matters related to this offering will be passed upon
for the underwriters by Davis Polk & Wardwell LLP, New York, New York.
EXPERTS
The consolidated financial statements incorporated in this prospectus supplement by reference from the Company's Annual Report on
Form 10-K and the effectiveness of the Company's internal control over financial reporting have been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their reports, which are incorporated herein by reference. Such financial statements have been so incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
S-26
Table of Contents
INCORPORATION BY REFERENCE
This prospectus supplement "incorporates by reference" certain information we file with the SEC under the Exchange Act. This means that
we are disclosing important information to you by referring you to these filings. The information we incorporate by reference is considered a part of this prospectus supplement, and subsequent
information that we file with the SEC will automatically update and supersede this information.
Any
statement contained in a document incorporated or considered to be incorporated by reference in this prospectus supplement shall be considered to be modified or superseded for
purposes of this prospectus supplement to the extent a statement contained in this prospectus supplement or in any other subsequently filed document that is or is deemed to be incorporated by
reference in this prospectus supplement modifies or supersedes such statement.
We
incorporate by reference the following documents that we have filed with the SEC:
-
-
our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC on
March 1, 2010, including portions of our Proxy Statement for our 2010 annual meeting of holders of our common shares held on April 29, 2010 filed with the SEC on March 23, 2010 to
the extent specifically incorporated by reference into such Form 10-K;
-
-
our Quarterly Report on Form 10-Q for the three months ended March 31, 2010, filed with the SEC
on April 29, 2010;
-
-
our Current Reports on Form 8-K filed with the SEC on January 11, 2010, January 12, 2010,
January 15, 2010, February 4, 2010, March 18, 2010, April 29, 2010 and May 3, 2010; and
-
-
the description of our common shares included in our Registration Statement on Form 8-A filed with the
SEC on April 30, 2007, and any amendment or report filed thereafter for the purpose of updating that description.
We
are not incorporating by reference any information furnished under Item 2.02 or Item 7.01 of Form 8-K or any exhibit attached thereto into any filing
under the Securities Act or the Exchange Act or into this prospectus.
In
addition, we incorporate by reference any future filings we make with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act from the date of this prospectus
supplement until we have sold all of the common shares to which this prospectus supplement relates or the offering is otherwise terminated. We will provide free copies of any of those documents, if
you write or telephone us at:
KKR
Financial Holdings LLC
555 California Street, 50
th
Floor
San Francisco, California 94104
Attention: Investor Relations
(415) 315-3620
You
also may review a copy of the prospectus and registration statement and its exhibits at the SEC's Public Reference Room in Washington, D.C., as well as through the SEC's internet
website (See "Where You Can Find More Information" above).
S-27
Table of Contents
PROSPECTUS
$500,000,000
KKR Financial Holdings LLC
Common Shares
Preferred Shares
Depositary Shares
Warrants to Purchase Common Shares, Preferred Shares, Depositary Shares or Debt Securities
Subscription Rights to Purchase Common Shares, Preferred
Shares, Depositary Shares or Debt Securities
Debt Securities
Guarantees of Debt Securities
Share Purchase Contracts
Share Purchase Units
We
may offer from time to time:
-
-
our common shares,
-
-
our preferred shares,
-
-
depositary shares representing fractional interests in our preferred shares,
-
-
warrants to purchase our common shares, preferred shares, depositary shares or debt securities,
-
-
subscription rights to purchase our common shares, preferred shares, depository shares or debt securities;
-
-
our debt securities, which may or may not be guaranteed by one or more of the subsidiaries identified in this prospectus;
-
-
our share purchase contracts; and
-
-
our share purchase units.
The
aggregate initial public offering price of the securities offered by this prospectus is limited to $500,000,000 (or the equivalent in one or more foreign currencies). We will provide
specific terms of any offering of these securities in a prospectus supplement or a free writing prospectus. The securities may be offered separately or together or in units in any combination and as
separate series. You should read this prospectus and any applicable prospectus supplement and free writing prospectus we may provide to you, as well as the documents incorporated and deemed to be
incorporated by reference in this prospectus, carefully before you invest.
Ownership
of our shares by any person is generally limited to 9.8% in value or in number of shares, whichever is more restrictive. In addition, our operating agreement contains other
limitations on the ownership and transfer of our shares. However, pursuant to our operating agreement, our board of directors may, under certain circumstances, terminate these limitations on ownership
and transfer of our shares or grant exemptions to certain persons. For additional information on the ownership and transfer restrictions on our shares, see "Description of SharesCertain
Provisions of the Operating AgreementRestrictions on Ownership and Transfer."
Our
common shares are traded on the New York Stock Exchange, or "NYSE," under the symbol "KFN." On February 27, 2009, the last reported sale price of our common shares on the NYSE
was $1.08 per share.
Investing in our securities involves risks. See "Risk Factors" on page 8 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
We
may sell these securities on a continuous or delayed basis directly, through agents, dealers or underwriters as designated from time to time, or through a combination of these
methods. We reserve the sole right to accept, and we and any agents, dealers and underwriters reserve the right to reject, in whole or in part, any proposed purchase of securities. If any agents,
dealers or underwriters are involved in the sale of any securities, the applicable prospectus supplement or a free writing prospectus will set forth any applicable commissions or discounts payable to
them. Our net proceeds from the sale of the securities also will be set forth in the applicable prospectus supplement or free writing prospectus.
The date of this prospectus is March 2, 2009
Table of Contents
TABLE OF CONTENTS
This
prospectus is part of an automatic shelf registration statement that we filed with the Securities and Exchange Commission, or the "SEC," as a "well-known seasoned
issuer" as defined in Rule 405 under the Securities Act of 1933, as amended, or the "Securities Act," utilizing a "shelf" registration process. Under this shelf registration process, we may
sell any of the securities described in this prospectus in one or more offerings. This prospectus provides you with a general description of the securities we may offer. Each time we sell securities,
we will provide a prospectus supplement and may also provide you with a free writing prospectus that will contain specific information about the terms of that offering. The prospectus supplement or
free writing prospectus may also add, update or change information contained in this prospectus. You should read both this prospectus and any applicable prospectus supplement and free writing
prospectus together with information incorporated and deemed to be incorporated by reference herein as described under "Incorporation by Reference" and the additional information described under
"Where You Can Find More Information" before making an investment in our securities.
You should rely only on the information contained or incorporated or deemed to be incorporated by reference in this prospectus and in any prospectus supplement or
free writing prospectus that we may provide to you in connection with an offering of our securities described in this prospectus. We have not authorized anyone to provide you with different or
additional information. If anyone provides you with different or additional information, you should not rely on it. This prospectus does not constitute, and any prospectus supplement or free writing
prospectus that we may provide to you in connection with an offering of our securities described in this prospectus will not constitute, an offer to sell, or a solicitation of an offer to purchase,
the offered securities in any jurisdiction to or from any person to whom or from whom it is unlawful to make such offer or solicitation in such jurisdiction. You should not assume that the information
contained in this prospectus, in any prospectus supplement or free writing prospectus that we may provide to you in connection with an offering of our securities described in this prospectus, or in
any document incorporated or deemed to be incorporated by reference in this prospectus or any prospectus supplement is accurate as of any date other than the date of that document. Neither the
delivery of this prospectus nor any prospectus supplement or free writing prospectus that we may provide to you in connection with an offering of
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our securities described in this prospectus nor any distribution of securities pursuant to this prospectus or any such prospectus supplement or free writing prospectus shall, under any circumstances,
create any implication that there has been no change in the information set forth in this prospectus, any such prospectus supplement or free writing prospectus or any document incorporated or deemed
to be incorporated by reference in this prospectus or any prospectus supplement since the date thereof.
For
investors outside the United States: we have not done anything that would permit this offering or possession or distribution of this prospectus or any prospectus supplement or free
writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating
to an offering of our securities described in this prospectus and the distribution of this prospectus and any prospectus supplement or free writing prospectus.
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KKR FINANCIAL HOLDINGS LLC
This prospectus contains certain information about KKR Financial Holdings LLC and our common shares,
preferred shares, depositary shares, warrants, subscription rights, debt securities, share purchase contracts and share purchase units and about the guarantees of our debt securities by certain of our
subsidiaries. This prospectus is not complete and does not contain all of the information that you should consider before making an investment in our securities. You should read carefully the
information appearing in this prospectus and in any prospectus supplement and free writing prospectus we may provide to you in connection with an offering of our securities described in this
prospectus and in the documents incorporated and deemed to be incorporated by reference in this prospectus.
Unless otherwise expressly stated or the context otherwise requires, the terms "we," "our company," "us" and "our" and similar terms refer, as of dates and for
periods on and after May 4, 2007, to KKR Financial Holdings LLC and its subsidiaries and, as of dates and for periods prior to May 4, 2007, to our predecessor, KKR Financial
Corp., and its subsidiaries; "Manager" means KKR Financial Advisors LLC; "KKR" means Kohlberg Kravis Roberts & Co. L.P. and its affiliated companies (excluding portfolio
companies that are minority or majority owned or managed by funds associated with KKR); "management agreement" means the amended and restated management agreement between KKR Financial
Holdings LLC and the Manager; "operating agreement" means the amended and restated operating agreement of KKR Financial
Holdings LLC; "common shares" and "preferred shares" mean common shares and preferred shares, respectively, representing limited liability company interests in KKR Financial
Holdings LLC; and references to "our shares" (and similar references) mean common shares and preferred shares of KKR Financial Holdings LLC; "debt securities" means our debt securities
that we may offer pursuant to this prospectus; and references to "$" and "dollars" mean U.S. dollars.
We
are a specialty finance company that invests in multiple asset classes. We were organized as a Delaware limited liability company on January 17, 2007. We are the successor to
KKR Financial Corp., a Maryland corporation. KKR Financial Corp. was originally incorporated in the State of Maryland on July 7, 2004. We are externally managed and advised by KKR Financial
Advisors LLC, our Manager and an affiliate of KKR, pursuant to a management agreement between us and our Manager. All of our executive officers are employees or members of our Manager or one or
more of its affiliates. The executive offices of our Manager are located at 555 California Street, 50th Floor, San Francisco, California 94104 and the telephone number of our Manager's
executive offices is (415) 315-3620.
Our
principal executive offices are located at 555 California Street, 50th Floor, San Francisco, California 94104. Our telephone number is (415) 315-3620. The
debt securities we may offer pursuant to this prospectus may be guaranteed by one or more of the subsidiaries named herein and the address and telephone number of the principal executive office of
each such subsidiary is the same as ours. Our common shares are listed on the New York Stock Exchange, or the "NYSE," under the symbol "KFN."
Our 1940 Act Status
We are organized as a holding company that conducts its operations primarily through majority-owned subsidiaries and we intend to
continue to conduct our operations so that we are not required to register as an investment company under the Investment Company Act of 1940, as amended, or the "1940 Act." Section 3(a)(1)(C)
of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or
proposes to acquire "investment securities" (within the meaning of the 1940 Act) having a value exceeding 40% of the value of the issuer's total assets (exclusive of U.S. government securities and
cash items) on an unconsolidated basis (the "40% test"). Excluded from the term "investment securities" are, among others, securities issued by majority-owned subsidiaries unless the subsidiary is an
investment company or relies on the exceptions from the definition of an investment company provided by Section 3(c)(1) or Section 3(c)(7) of the 1940 Act (a "fund"). The
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1940
Act defines a "majority-owned subsidiary" of a person as any company 50% or more of the outstanding voting securities (i.e., those securities presently entitling the holder thereof to vote
for the
election of directors of the company) of which are owned by that person, or by another company that is, itself, a majority-owned subsidiary of that person. We are responsible for determining whether
any of our subsidiaries is majority-owned. We treat subsidiaries in which we own at least 50% of the outstanding voting securities, including those that issue collateralized loan obligations, or
"CLOs," as majority-owned for purposes of the 40% test.
We
monitor our holdings regularly to confirm our continued compliance with the 40% test. Some of our subsidiaries may rely solely on Section 3(c)(1) or Section 3(c)(7) of
the 1940 Act. In order for us to satisfy the 40% test, securities issued to us by those subsidiaries or any of our subsidiaries that are not majority-owned, together with any other "investment
securities" that we may own, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis and exclusive of U.S. government securities and cash items.
However, most of our subsidiaries rely on exceptions provided by provisions of, and rules and regulations promulgated under, the 1940 Act (other than Section 3(c)(1) or Section 3(c)(7)
of the 1940 Act) to avoid being defined and regulated as an investment company. In order to conform to these exceptions, our subsidiaries may be limited with respect to the assets in which each of
them can invest and/or the types of securities each of them may issue. We must, therefore, monitor each subsidiary's compliance with its applicable exception and our freedom of action, and that of our
subsidiaries, may be limited as a result. For example, our subsidiaries that issue CLOs generally rely on Rule 3a-7 under 1940 Act, while KKR Financial Holdings II, LLC, or
"KFH II," our subsidiary that is taxed as a real estate investment trust, or "REIT," for U.S. federal income tax purposes, generally relies on Section 3(c)(5)(C) of the 1940 Act. Each of these
exceptions requires, among other things, that the subsidiary (i) not issue redeemable securities and (ii) engage in the business of holding certain types of assets, consistent with the
terms of the exception. We do not treat our interests in majority-owned subsidiaries that rely on Section 3(c)(5)(C) of, or Rule 3a-7 under, the 1940 Act as investment
securities when calculating our 40% test.
We
sometimes refer to our subsidiaries that rely on Rule 3a-7 under the 1940 Act as "CLO subsidiaries." Rule 3a-7 under the 1940 Act is available to
certain structured financing vehicles that are engaged in the business of holding financial assets that, by their terms, convert into cash within a finite time period and that issue fixed income
securities entitling holders to receive payments that depend primarily on the cash flows from these assets, provided that, among other things, the structured finance vehicle does not engage in certain
portfolio management practices resembling those employed by mutual funds. Accordingly, each of these CLO subsidiaries is subject to an indenture (or similar transaction documents) that contains
specific guidelines and restrictions limiting the discretion of the CLO subsidiary and its collateral manager. In particular, these guidelines and restrictions prohibit the CLO subsidiary from
acquiring and disposing of assets primarily for the purpose of recognizing gains or decreasing losses resulting from market value changes. Thus, a CLO subsidiary cannot acquire or dispose of assets
primarily to enhance returns to the owner of the equity in the CLO subsidiary; however, subject to this limitation, sales and purchases of assets may be made so long as doing so does not violate
guidelines contained in the CLO subsidiary's relevant transaction documents. A CLO subsidiary generally can, for example, sell an asset if the collateral manager believes that its credit quality has
declined since its acquisition or that the credit profile of the obligor will deteriorate and the proceeds of permitted dispositions may be reinvested in additional collateral, subject to fulfilling
the requirements set forth in Rule 3a-7 under the 1940 Act and the CLO subsidiary's relevant transaction documents. As a result of these restrictions, our CLO subsidiaries may
suffer losses on their assets and we may suffer losses on our investments in those CLO subsidiaries.
We
sometimes refer to KFH II, our subsidiary that relies on Section 3(c)(5)(C) of the 1940 Act, as our "REIT subsidiary." Section 3(c)(5)(C) of the 1940 Act is available to
companies that are primarily
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engaged
in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. While the SEC has not promulgated rules to address precisely what is required
for a company to be considered to be "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate," the SEC's Division of
Investment Management, or the "Division," has taken the position, through a series of no-action and interpretive letters, that a company may rely on Section 3(c)(5)(C) of the 1940
Act if, among other things, at least 55% of the company's assets consist of mortgage loans and other assets that are considered the functional equivalent of mortgage loans (collectively, "qualifying
real estate assets"), and at least 25% of the company's assets consist of real estate-related assets (reduced by the excess of the company's qualifying real estate assets over the required 55%),
leaving no more than 20% of the company's assets to be invested in miscellaneous assets. The Division has also provided guidance as to the types of assets that can be considered qualifying real estate
assets. Because the Division's interpretive letters are not binding except as they relate to the companies to whom they are addressed, if the Division were to change its position as to, among other
things, what assets might constitute qualifying real estate assets, our REIT subsidiary might be required to change its investment strategy to comply with the changed position. We cannot predict
whether such a change would be adverse.
Based
on current guidance, our REIT subsidiary classifies investments in mortgage loans as qualifying real estate assets, as long as the loans are "fully secured" by an interest in real
estate on which we retain the right to foreclose. That is, if the loan-to-value ratio of the loan is equal to or less than 100%, then the mortgage loan is considered to be a
qualifying real estate asset. Mortgage loans with loan-to-value ratios in excess of 100% are considered to be only real estate-related assets. Our REIT subsidiary considers
agency whole pool certificates to be qualifying real estate assets. Examples of agencies that issue whole pool certificates are the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation and the Government National Mortgage Association. An agency whole pool certificate is a certificate, issued or guaranteed as to principal and interest by the U.S. government or by
a federally chartered entity, that represents the entire beneficial interest in the underlying pool of mortgage loans. By contrast, an agency certificate that represents less than the entire
beneficial interest in the underlying mortgage loans is not considered to be a qualifying real estate asset, but is considered to be a real estate-related asset.
Most
non-agency mortgage-backed securities do not constitute qualifying real estate assets, because they represent less than the entire beneficial interest in the related
pool of mortgage loans; however, based on Division guidance where our REIT subsidiary's investment in non-agency mortgage-backed securities is the "functional equivalent" of owning the
underlying mortgage loans, our REIT subsidiary may treat those securities as qualifying real estate assets. Moreover, investments in mortgage-backed securities that do not constitute qualifying real
estate assets will be classified as real estate-related assets. Therefore, based upon the specific terms and circumstances related to each non-agency mortgage-backed security that our REIT
subsidiary owns, our REIT subsidiary will make a determination of whether that security should be classified as a qualifying real estate asset or as a real estate-related asset; and there may be
instances where a security is recharacterized from being a qualifying real estate asset to a real estate-related asset, or conversely, from being a real estate-related asset to being a qualifying real
estate asset based upon the acquisition or disposition or redemption of related classes of securities from the same securitization trust. If our REIT subsidiary acquires securities that, collectively,
receive all of the principal and interest paid on the related pool of underlying mortgage loans (less fees, such as servicing and trustee fees, and expenses of the securitization), and that subsidiary
has foreclosure rights with respect to those mortgage loans, then our REIT subsidiary will consider those securities, collectively, to be qualifying real estate assets. If another entity acquires any
of the securities that are expected to receive cash flow from the underlying mortgage loans, then our REIT subsidiary will consider whether it has appropriate foreclosure rights with respect to the
underlying loans and whether its investment is a first loss position in deciding whether these securities should be classified as qualifying real estate assets. If our REIT subsidiary
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owns
more than one subordinate class, then, to determine the classification of subordinate classes other than the first loss class, our REIT subsidiary will consider whether such classes are
contiguous with the first loss class (with no other classes absorbing losses after the first loss class and before any other subordinate classes that our REIT subsidiary owns), whether our REIT
subsidiary owns the entire amount of each such class and whether our REIT subsidiary would continue to have appropriate foreclosure rights in connection with each such class if the more subordinate
classes were no longer outstanding. If the answers to any of these questions is no, then our REIT subsidiary would expect not to classify that particular class, or classes senior to that class, as
qualifying real estate assets.
As
noted above, if the combined values of the investment securities issued by our subsidiaries that must rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act,
together with any other investment securities we may own, exceeds 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, we may be
deemed to be an investment company. If we fail to maintain an exception, exemption or other exclusion from the 1940 Act, we could, among other things, be required either (i) to change
substantially the manner in which we conduct our operations to avoid being subject to the 1940 Act or (ii) to register as an investment company. Either of these would likely have a material
adverse effect on us, our ability to service our indebtedness and to make distributions on our shares, and on the market price of our shares and any other securities we may issue. If we were required
to register as an investment company under the 1940 Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management,
operations, transactions with certain affiliated persons (within the meaning of the 1940 Act), portfolio composition (including restrictions with respect to diversification and industry concentration)
and other matters. Additionally, our Manager would have the right to terminate our management agreement. Moreover, if we were required to register as an investment company, we would no longer be
eligible to be treated as a partnership for U.S. federal income tax purposes.
Instead, we would be classified as a corporation for tax purposes and would be able to avoid corporate taxation only to the extent that we were able to elect and qualify as a regulated investment
company, or "RIC," under applicable tax rules. Because our eligibility for RIC status would depend on our investments and sources of income at the time that we were required to register as an
investment company, there can be no assurance that we would be able to qualify as a RIC. If we were to lose partnership status and fail to qualify as a RIC, we would be taxed as a regular corporation.
See "Material U.S. Federal Income Tax ConsiderationsU.S. Federal Income Tax Consequences of the Ownership and Disposition of Our SharesClassification of KKR
Financial Holdings LLC."
We
have not requested approval or guidance from the SEC or its staff with respect to our 1940 Act determinations, including, in particular: our treatment of any subsidiary as
majority-owned; the compliance of subsidiary with Section 3(c)(5)(C) of, or Rule 3a-7 under, the 1940 Act, including any subsidiary's determinations with respect to the
consistency of its assets or operations with the requirements thereof; or whether our investments in one or more subsidiaries constitute investment securities for purposes of the 40% test. If the SEC
were to disagree with our treatment of one or more subsidiaries as being excepted from the 1940 Act pursuant to Rule 3a-7 or Section 3(c)(5)(C), or with our determination
that one or more of our other investments do not constitute investment securities for purposes of the 40% test, we and/or one or more of our subsidiaries would need to adjust our investment strategies
or investments in order for us to continue to pass the 40% test or register as an investment company, which could have a material adverse effect on us. Moreover, we may be required to adjust our
investment strategy and investments if the SEC or its staff provides more specific or different guidance regarding the application of relevant provisions of, and rules under, the 1940 Act. Such
guidance could provide additional flexibility, or it could further inhibit our ability, or the ability of a subsidiary, to pursue a chosen investment strategy, which could have a material adverse
effect on us.
The
foregoing discussion of some of the aspects of our 1940 Act status, and that of our subsidiaries, includes a summary of certain provisions of, and rules under, the 1940 Act, and is
not
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complete.
For additional information, including information as to certain risks and uncertainties regarding our 1940 Act status, and that of our subsidiaries, you should review the documents
incorporated by reference in this prospectus. See "Risk Factors" and "Incorporation by Reference."
RISK FACTORS
Investing in our securities involves risks. In addition to the risks discussed below under "Cautionary Note Regarding
Forwarding-Looking Statements", you should carefully review the risks discussed under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, which is incorporated by reference in this prospectus, and
under the caption "Risk Factors" or any similar caption in the other documents that we have filed or subsequently file with the SEC that are incorporated or deemed to be incorporated by reference in
this prospectus as described below under "Incorporation by Reference" and in any prospectus supplement or free writing prospectus that we provide you in connection with an offering of securities
pursuant to this prospectus. You should also carefully review the other risks and uncertainties discussed in the documents incorporated and deemed to be incorporated by reference in this prospectus
and in any such prospectus supplement and free writing prospectus. The risks and uncertainties discussed below and in the documents referred to above and other matters discussed in those documents
could materially and adversely affect our business, financial condition, liquidity and results of operations and the market price of our shares and any other securities we may issue. Moreover, the
risks and uncertainties discussed below and in the foregoing documents are not the only risks and uncertainties that we face, and our business, financial condition, liquidity and results of operations
and the market price of our shares and any other securities we may issue could be materially adversely affected by other matters that are not known to us or that we currently do not consider to be
material risks to our business.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated and deemed to be incorporated by reference herein contain, and any prospectus supplement
and free writing prospectus that we may provide to you in connection with an offering of our securities described in this prospectus may contain, forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act." Forward-looking statements relate to expectations, beliefs,
estimates, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward
looking statements by terms such as "aim," "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," "strive" and "would" or the negative of
these terms or other comparable terminology and similar words.
The
forward-looking statements are based on our beliefs, assumptions and expectations with respect to our future performance and future events or circumstances at the respective times
those forward-looking statements were made, taking into account information available to us at those times, and are not guarantees of future performance, events or results. These beliefs, assumptions
and expectations involve risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us or within our control. If a change occurs, our
business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make
an investment decision with respect to our securities, along with the following factors that could cause actual results to vary materially from our forward-looking
statements:
-
-
the factors referenced in this prospectus, the applicable prospectus supplement and any applicable free writing
prospectus, and the documents incorporated and deemed to be incorporated by reference herein, including those referred to above under the caption "Risk Factors";
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-
-
general volatility of the capital markets and the market price of our common shares and potential volatility of the market
price of any other securities we may issue;
-
-
changes in our business strategy;
-
-
limitations imposed on our business by our exemption under the 1940 Act;
-
-
limitations imposed on our business by the "qualifying income exception" applicable to publicly traded partnerships for
U.S. federal income tax purposes;
-
-
availability, terms and deployment of capital;
-
-
availability of qualified personnel for our Manager;
-
-
our limited ability to remove our Manager and our Manager's right to resign;
-
-
our limited liability company and organizational structure, which may limit our ability to make distributions;
-
-
our ability to service and comply with the terms of our indebtedness;
-
-
the risk that we may be unable to refinance our indebtedness, particularly short-term indebtedness, as it
comes due;
-
-
our cash flow available for distribution and our ability to make distributions in the future to holders of our shares;
-
-
our ability to pay the management fee payable to our Manager when due;
-
-
the regulatory environment in which our businesses operate;
-
-
costs and effects of legal and administrative proceedings, settlements, investigations and claims;
-
-
changes in our industry, interest rates or the general economy;
-
-
increased rates of default and/or decreased recovery rates on our investments;
-
-
material variances between the realized prepayment rates as compared to our projected prepayment rates on our residential
real estate-related investments; and
-
-
the degree and nature of our competition.
We
undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep
this cautionary note in mind as you read this prospectus, the documents incorporated and deemed to be incorporated by reference herein and any prospectus supplement and free writing prospectus that we
may provide to you in connection with this offering.
The
documents incorporated and deemed to be incorporated by reference herein contain or may contain, and any prospectus supplement and free writing prospectus that we may provide to you
in connection with this offering may contain, market data, industry statistics and other data that have been obtained from, or compiled from, information made available by third parties. We have not
independently verified this data or these statistics.
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement or a free writing prospectus prepared in connection with an offering of
securities pursuant to this prospectus, the net proceeds from the sale of the securities to which this prospectus relates will be used for general corporate purposes. General
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corporate
purposes may include repayment, repurchase or redemption of debt, acquisitions, additions to working capital, capital expenditures and investments in our subsidiaries. Net proceeds may be
temporarily invested or temporarily used to repay indebtedness prior to deployment for their intended purposes.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table presents the ratios of earnings to fixed charges for us and our consolidated subsidiaries for the periods
indicated. For the purposes of calculating the ratio of earnings to fixed charges, "earnings" consist of pre-tax income before equity in income of unconsolidated affiliate. "Fixed charges"
consist of interest incurred on all indebtedness and capitalized expenses relating to indebtedness. Neither we nor any of our consolidated subsidiaries had any preferred shares outstanding for any of
the periods reflected in this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
2008
|
|
Year ended
December 31,
2007(1)
|
|
Year ended
December 31,
2006(1)
|
|
Year ended
December 31,
2005(1)
|
|
Period from
August 12, 2004
(Inception) through
December 31,
2004(1)
|
Ratio of earnings (loss) to fixed charges
|
|
(2)
|
|
1.3x
|
|
1.3x
|
|
1.6x
|
|
(3)
|
-
(1)
-
Certain
prior period information has been reclassified to conform to the presentation for the year ended December 31, 2008.
-
(2)
-
For
the year ended December 31, 2008, our losses exceeded our fixed charges by approximately $513.0 million.
-
(3)
-
For
the period from August 12, 2004 (the date of our inception) through December 31, 2004, our losses exceeded our fixed charges by
approximately $8.0 million.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following summary discusses the material U.S. federal income tax consequences of the ownership and disposition of our common shares
and preferred shares, which we refer to collectively as shares. Any additional U.S. federal income tax consequences of the ownership and disposition of our preferred shares, depositary shares,
warrants to purchase common shares, preferred shares, depositary shares or debt securities, subscription rights to purchase common shares, preferred shares, depositary shares or debt securities, debt
securities, guarantees of debt securities, share purchase contracts or share purchase units will be addressed in an applicable prospectus supplement or free writing prospectus we may provide you. This
summary is based on current law, is for general information only and is not tax advice. This discussion is based on the Internal Revenue Code of 1986, as amended, or the "Code," applicable U.S.
Treasury Regulations, judicial authority, and administrative rulings and practice, all as currently in effect and which are subject to change or
differing interpretations, possibly with retroactive effect. This summary assumes that our shares will be held as capital assets for U.S. federal income tax purposes. This summary is not intended to
be a complete description of all of the U.S. federal income tax consequences of the ownership and disposition of our shares. In addition, except as specifically set forth below, this summary does not
discuss any state or local income taxation or foreign income taxation or other tax consequences. This discussion does not address all of the aspects of U.S. federal income taxation that may be
relevant to a particular holder of our shares in light of its personal circumstances, or to holders of our shares that are subject to special treatment under U.S. federal income tax laws, including
but not limited to:
-
-
dealers in securities or foreign currencies;
-
-
financial institutions;
-
-
insurance companies;
-
-
tax-exempt organizations (except to the extent discussed in "U.S. Federal Income Tax Consequences
of the Ownership and Disposition of Our SharesUnrelated Business Taxable Income" and "Material U.S. Federal Income Tax Considerations Relating to Investments in
REITsTaxation of Holders of REIT SharesTax-Exempt Holders of REIT Shares");
-
-
non-U.S. individuals and foreign corporations (except to the extent discussed in "U.S. Federal
Income Tax Consequences of the Ownership and Disposition of Our SharesNon U.S. Holders" and "Material U.S. Federal Income Tax Considerations Relating to Investments in
REITsTaxation of Holders of REIT SharesTaxation of Non-U.S. Holders of REIT Shares");
-
-
persons who are subject to the alternative minimum tax;
-
-
traders in securities who elect to apply a mark-to-market method of accounting;
-
-
persons that hold our shares as part of a hedge, straddle, constructive sale or conversion transaction;
-
-
persons whose functional currency is not the U.S. dollar;
-
-
persons who are, or who hold our shares through, partnerships or other pass-through entities; or
-
-
holders of options granted by us or persons who acquired our shares as compensation.
The
tax treatment of partners in a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) that holds our shares generally depends on both the
status of the partner (rather than the partnership) and the activities of the partnership and is not specifically addressed herein. Partners in partnerships that hold our shares should consult their
tax advisors.
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As
used below, a "U.S. holder" is a beneficial holder of our shares who is, for U.S. federal income tax purposes:
-
-
a citizen or resident of the United States;
-
-
a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under
the laws of the United States, any state thereof or the District of Columbia;
-
-
an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
-
-
a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the trust, or if the trust was in existence on August 20, 1996 and has elected to continue to be treated as a U.S. person.
The
term "non-U.S. holder" means a beneficial owner of our shares that is not a U.S. holder or a partnership (or other entity treated as a partnership for U.S. federal income
tax purposes). The term "holders" includes both a U.S. holder and a non-U.S. holder.
The U.S. federal income tax laws are complex, and your circumstances may affect your tax consequences. Consequently, you are urged to consult your own tax
advisors as to the specific tax consequences to you of the ownership and disposition of our shares, including the applicability and effect of federal, state and local or foreign income and other tax
laws to your particular circumstances.
U.S. Federal Income Tax Consequences of the Ownership and Disposition of Our Shares
In the opinion of Hunton & Williams LLP, or "Hunton & Williams," we will be treated for U.S. federal income tax
purposes as a partnership, and not as an association or a
publicly traded partnership taxable as a corporation. It must be emphasized that the opinion of Hunton & Williams speaks as of the date issued and is based on various assumptions and
representations relating to our organization, operations, assets, activities and income, including that all factual representations and statements set forth in all relevant documents, records and
instruments are true and correct, and that we, at all times, have operated and will continue to operate in accordance with the method of operation described in our organizational documents and this
prospectus, and is conditioned upon factual representations and covenants regarding our organization, assets, income, and present and future conduct of our activities and operations, and assumes that
such representations and covenants are accurate and complete.
There
is limited statutory, administrative and judicial authority addressing the treatment of instruments similar to our shares for U.S. federal income tax purposes. No assurance can be
given that the Internal Revenue Service, or IRS, would not successfully assert a position contrary to any of the tax aspects set forth below. Moreover, no advance rulings have been sought from the IRS
regarding any matter discussed in this prospectus. Accordingly, you are urged to consult your tax advisors with regard to the U.S. federal income tax consequences to you of owning and disposing of our
shares, as well as the effects of state, local and non-U.S. tax laws, including potential state tax filing requirements.
While
we believe that we have been organized and have operated so that we will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a
publicly traded partnership taxable as a corporation, given the highly complex nature of the rules governing partnerships, the ongoing importance of factual determinations, and the possibility of
future changes in our circumstances, no assurance can be given by Hunton & Williams or us that we will so qualify for any particular year. Hunton & Williams will have no obligation to
advise us or you of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. Our taxation as a partnership will depend on our ability to
meet, on a continuing basis, through actual operating results, the "qualifying income exception" (as described below), the compliance with
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which
will not be reviewed by Hunton & Williams on an ongoing basis. Accordingly, no assurance can be given that the actual results of our operations for any taxable year will satisfy the
qualifying income exception. You should be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such
opinions.
If,
for any reason, including our failure to meet the "qualifying income exception," we were treated as an association or publicly traded partnership taxable as a corporation for U.S.
federal income tax purposes, we would be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, without deduction for any distributions to holders of our
shares, thereby materially reducing the amount of any cash available for distribution to holders of our shares.
Under
Section 7704 of the Code, unless certain exceptions apply, a publicly traded partnership is generally treated and taxed as a corporation, and not as a partnership, for U.S.
federal income tax purposes. A partnership is a publicly traded partnership if (i) interests in the partnership are traded on an established securities market or (ii) interests in the
partnership are readily tradable on a secondary market or the substantial equivalent thereof. We believe that we are, and will continue to be, treated as a publicly traded partnership.
If
(i) a publicly traded partnership is not a business development company or registered as a management company or unit investment trust under the 1940 Act and (ii) 90% or
more of the income of the publicly traded partnership during each taxable year consists of "qualifying income," it will be treated as a partnership, and not as an association or publicly traded
partnership taxable as a corporation, for U.S. federal income tax purposes. We refer to this exception as the "qualifying income exception." Qualifying income generally includes rents, dividends,
interest, and capital gains from the sale or other disposition of stocks, bonds and real property. Qualifying income also includes other income derived from the business of investing in, among other
things, stocks and securities. Interest is not qualifying income if it is derived in the "conduct of a financial or insurance business" or is based, directly or indirectly, on the income or profit of
any person. Our income currently consists primarily of interest income, dividends and income and gain from interest rate, credit risk and other derivatives, all of which will generally be qualifying
income for purposes of the qualifying income exception.
We
believe we will satisfy the qualifying income exception. There can be no assurance, however, that the IRS will not challenge our compliance with the qualifying income exception
requirements and, therefore, assert that we are taxable as a corporation for U.S. federal income tax purposes. In such event, the amount of cash available for distribution to holders of our shares
would likely be reduced materially.
By reason of our taxation as a partnership for U.S. federal income tax purposes, we are not subject to U.S. federal income tax. Rather,
in computing your U.S. federal income tax liability for a taxable year, you will be required to take into account your allocable share of our items of income, gain, loss, deduction and credit for our
taxable year ending within or with your taxable year, regardless of whether you have received any distributions. It is possible that your U.S. federal income tax liability with respect to your
allocable share of our earnings in a particular taxable year could exceed the cash distributions to you, thus requiring an out-of-pocket tax payment by you. See
"Non-Cash Income from Our Investments." The characterization of an item of our income, gain, loss, deduction or credit generally will be determined at the partnership level
(rather than at the shareholder level).
For each of our fiscal years, items of income, gain, loss, deduction or credit recognized by us will be allocated among the holders of
our shares in accordance with their allocable shares of our items of income, gain, loss, deduction and credit. The allocable share of such items for a holder of our shares will be determined by our
operating agreement, provided such allocations either have "substantial
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economic
effect" or are determined to be in accordance with such holder's interest in us. If the allocations provided by our operating agreement do not have "substantial economic effect" and were
successfully challenged by the IRS, the redetermination of the allocations to a particular holder for U.S. federal income tax purposes could be less favorable than the allocations set forth in our
operating agreement.
We
will apply a monthly convention pursuant to which our taxable income and losses will be determined annually and will be prorated on a monthly basis. Then the income and losses will be
apportioned among the holders in proportion to the shares owned by each of them as of the opening of the New York Stock Exchange on the first business day of the month, or the "Allocation Date."
However, gain or loss realized on a sale or other disposition of our assets other than in the ordinary course of business will be allocated among the holders owning our shares on the Allocation Date
in the month in which that gain or loss is recognized. As a result, holders transferring our shares may be allocated items of income, gain, loss, deduction, and credit realized after the date of
transfer. In addition, as a result of such allocation method, you may be allocated taxable income even if you do not receive any cash distributions. Moreover, you may be allocated differing amounts of
our income, gain, loss, deduction and credit than other holders of our shares as a result of Section 704(c) of the Code and the Treasury Regulations promulgated thereunder.
Section 706
of the Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily
basis. It is possible that transfers of our shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to our monthly convention for
allocating income and deductions. In that event, our allocation method might be considered a monthly convention that does not literally comply with that requirement. If our monthly convention is not
allowed by the Treasury Regulations (or only applies to transfers of less than all of a holder's shares) or if the IRS otherwise does not accept our convention, the IRS may contend that our taxable
income or losses must be reallocated among the holders of our shares. If such a contention were sustained, your income or loss allocation could be adjusted, possibly to your detriment. The board of
directors is authorized to revise our method of allocation between transferors and transferees (as well as among holders whose interests otherwise could vary during a taxable period).
Our distributions generally will not be taxable to you to the extent of your adjusted tax basis in our shares. In addition, you will be
allowed to deduct your allocable share of our losses (if any) only to the extent of your adjusted tax basis in your shares at the end of the taxable year in which the losses occur. Your initial tax
basis in your shares will be generally equal to the amount of cash you paid for your shares and will be generally increased by your allocable share of our profits (and items of income and gain). Your
adjusted tax basis in the shares will be generally decreased (but not below zero) by your allocable share of our losses (and items of loss, deduction and expense), the amount of cash distributed to
you and our tax basis in property (other than cash) distributed to you by us. Moreover, your adjusted tax basis will include your allocable share of our liabilities, if any.
To
the extent your allocable share of our losses is not allowed because you had insufficient adjusted tax basis in your shares, you would be able to carry over such disallowed losses to
subsequent taxable years and such losses would be allowed if and to the extent of your adjusted tax basis in your shares in subsequent taxable years.
Cash distributions by us with respect to our shares or in redemption of less than all of your shares generally will not be taxable to
you. Instead, such distributions will reduce, but not below zero, your adjusted tax basis in your shares immediately before the distribution. If such distributions exceed your
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adjusted
tax basis in your shares, the excess will be taxable to the holder as gain from a sale or exchange of shares (as described in "Disposition of Interest" below). It is possible
that partial redemptions made during the taxable year could result in taxable gain to a holder where no gain would otherwise have resulted if the same partial redemption were made at the end of the
taxable year. A reduction in a holder's allocable share of our liabilities, and certain distributions of marketable securities by us, are treated as cash distributions for U.S. federal income tax
purposes.
A sale or other taxable disposition of all or a part of your shares (including in redemption for cash of all of your shares) generally
will result in the recognition of gain or loss in an amount equal to the difference, if any, between the amount realized on the disposition (including your share of our indebtedness, if any) and your
adjusted tax basis in your shares (as described in "Adjusted Tax Basis of Shares" above). Your adjusted tax basis will be adjusted for this purpose by your allocable share of our income
or loss for the year of such sale or other disposition. Any gain or loss recognized with respect to such sale or other disposition generally will be treated as capital gain or loss and will be
long-term capital gain or loss if your holding period for your shares exceeds one year. A portion of such gain, however, will be treated as ordinary income under the Code to the extent
attributable to your allocable share of unrealized gain or loss in our assets to the extent described in Section 751 of the Code. This would include unremitted earnings of any controlled
foreign corporation, or CFC, held by us, although in the case of a holder who is an individual, the amount treated as ordinary income may be limited pursuant to Section 1248 of the Code.
If
you dispose of our shares at a time when we hold stock in a passive foreign investment company, or PFIC, that is not a qualified electing fund, or QEF, you would be treated as
disposing of an interest in such PFIC to the extent of your pro rata share of such PFIC stock held by us. See "Foreign Corporate SubsidiariesPFICs" for a discussion of the
tax treatment applicable to a disposition of stock of a PFIC that is not a QEF.
If you are an individual, any capital losses generated by us (or upon a disposition of our shares) generally will be deductible only to
the extent of your capital gains for the taxable year plus up to $3,000 of ordinary income ($1,500 in the case of a married individual filing a separate return). Excess capital losses may be carried
forward by individuals indefinitely. If you are a corporation, any capital losses generated by us (or upon a disposition of shares) generally will be deductible to the extent of your capital gains for
the taxable year. Corporations may carry capital losses back three years and forward five years. You should consult your tax advisors regarding the deductibility of capital losses.
Individuals and certain closely held subchapter C corporations will be allowed to deduct their allocable share of our losses (if
any) only to the extent of each such holder's "at risk" amount in us at the end of the taxable year in which the losses occur. The amount for which a holder is "at risk" with respect to its interest
generally is equal to its adjusted tax basis for such interest, less any amounts borrowed (i) in connection with its acquisition of such interest for which it is not personally liable and for
which it has pledged no property other than its interest; (ii) from persons who have a proprietary interest in us and from certain persons related to such persons; and (iii) for which
the holder is protected against loss through nonrecourse financing, guarantees or similar arrangements. To the extent that a holder's allocable share of our losses is not allowed because the holder
has an insufficient amount at risk in us, such disallowed losses may be carried over by the holder to subsequent taxable years and will be allowed if and to the extent of the holder's at risk amount
in subsequent years.
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We
do not expect to generate any material amount of income or losses from "passive activities" for purposes of Section 469 of the Code. However, to the extent that we generate any
income from "passive activities," such income will not be treated as passive activity income for purposes of Section 469 of the Code, and may not be used to offset your passive activity losses
from other activities. To the extent that we generate any losses from "passive activities," such losses will be suspended and will only be allowed as an offset to passive activity income from us in
future years or allowed as a loss upon the complete disposition of a holder's interest in us. Accordingly, income allocated by us to you generally will not be able to be offset by your other passive
activity losses, and losses allocated to you generally will not be able to be used to offset your other passive activity income. You should consult your tax advisors regarding the possible application
of the limitations on the deductibility of losses from certain passive activities contained in Section 469 of the Code.
Individuals and other noncorporate holders of shares will be allowed to deduct their allocable share of our "investment interest"
(within the meaning of Section 163(d) of the Code and the Treasury Regulations promulgated thereunder) only to the extent of each such holder's net investment income for the taxable year. A
holder's net investment income generally is the excess, if any, of the holder's investment income from all sources (which is gross income from property held for investment) over investment expenses
from all sources (which are deductions allowed that are directly
connected with the production of investment income). Investment income excludes net capital gain attributable to the disposition of property held for investment, as well as "qualified dividend income"
that is taxable as long-term capital gains, unless the holder elects to pay tax on such gain or income at ordinary income rates.
To
the extent that your allocable share of our investment interest is not allowed as a deduction because you have insufficient net investment income, you may carry over such disallowed
investment interest to subsequent taxable years and such disallowed investment interest will be allowed if and to the extent of your net investment income in subsequent years. If you borrow to finance
the purchase of our shares, any interest paid or accrued on the borrowing will be allocated among our assets for purposes of determining the portion of such interest that is investment interest
subject to the foregoing limitations or passive activity interest subject to the passive activity rules under Section 469 of the Code. The portion of such interest allocated to property held
for investment (such as bonds or other securities) will be treated as investment interest. You should consult your tax advisors regarding the application to you of the allocation of such interest
among our assets. Since the amount of a holder's allocable share of our investment interest that is subject to this limitation will depend on the holder's aggregate investment interest and net
investment income from all sources for any taxable year, the extent, if any, to which our investment interest will be disallowed under this rule will depend on your particular circumstances each year.
An individual, estate or trust may deduct so-called "miscellaneous itemized deductions," which include fees paid to our
Manager and our other expenses, only to the extent that such deductions, in the aggregate, exceed 2% of the holder's adjusted gross income. The amount of a holder's allocable share of such expenses
that is subject to this disallowance rule will depend on the holder's aggregate miscellaneous itemized deductions from all sources and adjusted gross income for any taxable year. Thus, the extent, if
any, to which such fees and expenses will be disallowed will depend on your particular circumstances each year. There are also limitations on the deductibility of itemized deductions by individuals
whose adjusted gross income exceeds a specified amount, adjusted annually for inflation. In addition, these expenses are not deductible in determining the alternative minimum tax liability of a U.S.
holder. Your share of management fees and certain other expenses attributable to us
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likely
will constitute miscellaneous itemized deductions for these purposes. You are urged to consult your tax advisors regarding your ability to deduct expenses incurred by us.
Our
organizational expenses are not currently deductible, but must be amortized ratably over a period of 15 years. Our syndication expenses (i.e., expenditures made in
connection with the marketing and issuance of shares) are neither deductible nor amortizable.
We have elected under Section 754 of the Code to adjust the tax basis in all or a portion of our assets in the event of a
distribution of property to a holder or in the event of a transfer of an interest in us, including our shares, by sale or exchange or as a result of the death of a holder. We are also required to
reduce the tax basis in our assets in connection with certain redemptions and dispositions of our shares. As a result of our election under Section 754 of the Code, each holder that purchases
our shares will have an initial tax basis in our assets that reflects the fair market value of our assets at the time of the purchase. Because our holders are treated as having differing tax bases in
our assets, a sale of an asset by us may cause holders to recognize different amounts of gain or loss or may cause some holders to recognize a gain and others to recognize a loss. Depending on when a
holder purchases our shares and the fair market value of our assets at that time, the holder may recognize gain for U.S. federal income tax purposes from the sale of certain of our assets even though
the sale would cause us to recognize a loss for financial accounting purposes. Our election under Section 754 of the Code can be revoked only with the consent of the IRS.
The
calculations under Section 754 of the Code are complex, and there is little legal authority concerning the mechanics of the calculations in the context of publicly traded
partnerships. To help reduce the complexity of those calculations and the resulting administrative costs to us, we will apply certain conventions in determining and allocating basis adjustments. It is
possible that the IRS will successfully assert that the conventions we intend to use do not satisfy the technical requirements of the Code or the Treasury Regulations and, thus, will require different
basis adjustments to be made. Such different basis adjustments could adversely affect the manner in which our income, gain, loss, deduction and credit is allocated to certain holders of shares.
U.S. mutual funds that are treated as regulated investment companies, or RICs, for U.S. federal income tax purposes are required, among
other things, to meet an annual 90% gross income and quarterly 50% and 25% asset value tests under Section 851(b) of the Code to maintain their favorable U.S. federal income tax treatment. The
treatment of an investment by a RIC in our shares for purposes of these tests will depend on whether we will be treated as a "qualified publicly traded partnership." If we are so treated, then the
shares themselves are the relevant asset for purposes of the 50% and 25% asset value tests and the net income from our shares is the relevant gross income for purposes of the 90% gross income test. In
addition, the aggregate amount that a RIC can invest in the securities of one or more "qualified publicly traded partnerships" is limited to 25% of the RIC's total assets. If, however, we are not
treated as a "qualified publicly traded partnership," then the relevant assets are the RIC's allocable share of the underlying assets held by us and the relevant gross income is the RIC's allocable
share of the underlying gross income earned by us. However, the 25% limitation on a RIC's ability to invest in the securities of "qualified publicly traded partnerships" would not apply. We will
qualify as a "qualified publicly traded partnership" if we derive less than 90% of our income from sources that are qualifying income for purposes of the RIC 90% gross income test. We believe that we
have not been, and anticipate that we will not in the future be, treated as a "qualified publicly traded partnership." However, because such qualification will depend on the nature of our future
investments, no complete assurance can be provided that we will or will not be treated as a "qualified publicly
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traded
partnership" in any particular year. RICs should consult their own tax advisors regarding an investment in the shares.
We expect that tax-exempt holders of our shares will recognize a significant amount of "unrelated business taxable income,"
or "UBTI," as a result of our indebtedness with respect to our assets and as a result of excess inclusion income from our residual interests in real estate mortgage investment conduits, or REMICs, and
in taxable mortgage pools. A holder that is a tax-exempt organization for U.S. federal income tax purposes and, therefore, is generally exempt from U.S. federal income taxation, may
nevertheless be subject to "unrelated business income tax" to the extent, if any, that its allocable share of our income consists of UBTI. A tax-exempt partner in a partnership (or an
entity treated as partnership for U.S. federal income tax purposes) that regularly engages in a trade or business that is unrelated to the exempt function of the tax-exempt partner must
include, in computing its UBTI, its pro rata share (whether or not distributed) of such partnership's gross income derived from such unrelated trade or business. Moreover, such tax-exempt
partner could be treated as earning UBTI to the extent that such entity derives income from "debt-financed property," or if the
partnership interest itself is debt financed. Debt-financed property means property held to produce income with respect to which there is "acquisition indebtedness"
(i.e., indebtedness incurred in acquiring or holding property). We expect that we will incur "acquisition indebtedness" with respect to certain of our assets.
To
the extent we recognize income in the form of dividends and interest from securities with respect to which there is "acquisition indebtedness" during a taxable year, the percentage of
the income that will be treated as UBTI generally will be equal to the amount of the income times a fraction, the numerator of which is the "average acquisition indebtedness" incurred with respect to
the securities, and the denominator of which is the "average amount of the adjusted basis" of the securities during the period such securities are held by us during the taxable year.
To
the extent we recognize gain from disposition of securities with respect to which there is "acquisition indebtedness," the portion of the gain that will be treated as UBTI will be
equal to the amount of the gain times a fraction, the numerator of which is the highest amount of the "acquisition indebtedness" with respect to the securities during the twelve-month period ending
with the date of their disposition, and the denominator of which is the "average amount of the adjusted basis" of the securities during the period such securities are held by us during the taxable
year.
In
addition, a portion of our income from a residual interest in a REMIC or a taxable mortgage pool arrangement could be treated as "excess inclusion income." See "Material
U.S. Federal Income Tax Considerations Relating to Investments in REITs" below. We own a small number of REMIC residual interests and expect to own residual interests in taxable mortgage pools through
a REIT subsidiary. Any excess inclusion income generated by a REIT subsidiary would flow through to our shareholders. Excess inclusion income is subject to tax as UBTI in the hands of most
tax-exempt shareholders.
Tax-exempt
holders are strongly urged to consult their tax advisors regarding the tax consequences of owning our shares.
We invest, directly or indirectly, in a variety of assets, including, but not limited to, (i) debt and equity securities of
various U.S. and foreign issuers; (ii) equity of REIT subsidiaries; (iii) securities of certain foreign collateralized loan obligation, or "CLO," issuers, all of which have elected to be
treated as a partnership or disregarded as a separate entity from us for U.S. federal income tax purposes; and (iv) interest rate, credit risk and other derivatives. Such investments have
different tax consequences, which may vary depending on their particular terms and your particular circumstances. Certain of our business activities are subject to special and complex U.S. federal
income tax provisions that may,
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among
other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gain or "qualified
dividend income" into higher taxed short-term capital gain or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more
limited), (iv) cause us (and thus you) to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the timing as to when a purchase or sale of stock or
securities is deemed to occur, and (vi) adversely alter the tax characterization of certain financial transactions.
The
discussion below describes the U.S. federal income tax considerations that may be relevant to some, but not to all, of our investments and contemplated investments, including the
qualification of such income for purposes of the qualifying income exception. Accordingly, you are urged to consult your tax advisors with regard to the U.S. federal income tax consequences to you of
our business activities.
Interest income derived by us will generally be qualifying income for purposes of the qualifying income exception for publicly traded
partnerships provided the income is not derived from "the conduct of a financial or insurance business" and is not based, directly or indirectly, on the profits of any person. Although there is no
direct authority defining what constitutes "the conduct of a financial or insurance business," we believe that our investment activities generally will not constitute "the conduct of a financial or
insurance business" for purposes of the qualifying income exception. For example, we believe that we have not been engaged, and do not intend to engage, in the loan origination business, either
directly or indirectly through our Manager and its affiliates. Despite such measures, there can be no assurance that the IRS will not successfully contend that all or a portion of our interest income
is related to the "conduct of a financial or insurance business," in which case such interest income would not be treated as qualifying income for the qualifying income exception and we could fail to
qualify for that exception. We
intend to continue to conduct our operations so that at least 90% of our gross income in each taxable year is qualifying income for purposes of the qualifying income exception.
U.S.
holders will generally be subject to tax at ordinary income rates on their allocable share of our interest income. For a discussion of the potential withholding on interest income
allocated to non-U.S. holders, see "Non-U.S. Holders."
Dividends and capital gains earned by us will generally be qualifying income for purposes of the qualifying income exception. Tax
legislation enacted in 2003 and 2006 reduced the U.S. federal income tax rates on (i) capital gains received by taxpayers taxed at individual rates and (ii) "qualified dividend income" received
by taxpayers taxed at individual rates from certain domestic and foreign corporations. Subject to the discussion under "Disposition of Interest" and "Material U.S. Federal
Income Tax Considerations Relating to Investments in REITsTaxation of Holders of REIT SharesTaxation of Non-U.S. Holders of REIT Shares," the reduced rates
applicable to capital gains generally will also apply to capital gains recognized by holders of shares who sell the shares that they have held for more than one year. The reduced rates, which do not
apply to short-term capital gains, generally apply to long-term capital gains from sales or exchanges recognized during taxable years beginning on or prior to
December 31, 2010.
Ordinary
dividends attributable to our investment in KFH II and any other REIT and certain foreign corporate subsidiaries will generally not constitute "qualified dividend income," and,
therefore, will not qualify for the reduced rate of tax applicable to taxpayers taxed at individual rates. In addition, certain portions of the distributions attributable to our investment in KFH II
may be taxable in the hands of tax-exempt shareholders and may not qualify for reduced withholding in the hands of foreign shareholders. For a more detailed discussion of the tax
considerations related to the dividends and
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capital
gains attributable to our investment in KFH II, see "Material U.S. Federal Income Tax Considerations Relating to Investments in REITs."
We own, and may in the future acquire, equity interests in foreign corporate subsidiaries that are treated as corporations for U.S.
federal income tax purposes (each, a "foreign corporate subsidiary"). We anticipate that any such foreign corporate subsidiary in which we own an interest will be treated as a CFC or PFIC for U.S.
federal income tax purposes. The rules applicable to an investment in non-U.S. entities are complex, and, by necessity, the discussion below is only a summary. Thus, you are urged to
consult your tax advisors in this regard.
CFCs.
A non-U.S. entity will be treated as a CFC if it is treated as a non-U.S. corporation for U.S. federal income tax
purposes and if more than 50% of (i) the total combined voting power of all classes of stock of the non-U.S. entity entitled to vote or (ii) the total value of the stock of
the non-U.S. entity, is owned, within the meaning of Section 958(a) of the Code, or is treated as owned by reason of applying the attribution rules of ownership of
Section 958(b) of the Code, by U.S. Shareholders (as defined below) on any day during the taxable year of such non-U.S. entity.
For
purposes of this discussion, a "U.S. Shareholder" with respect to a non-U.S. entity means a U.S. person (within the meaning of Section 957(c) of the Code) that
owns (within the meaning of Section 958(a) of the Code) or is treated as owning (by reason of applying the attribution rules of ownership of Section 958(b) of the Code) 10% or more of
the total combined voting power of all classes of stock of the non-U.S. entity entitled to vote (whether actually or in substance).
If
a non-U.S. entity held by us directly or indirectly is treated as a CFC for an uninterrupted period of 30 days or more during the tax year, then if we are a U.S.
Shareholder with respect to such non-U.S. entity and are treated as owning (within the meaning of Section 958(a) of the Code) shares in such non-U.S. entity on the last
day of the non-U.S. entity's tax year, each holder (regardless of whether such holder is a U.S. Shareholder with respect to such CFC) of our shares generally will be required to include in
its gross income its allocable share of our pro rata share of such non-U.S. entity's income from dividends, interest, net gains from the sale or other disposition of stocks or securities
(determined in accordance with the Code and Treasury Regulations) and certain other income as described under Section 951 of the Code and the Treasury Regulations promulgated thereunder, such
inclusions in gross income, collectively, "Subpart F Inclusions," regardless of whether we receive cash in respect of its income or the holder receives a distribution from us. The aggregate
Subpart F Inclusions in any taxable year for a non-U.S. entity treated as a CFC are limited to such entity's current earnings and profits. Subpart F Inclusions are treated as
ordinary income (whether or not such inclusions are attributable to net capital gains). Thus, you may be required to report as ordinary income your allocable share of our Subpart F Inclusions
without corresponding receipts of cash and may not benefit from capital gain treatment with respect to the portion of our earnings (if any) attributable to net capital gains of the CFC. Our tax basis
in the shares of such non-U.S. entity, and your tax basis in your shares, will be increased to reflect Subpart F Inclusions. Subpart F Inclusions will be
treated as income from sources within the United States, for certain foreign tax credit purposes, to the extent derived by the CFC from U.S. sources. Subpart F Inclusions will not be eligible
for the favorable tax rate applicable to "qualified dividend income" for individual U.S. holders of shares. Amounts included as Subpart F Inclusions with respect to direct and indirect
investments generally will not be taxed again when actually distributed to the U.S. Shareholder. Moreover, any gain allocated to you from a disposition of stock in a CFC by us would be treated as
ordinary income to the extent of your allocable share of the current and/or accumulated earnings and profits of the CFC. In this regard, earnings and profits would not include any amounts previously
taxed pursuant to the CFC rules. Net losses (if any) of a non-U.S. entity owned by us that is treated as a CFC will not, however, pass-through to the holders of shares.
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If a foreign corporate subsidiary is classified as a CFC, and a holder is required to include amounts in income with respect to such foreign corporate subsidiary
pursuant to this subheading, then the consequences described under this subheading "CFCs" (and not the consequences described under the subheading "PFICs" below) generally will apply to the holder. If
our ownership percentage in a foreign corporate subsidiary changes such that we are not always a U.S. Shareholder with respect to such entity, then we and you may be subject to both the PFIC and the
CFC rules. The interaction of these rules is complex, and you are urged to consult your tax advisors in this regard.
The
discussion under this subheading "CFCs" does not address the tax consequences applicable to a holder that owns an interest in a CFC both through us and either directly or indirectly
through a chain of ownership that does not include us. Such holders of shares are urged to consult their tax advisors regarding the tax consequences in such circumstances.
PFICs.
In the event that our equity interest in a foreign corporate subsidiary is not treated as voting stock for purposes of the
CFC rules or we own
less than 10% of the equity interests in foreign corporate subsidiaries, then those entities will be subject to the tax rules applicable to PFICs. A non-U.S. entity will be treated as a
PFIC for U.S. federal income tax purposes if (i) such entity is treated as a non-U.S. corporation for U.S. federal income tax purposes and (ii) either 75% or more of the
gross income of such entity for the taxable year is "passive income" (as defined in Section 1297 of the Code and the Treasury Regulations promulgated thereunder) or the
average percentage of assets held by such entity during the taxable year which produce passive income or which are held for the production of passive income is at least 50%. A. U.S. person will be
subject to the PFIC rules for an investment in a PFIC without regards to its percentage ownership.
We
currently intend to make a protective election to treat any foreign corporate subsidiary that may be treated as a PFIC as a QEF, or a "QEF Election," in the first year we hold shares
in such entity. A QEF Election is effective for the taxable year for which the election is made and all subsequent taxable years and may not be revoked without the consent of the IRS.
As
a result of a QEF Election, you will be required to include in your gross income each year your allocable share of our pro rata share of such non-U.S. corporation's
ordinary earnings and net capital gains, at ordinary income and long-term capital gain rates, respectively (we sometimes refer to such inclusions in gross income as "QEF Inclusions"), for
each year in which the non-U.S. corporation owned directly or indirectly by us is a PFIC, regardless of whether we receive cash in respect of its income or you receive distributions from
us. Thus, you may be required to report taxable income as a result of QEF Inclusions without corresponding receipts of cash. You may, however, elect to defer, until the occurrence of certain events,
payment of the U.S. federal income tax attributable to QEF Inclusions for which no current distributions are received, but you will be required to pay interest on the deferred tax computed by using
the statutory rate of interest applicable to an extension of time for payment of tax. Net losses (if any) of a non-U.S. corporation owned by us that is treated as a PFIC will not, however,
pass through to holders of our shares and may not be carried back or forward in computing such PFIC's ordinary earnings and net capital gain in other taxable years. Consequently, you may, over time,
be taxed on amounts that, as an economic matter, exceed our net profits. Our tax basis in the shares of such non-U.S. corporations, and of a holder of our shares, will be increased to
reflect QEF Inclusions. No portion of the QEF Inclusion attributable to ordinary income will be eligible for the favorable tax rate applicable to "qualified dividend income" for individual U.S.
persons. Amounts included as QEF Inclusions with respect to direct and indirect investments generally will not be taxed again when actually distributed to the U.S. person.
If
we do not make a QEF Election with respect to a foreign corporate subsidiary treated as a PFIC (and such entity is not treated as a CFC), Section 1291 of the Code will treat
all gain on a disposition by us of shares of such entity, gain on the disposition of our shares by a holder thereof at a time when we own shares of such entity, as well as certain other defined
"excess distributions," as if the
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gain
or excess distribution were ordinary income earned ratably over the shorter of the period during which the investor held its shares or the period during which we held shares in such entity. For
gain and excess distributions allocated to prior years, (i) the tax rate will be the highest in effect for that taxable year and (ii) the tax will be payable generally without regard to
offsets from deductions, losses and expenses. You will also be subject to an interest charge for any deferred tax. No portion of this ordinary income will be eligible for the favorable tax rate
applicable to "qualified dividend income" for taxpayers taxed at individual rates.
The Code and the Treasury Regulations promulgated thereunder provide a specific exemption from U.S. federal income tax to non-U.S.
corporations that restrict their activities in the United States to trading in stock and securities (or any activity closely related thereto) for their own account whether such trading (or such other
activity) is conducted by the corporation or its employees through a resident broker, commission agent, custodian or other agent. We anticipate that our foreign corporate subsidiaries have and will
continue to either (i) rely on the exemption described above or (ii) otherwise operate in a manner so that they will not be subject to U.S. federal income tax on their net income at the
entity level. There can be no assurance, however, that our foreign corporate subsidiaries will be able to satisfy the requirements for such exemption and, therefore, will not be subject to U.S.
federal income tax on their income on a net basis.
Notwithstanding
these rules, any gain recognized by a foreign corporation with respect to U.S. real property is subject to U.S. tax as if the foreign corporation were a U.S. taxpayer. It
is not anticipated that any of our foreign corporate subsidiaries will hold U.S. real property. Nevertheless, gain (if any) realized on U.S. real property would be subject to U.S. tax.
Although
our foreign corporate subsidiaries are generally not expected to be subject to U.S. federal income tax on a net basis, such foreign corporate subsidiaries may receive income
that may be subject to withholding taxes imposed by the United States or other countries. To the extent that such entities are subject to U.S. federal income taxes on their income on a net basis or to
withholding taxes, our return on our investment in such entities could be materially adversely affected.
We own several domestic corporate subsidiaries, which we formed to make, from time to time, certain investments that could generate
income that would not be qualifying income if earned directly by us. Our domestic corporate subsidiaries will be subject to federal, state, and local corporate income tax on their income. To the
extent that any such domestic corporate subsidiaries pay any taxes, they will have less cash available for distribution to us, which would reduce the amount of cash available for distribution to
holders of our shares.
From time to time, we will enter into derivative transactions, such as interest rate swaps, caps and floors, total rate of return
swaps, options to purchase these items, and futures and forward contracts. We expect that many of our derivative transactions will be treated as "notional principal contracts" for U.S. federal income
tax purposes. For purposes of the qualifying income exception, unless we are treated as a dealer in notional principal contracts, income from notional principal contracts is treated as qualifying
income, provided the property, income, or cash flow that measures the amounts to which the partnership is entitled under the contract would give rise to qualifying income if held or received or the
notional principal contract is related to our business of investing in stock or securities. We expect that, in general, payments under our derivative instruments will be measured by reference to an
interest rate or interest rate index, with a cash flow that would be treated as interest income if received
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directly.
As stated above, interest (other than interest derived from the "conduct of a financial or insurance business" or interest that is based, directly or indirectly, on the profits of any
person) is qualifying income for purposes of the qualifying income exception. In addition, we expect that all income and gain from our notional principal contracts will be related to our business of
investing in stock or securities. Accordingly, we expect that the income and gain from such derivative transactions will be qualifying income for purposes of the qualifying income exception. However,
the rules regarding notional principal contracts are complex, and there can be no assurance that the IRS will not successfully challenge our characterization of a derivative transaction as a notional
principal contract. In addition, we may enter into derivative transactions that do not produce qualifying income for the qualifying income exception. We intend to use our best efforts to structure any
derivative transactions in a manner that does not jeopardize our satisfaction of the qualifying income exception.
If we make an investment denominated in a currency other than the U.S. dollar, then we may recognize gain or loss attributable to
fluctuations in such currency relative to the U.S. dollar. We may also recognize gain or loss on such fluctuations occurring between the time we obtain and dispose of non-U.S. currency,
between the time we accrue and collect income denominated in a non-U.S. currency, or between the time we accrue and pay liabilities denominated in a non-U.S. currency. Such
gains or losses generally will be treated as ordinary income or loss, and such gain generally will be treated as qualifying income under the qualifying income exception.
As discussed below, we will make investments that will cause us (and thus you) to recognize income or gain without a corresponding
receipt of cash. This so-called "non-cash" or "phantom income" could arise for a variety of reasons, including:
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We will recognize taxable income in advance of the related cash flow if any debt security is deemed to have original issue
discount. The accrued original issue discount will be treated as interest income by us and an applicable portion will be passed-through to you, even though we will generally not receive payments
corresponding to this income until the maturity of or the disposition of the debt security.
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We may recognize taxable market discount income when we receive the proceeds from the disposition of, or principal
payments on, debt securities that have a stated redemption price at maturity that is greater than our tax basis in those debt securities, even though such proceeds will be used to make
non-deductible principal payments on related borrowings.
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We will be required to include in income on a current basis the earnings of certain foreign corporate subsidiaries as well
as the earnings of CLO issuers treated as partnerships or disregarded as a separate entity from us for U.S. federal income tax purposes, regardless of whether there has been a cash distribution of
such earnings.
You
will be required to take such "non-cash" or "phantom income" income into account in determining your taxable income, regardless of whether you receive a cash distribution
from us. Accordingly, you may not receive cash distributions equal to your tax liability attributable to your share of our taxable income.
If we were subject to the "anti-stapling" rules of Section 269B of the Code, we would incur a significant tax
liability as a result of owning (i) more than 50% of the value of both a domestic corporate subsidiary and a foreign corporate subsidiary or (ii) more than 50% of both a REIT and a
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domestic
or foreign corporate subsidiary. When a foreign corporate subsidiary and a domestic corporate subsidiary are treated as "stapled entities," the foreign corporation is treated as a domestic
corporation subject to U.S. federal corporate income tax. When a REIT and a domestic or foreign corporate subsidiary are treated as "stapled entities," the REIT and the domestic or foreign corporate
subsidiary are treated as one entity for purposes of the tax requirements applicable to REITs, which could result in the REIT failing to qualify as a REIT for U.S. federal income tax purposes.
Currently,
we have several subsidiaries that could be impacted if we were subject to the "anti-stapling" rules, including one subsidiary taxed as a REIT (KFH II), two foreign
corporate subsidiaries (KKR TRS Holdings Ltd. and KKR Financial Holdings, Ltd.), and one domestic corporate subsidiary (KFN PEI VII, LLC). During 2008, we also owned two
additional subsidiaries taxed as REITs (KKR Financial Corp. and KKR QRS #1, Inc.), one additional domestic corporate subsidiary (KKR Financial Holdings, Inc.), and certain of our foreign
CLO issuers were treated as foreign corporate subsidiaries for U.S. federal income tax purposes. Because we intend to own a substantial proportion of our assets directly or through entities that are
treated as partnerships or disregarded entities for U.S. federal income tax purposes, we do not believe that the "anti-stapling" rules will apply. However, there can be no assurance that
the IRS would not successfully assert a contrary position.
We anticipate that certain of our majority-owned corporate and REIT subsidiaries will be treated as personal holding companies for U.S.
federal income tax purposes. A personal holding company is a "closely-held" corporation at least 60% of whose income constitutes "personal holding company income," which generally includes
dividends, interest, certain royalties, annuities and rents. We anticipate that all of our majority-owned corporate and REIT subsidiaries will be treated as "closely-held" under the
constructive ownership rules applicable to personal holding companies. In addition, substantially all of the income of certain of those subsidiaries will constitute personal holding company income. A
personal holding company generally is subject to a 15% (or 35% starting January 1, 2011) corporate tax on its personal holding company income that is not distributed, or treated as distributed,
during the year in which such income is
earned. However, certain liquidating distributions are not treated as distributions for that purpose. We intend to cause our personal holding company subsidiaries to distribute their income so as to
avoid the personal holding company tax.
Certain dividend, interest and other income received by us from sources outside of the United States may be subject to withholding
taxes imposed by other countries. We may also be subject to capital gains taxes in certain other countries where we purchase and sell stocks and securities. Tax treaties between the United States and
other countries may affect, reduce or eliminate such taxes. You will be required to include such taxes in your income and generally will be entitled to claim either a credit (subject, however, to
various limitations on foreign tax credits) or a deduction (subject to the limitations generally applicable to deductions) for your share of such non-U.S. taxes in computing your U.S.
federal income taxes.
In certain circumstances, individuals, corporations and other taxpayers may be subject to an alternative minimum tax in addition to
regular tax. Your potential alternative minimum tax liability may be affected by reason of an investment in the shares, including the limitation on the deductibility of "miscellaneous itemized
deductions" in determining the alternative minimum tax liability of a U.S. holder. The extent, if any, to which the alternative minimum tax applies will depend on your particular circumstances for
each taxable year.
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Subject to the electing large partnership rules described below, we will be considered to have been terminated for U.S. federal income
tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month
period. Our termination for tax purposes would result in the closing of our taxable year for all holders of shares. In the case of a holder reporting on a taxable year other than a fiscal year ending
on our year end, which is expected to continue to be the calendar year, the closing of our taxable year may result in more than 12 months of our taxable income or loss being includable in the
holder's taxable income for the year of termination. We would be required to satisfy the 90% "qualifying income" test for each tax period and to make new tax elections after a termination, including a
new tax election under Section 754 of the Code. A termination could also result in penalties if we were unable to determine that the termination had occurred. In the event that we become aware
of a termination, we will use commercially reasonable efforts to minimize any such penalties. Moreover, a termination might either accelerate the application of, or subject us to, any tax legislation
enacted before the termination. We have experienced terminations in the past and it is likely that we will experience terminations in the future.
We intend to use reasonable efforts to furnish to you tax information (including IRS Schedule K-1) as promptly as
possible after the end of each taxable year, which describes your allocable share of our income, gain, loss, deduction and credit for the preceding taxable year. In preparing this information, we will
use various accounting and reporting conventions to determine your allocable share of income, gain, loss and deduction. Delivery of this information will be subject to delay in the event of, among
other reasons, the late receipt of any necessary tax information from an investment in which we hold an interest. It is therefore possible that, in any taxable year, you will need to apply for
extensions of time to file your tax returns. The IRS may successfully contend that certain of these reporting conventions are impermissible, which could result in an adjustment to your income or loss.
If you are not a U.S. person, there can be no assurance that this information will meet your jurisdiction's tax compliance requirements.
It
is possible that we may engage in transactions that subject us and, potentially, the holders of our shares to other information reporting requirements with respect to an investment in
us. You may be subject to substantial penalties if you fail to comply with such information reporting requirements. You should consult with your tax advisors regarding such information reporting
requirements.
Persons who hold our shares as nominees for another person are required to furnish to us (i) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (ii) whether the beneficial owner is (1) a person that is not a U.S. person, (2) a foreign government, an
international organization or any wholly-owned agency or instrumentality of either of the foregoing, or (3) a tax-exempt entity; (iii) the amount and description of shares
held, acquired or transferred for the beneficial owner; and (iv) specific information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and acquisition costs for purchases, as well as the amount of net proceeds from sales.
Brokers
and financial institutions are required to furnish additional information, including whether they are U.S. persons and specific information on shares they acquire, hold or
transfer for their own account. A penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is imposed by the Code for failure to report that information to us. The nominee is
required to supply the beneficial owner of the shares with the information furnished to us.
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A partnership is required to have a tax year that is the same tax year as any partner, or group of partners, that owns a majority
interest (more than 50%) in the partnership. Our taxable year is currently the calendar year. A partnership also is required to change its tax year every time a group of partners with a different tax
year end acquires a majority interest, unless the partnership has been forced to change its tax year during the preceding two year period. In the event the majority interest in us changes to a group
of holders with a different tax year and we have not been forced to change our tax year during the preceding two year period, we would be required to change our tax year to the tax year of that group
of holders.
The Code allows large partnerships to elect streamlined procedures for income tax reporting. This election, if made, would reduce the
number of items that must be separately stated on IRS Schedule K-1 that are issued to the holders of our shares, and such IRS Schedules K-1 would have to be
provided on or before March 15 following the close of each taxable year. In addition, this election would prevent us from suffering a "technical termination" (which would close our taxable
year) if, within a 12-month period, there is a sale or exchange of 50% or more of our total interests. If an election is made, IRS audit adjustments will flow through to the holders of the
shares for the year in which the adjustments take effect, rather than the holders of the shares in the year to which the adjustment relates. In addition, we, rather than the holders of the shares
individually, generally will be liable for any interest and penalties that result from
an audit adjustment. We do not currently anticipate that we will elect to be subject to the large partnership procedures.
If we are required to withhold any U.S. tax on distributions made to any holder of our shares, we will pay such withheld amount to the
IRS. That payment, if made, will be treated as a distribution of cash to the holder of the shares with respect to whom the payment was made and will reduce the amount of cash to which such holder
would otherwise be entitled.
Adjustments in tax liability with respect to our items generally will be made at the KKR Financial Holdings LLC level in a
partnership proceeding rather than in separate proceedings with each holder. KKR Financial Advisors LLC will represent us as our "tax matters partner" during any audit and in any dispute with
the IRS. If KKR Financial Advisors LLC ceases to own shares or ceases to be our Manager, our board of directors may designate a replacement tax matters partner. Each holder of our shares will
be informed of the commencement of an audit of us. In general, the tax matters partner may enter into a settlement agreement with the IRS on behalf of, and that is binding upon, the holders of shares.
A non-U.S. holder will generally be subject to U.S. federal withholding taxes at the rate of 30% (or such lower rate
provided by an applicable tax treaty) on its share of our gross income from dividends, interest (other than interest that constitutes "portfolio interest" within the meaning of the Code) and certain
other income that is not treated as effectively connected with a U.S. trade or business. Although the matter is not entirely clear, income from derivative transactions may also be subject to U.S.
federal withholding taxes. We expect that most of our interest income will constitute "portfolio interest" that is not subject to the 30% withholding tax. We expect that we will earn dividend
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income
that will be subject to the 30% withholding tax. In certain circumstances, the amount of any withholding tax could exceed the amount of cash that would have otherwise been distributed to you.
Non-U.S.
holders treated as engaged in a U.S. trade or business are generally subject to U.S. federal income tax at the graduated rates applicable to U.S. holders on their
net income that is considered to be effectively connected with such U.S. trade or business. Non-U.S. holders that are corporations may also be subject to a 30% branch profits tax on such
effectively connected income. The 30% rate applicable to branch profits may be reduced or eliminated under the provisions of an applicable income tax treaty between the United States and the country
in which the non-U.S. person resides or is organized.
While
we expect that our method of operation will not result in our generating significant amounts of income treated as effectively connected with the conduct of a U.S. trade or business
with respect to non-U.S. holders, there can be no assurance that the IRS will not successfully assert that some portion of our income is properly treated as effectively connected income
with respect to such non-U.S. holders. In addition, if any REIT subsidiary in which we own an interest, recognizes gain from the disposition of a United States real property interest, such
gain will be treated as income that is effectively connected with a U.S. trade or business. Although we do not expect any REIT subsidiary to generate material amounts of gain from the disposition of
United States real property interests, no complete assurance can be provided that such REIT subsidiaries will not generate gain from dispositions of United States real property interests in the
future. If a holder who is a non-U.S. person were treated as being engaged in a U.S. trade or business in any year because an investment of us in such year constituted a U.S. trade or
business, such holder generally would be required to (i) file a U.S. federal income tax return for such year reporting its allocable share, if any, of our income or loss effectively
connected with such trade or business and (ii) pay U.S. federal income tax at regular U.S. tax rates on any such income. Moreover, a holder who is a corporate non-U.S. holder might
be subject to a U.S. branch profits tax on its allocable share of our effectively connected income. In addition, distributions to a non-U.S. holder would be subject to withholding at the
highest applicable tax rate to the extent of the non-U.S. holder's allocable share of our effectively connected income. Any amount so withheld would be creditable against such
non-U.S. holder's U.S. federal income tax liability, and such
non-U.S. holder could claim a refund to the extent that the amount withheld exceeded such non-U.S. person's U.S. federal income tax liability for the taxable year. Finally, if
we are engaged in a U.S. trade or business, a portion of any gain recognized by an investor who is a non-U.S. holder on the sale or exchange of its shares may be treated for U.S. federal
income tax purposes as effectively connected income, and hence such non-U.S. holder may be subject to U.S. federal income tax on the sale or exchange.
In
general, different rules from those described above apply in the case of non-U.S. holders subject to special treatment under U.S. federal income tax law, including a
non-U.S. holder (i) who has an office or fixed place of business in the United States or is otherwise carrying on a U.S. trade or business; (ii) who is an individual present
in the United States for 183 or more days or has a "tax home" in the United States for U.S. federal income tax purposes; or (iii) who is a former citizen or resident of the United States.
If
you are a non-U.S. holder, you are urged to consult your tax advisors with regard to the U.S. federal income tax consequences to you of owning and disposing of our shares,
as well as the effects of state, local and non-U.S. tax laws.
In certain circumstances, a holder who disposes of our shares resulting in the recognition by such holder of significant losses in
excess of certain threshold amounts may be obligated to disclose its participation in such transaction, or a "reportable transaction," in accordance with recently issued
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regulations
governing tax shelters and other potentially tax-motivated transactions, or the "Tax Shelter Regulations." In addition, an investment in us may be considered a "reportable
transaction" if, for example, we recognize certain significant losses in the future. You should consult your tax advisors concerning any possible disclosure obligation under the Tax Shelter
Regulations with respect to the disposition of your shares or your allocable share of certain losses incurred by us.
Certain State, Local and Non-U.S. Tax Matters
Holders of shares, as well as us (and various vehicles in which we invest), may be subject to various state, local and
non-U.S. taxes and tax filing requirements. You are urged to consult your tax advisors with respect to the state, local and non-U.S. tax consequences of owning and disposing of
your shares, including potential state tax filing requirements.
We will be required in certain circumstances to backup withhold on certain payments paid to noncorporate holders of the shares who do
not furnish us with their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to you may be refunded or credited against your U.S. federal income tax liability, if any, provided
that the required information is furnished to the IRS.
Material U.S. Federal Income Tax Considerations Relating to Investments in REITs
We currently own one subsidiary taxed as a REIT (KFH II). During 2008, we owned two additional subsidiaries taxed as REITs (KKR
Financial Corp. and KKR QRS #1, Inc.). We may in the future invest in other REITs. In light of those investments and the complexity of the REIT rules, certain aspects of such rules are
discussed below.
Under the Code, a REIT itself is generally not subject to tax to the extent that it currently distributes its income to its
shareholders. To qualify as a REIT, an entity is required meet a number of technical U.S. federal income tax requirements, including various tests regarding the sources of its income, the nature and
diversification of its assets, the amounts it distributes to its shareholders and the ownership of its shares. In summary form, these technical requirements include the
following:
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a REIT must have at least 100 shareholders;
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no more than 50% in value of the REIT's outstanding capital stock may be owned, directly or indirectly, by five or fewer
individuals (defined to include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts certain entities) during the last half of any calendar year;
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a REIT generally must distribute 90% of its REIT taxable income each year to its shareholders;
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75% of a REIT's gross income must be from rents from real property, interest on mortgages and certain real estate related
income, or the "75% gross income test," and 95% of the REIT's gross income must be derived from those sources together with certain types of passive investment income, including interest and
dividends;
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at least 75% of the value of a REIT's total assets at the end of each calendar quarter must be represented by real estate
assets (which generally includes interest in real property, stock or other entities that qualify as REITs, interest in mortgage loans secured by real property,
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A
portion of a REIT's income from a residual interest in a REMIC or a taxable mortgage pool arrangement may be treated as "excess inclusion income." KFH II holds residual interests in
certain securitization vehicles that may be treated as taxable mortgage pools. IRS guidance indicates that excess inclusion income will be allocated among a REIT's shareholders in proportion to its
dividends paid. A shareholder's share of excess inclusion income (i) would not be allowed to be offset by any net operating losses otherwise available to U.S. shareholders, (ii) would be
subject to tax as UBTI in the hands of most tax-exempt shareholders, and (iii) would result in the application of U.S. federal income tax withholding at the maximum rate of 30%,
without reduction for any otherwise applicable income tax treaty, to the extent allocable to most types of foreign shareholders. If at any time a "disqualified organization," as defined in
Section 860E(e)(5) of the Code, is a record holder of our shares, we would be subject to tax at the highest corporate tax rate on any excess inclusion income allocable to such disqualified
organization.
A
REIT in which we invest will generally not be subject to U.S. federal income tax on the portion of its ordinary income and capital gain it distributes currently to its shareholders.
The REIT would be subject to tax at corporate rates on any net ordinary income or capital gain not so distributed. The REIT would also be subject to a tax equal to 100% of net income from any
prohibited transaction and to alternative minimum tax liability (which could arise if it has significant items of tax preference). A "prohibited transaction" is a sale of inventory or property held
for sale to customers in the ordinary course of business. We generally do not anticipate that any REIT in which we invest will generate significant amounts of income from prohibited transactions.
If
a REIT in which we invest failed to qualify as a REIT and was not able to cure such failure under the applicable provisions of the Code, it would be subject to U.S. federal income tax
(including any applicable alternative minimum tax) on its taxable income at regular corporate rates, and it would not be permitted to deduct distributions to its shareholders. In addition, to the
extent of current and
accumulated earnings and profits, all distributions would be taxable as dividend income and, subject to certain limitations under the Code, corporate distributees could be eligible for the
dividends-received deduction and individual U.S. holders could be eligible for the reduced U.S. federal income tax rate on corporate dividends. Unless entitled to relief under specific statutory
provisions, such REIT and any "successor entity" will also be disqualified from taxation as a REIT for the four taxable years following the year in which it lost its qualification. It is not possible
to state whether in all circumstances our REIT subsidiary would be entitled to this statutory relief.
In
addition, if KFH II failed to qualify as a REIT, it could result in the securitization vehicles treated as taxable mortgage pools being taxed as corporations for U.S. federal income
tax purposes. Generally, when an entity, or a portion of an entity, is classified as a taxable mortgage pool, it is treated as a taxable corporation for U.S. federal income tax purposes. However,
special rules apply to a REIT, a portion of a REIT or a qualified REIT subsidiary that is a taxable mortgage pool. The portion of the REIT's assets held directly or through a qualified REIT subsidiary
that qualifies as a taxable mortgage pool is treated as a qualified REIT subsidiary that is not subject to corporate income tax, and the taxable mortgage pool classification does not affect the tax
qualification of the REIT. We expect that KFH II will continue to be treated as a REIT and the special rules will apply to its ownership of the securitization vehicles treated as taxable mortgage
pools. However, if the securitization vehicles
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were
not eligible for the special treatment for taxable mortgage pools owned by a REIT, the resulting corporate income tax liability of the securitization vehicles could be substantial.
You will be allocated a portion of the income that we realize with respect to our ownership of the equity of any REIT in which we
invest. You generally will be taxed with respect to this allocated income in the same manner as if you held the REIT shares directly.
U.S. Holders of REIT Shares.
Distributions made by a REIT to its taxable U.S. shareholders out of current or accumulated earnings
and profits (and
not designated as capital gain dividends) will be taken into account by them as ordinary income and will not be eligible for the dividends-received deduction for corporations or the reduced rate of
U.S. federal income tax on dividend income for taxpayers taxed at individual rates. Distributions that a REIT designates as capital gain dividends will be taxed as long-term capital gains
(to the extent they do not exceed the REIT's actual net capital gain for the taxable year) without regard to the period for which the shareholder has held its stock. Corporate shareholders, however,
may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and profits will generally not be taxable to a
shareholder to the extent that they do not exceed the shareholder's
adjusted basis in its shares, but rather will reduce such adjusted basis. To the extent that such distributions exceed the adjusted basis of a shareholder's shares they will be included in income as
long-term capital gain (or short-term capital gain if the shares have been held for one year or less), assuming the shares are a capital asset in the hands of the shareholder.
Any consent dividends deemed paid by a REIT will be taxable as ordinary income to the shareholders to the extent of earnings and profits, even though no cash will be distributed by the REIT.
Shareholders may not include in their income tax returns any net operating losses or capital losses of a REIT. A U.S. shareholder's share of excess inclusion income would not be allowed to be offset
by any net operating losses otherwise available to the shareholder.
A
shareholder's gain on the sale of its shares in a REIT will be taxed at long-term or short-term capital gain rates, depending on how long the shares were held,
and assuming the shares were a capital asset in the hands of the shareholder. In general, however, any loss upon a sale or exchange of shares by a shareholder that has held such shares for six months
or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of previous distributions from a REIT to the shareholder that were required
to be treated by such shareholder as long-term capital gain.
Tax-Exempt Holders of REIT Shares.
Unless the REIT is a "pension-held REIT," distributions by a REIT to a shareholder that is
a tax-exempt entity generally will not constitute UBTI, other than any amounts that represent excess inclusion income, assuming the shares are not debt-financed or used in an
unrelated business of such holder. Although tax-exempt holders of our shares may not derive significant UBTI as a result of distributions with respect to REIT shares, such holders will
recognize a significant amount of UBTI as a result of indebtedness incurred by us with respect to our assets and as a result of excess inclusion income from the securitization vehicles that are
treated as taxable mortgage pools. See "U.S. Federal Income Tax Consequences of the Ownership and Disposition of Our SharesUnrelated Business Taxable Income."
Tax-exempt holders are strongly urged to consult their tax advisors regarding the tax consequences of owning shares.
Taxation of Non-U.S. Holders of REIT Shares.
Dividends from a REIT that are not attributable to gains from the sale of "United
States
real property interests" would be subject to U.S. withholding tax at a 30% rate (subject to reduction by applicable treaty). For most types of foreign shareholders, dividends that are attributable to
excess inclusion income would be subject to withholding at the maximum rate of 30%, without reduction for any otherwise applicable income tax treaty. However, if a distribution is treated as
effectively connected with the non-U.S. shareholder's conduct of a U.S. trade or business, the non-U.S. shareholder generally will be subject to U.S. federal income tax on the
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distribution
at graduated rates, in the same manner as U.S. shareholders are taxed on distributions and may be subject to the 30% branch profits tax in the case of corporate non-U.S.
shareholders.
Dividends
that are attributable to gains from the sale of "United States real property interests" (as defined for U.S. federal income tax purposes) would be subject under the Foreign
Investment in Real Property Tax Act of 1980, or "FIRPTA," to withholding tax at a rate of 35% and would be considered income effectively connected with a U.S. trade or business (which would require
the filing of U.S. federal income tax returns by non-U.S. persons and which would be subject to the branch profits tax for corporate non-U.S. shareholders). For these purposes,
dividends paid are first considered attributable to gains from the sale of United States real property interests, if any. The term "United States real property interest" does not include mortgage
loans or mortgage-backed securities. As a result, we do not anticipate that any REIT in which we invest will generate material amounts of gain that would be subject to FIRPTA.
If
at least 50% of the assets that a REIT holds are United States real property interests, gains from the sale of the REIT shares by a non-U.S. shareholder would be subject
to FIRPTA tax. We believe it is unlikely that gains from the sale of the equity in KFH II will be subject to the FIRPTA tax. It is possible, however, we may hold stock in another REIT that exceeds the
50% threshold. Gains on the sale of shares in such a REIT, however, would not be subject to the FIRPTA tax, so long as the REIT was "domestically controlled." A domestically controlled REIT is a REIT
in which, at all times during a specified testing period, less than 50% in value of its shares is held directly or indirectly by non-U.S. persons.
You
should consult your tax advisors regarding the application and effect of state, local and foreign income and other tax laws on the indirect investment in stock or other securities of
any REIT in which we invest.
DESCRIPTION OF SHARES
General
The following is a summary of some of the terms of the shares representing limited liability company interests in KKR Financial
Holdings LLC. Our operating agreement provides for the issuance of our shares, as well as certain terms of our shares. The following summary of some of the terms of our shares, the operating
agreement and the Delaware Limited Liability Company Act is not complete and is subject to, and qualified in its entirety by reference to, all of the provisions of the operating agreement, a copy of
which has been incorporated by reference as an exhibit to the registration statement of which this prospectus is a part and which you may obtain as described under "Where You Can Find More
Information," and the Delaware Limited Liability Company Act.
Authorized Shares
Each of our shares represents a limited liability company interest in KKR Financial Holdings LLC. We are authorized to issue,
pursuant to action by our board of directors and without action by holders of our shares, up to 250,000,000 common shares and up to 50,000,000 preferred shares. As of February 16, 2009, there
were 150,889,325 common shares outstanding and no preferred shares outstanding. The aggregate number of shares that we are authorized to issue, and the authorized number of any class of our shares,
may be increased from time to time by an amendment to the operating agreement upon the adoption of a resolution by our board of directors and approval of such amendment by the holders of at least a
majority of our shares then outstanding at a meeting of shareholders.
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There is currently only one class of our common shares outstanding. All outstanding common shares of this class are duly issued.
Holders of common shares of this class, as such, are not entitled to any preemptive rights to subscribe for or purchase our shares or any other securities we may issue, and the common shares of this
class are not convertible at the option of the holders into other securities. Upon payment of the full consideration payable to us upon original issuance of any common shares of this class, as
determined by our board of directors, the holders of those shares will not be obligated to make any additional capital contributions to us with respect to those shares. All common shares of this class
are non-assessable. However, holders of common shares may be liable to us for certain distributions made to them in violation of the Delaware Limited Liability Company Act or the operating
agreement as described below under "Liability For Distributions" and "Certain Provisions of the Operating AgreementRestrictions on Ownership and Transfer" and
may also be required to make certain other payments as described under "Certain Required Payments."
Voting Rights.
Holders of outstanding common shares are entitled to one vote per common share as provided in the operating agreement.
Subject to the
voting rights, if any, of any other class or series of
our shares that may be outstanding from time to time, the holders of common shares are entitled, at the annual meeting of the holders of our shares, to vote for the election of all of our directors.
Because the operating agreement does not provide for cumulative voting rights, the holders of a plurality of the voting power of the then outstanding common shares represented at a meeting of the
holders of the common shares will effectively be able to elect all our directors standing for election by the holders of our common shares.
Distribution Rights.
We may, pursuant to action of our board of directors, declare and pay distributions on the common shares. Holders
of our
outstanding common shares are entitled to share ratably (based on the number of common shares held) in any distribution declared by our board of directors out of funds legally available therefor,
subject to any statutory or contractual restrictions on the payment of distributions, including those in the operating agreement and the Delaware Limited Liability Company Act, and to any restrictions
on the payment of distributions imposed by the terms of any other outstanding shares.
Dissolution Rights.
For a description of some of the provisions of our operating agreement that would be applicable to our outstanding
common shares
in the event of our dissolution, see "Certain Provisions of the Operating AgreementDissolution" below.
Our board of directors may, without further action by the holders of our shares (unless required by the rules of any applicable stock
exchange), cause us to issue from time to time one or more other classes or series of our shares, including one or more classes of preferred shares and one or more other classes of common shares. Our
board of directors may determine, without further action by the holders of our shares, the terms, designations, preferences, rights, powers and duties of any such future shares,
including:
-
-
the ranking of such shares relative to our other shares;
-
-
the right, if any, of such shares to share in our profits and losses or items thereof;
-
-
the right, if any, of such shares to share in our distributions, the dates distributions on such shares will be payable
and whether distributions with respect to such shares will be cumulative or non-cumulative;
-
-
the rights of such shares upon our dissolution;
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-
-
whether, and the terms and conditions upon which, we may redeem such shares;
-
-
whether such shares are issued with the privilege of conversion or exchange and, if so, the terms and conditions upon
which the conversion or exchange may be made;
-
-
the terms and amounts of any sinking fund provided for the purchase or redemption of such shares; and
-
-
the right, if any, of the holder of each such share to vote.
The Delaware Limited Liability Company Act imposes certain restrictions on distributions by a limited liability company to its members.
In that regard, our operating agreement defines a "member" as any holder of our shares. The Delaware Limited Liability Company Act provides that any of our members who receives a distribution from us
(including both distributions made by us from time to time and distributions in the event of our dissolution) and who knew at the time of the distribution that the distribution was in violation of
these restrictions shall be liable to us for the amount of the distribution for three years, subject to extension under certain circumstances. Under the Delaware Limited Liability Company Act, a
limited liability company may not in general make a distribution to any of its members if, after the distribution, all liabilities of the limited liability company, other than liabilities to its
members on account of their limited liability company interests and liabilities for which the recourse of creditors is limited to specific property of the limited liability company, would exceed the
fair value of the assets of the limited liability company. For the purpose of determining the fair value of the assets of a limited liability company, the Delaware Limited Liability Company Act
provides that the fair value of property subject to liability for which recourse of creditors is limited shall be included in the assets of the limited liability company only to the extent that the
fair value of that property exceeds the nonrecourse liability. In addition, the Delaware Limited Liability Company Act and our operating agreement provide in general that, in the event of our
dissolution, holders of our shares will be entitled to share in our assets legally available for distribution only after satisfaction of or provision for our liabilities to creditors and satisfaction
of liabilities for certain distributions owing to our members and former members. See "Certain Provisions of the Operating AgreementDissolution."
In
addition, our operating agreement provides that a member may be required to repay any distributions made to such member that are inconsistent with, or in violation of, the Delaware
Limited Liability Company Act, any provision of the operating agreement or any other applicable law.
Under the Delaware Limited Liability Company Act, unless otherwise provided in the operating agreement of a limited liability company,
an assignee of limited liability company interests (such as our shares) who becomes a member of the limited liability company is liable for the obligations of the assignor of those interests to make
any required contributions to the limited liability company, but the assignee is not obligated for, among other things, liabilities unknown to the assignee at the time it became a member and that
could not be ascertained from the operating agreement. Under our operating agreement, a person who purchases our shares is deemed to become one of our members and is therefore subject to the
provisions described in the preceding sentence.
Under our operating agreement, holders of our shares may be required to make certain other payments under certain circumstances. For
example, a holder of our shares may be required to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with a
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transfer
of those shares. In the event that we issue a new share certificate in place of any share certificate that has been lost, destroyed or stolen, we may require that the holder of the shares
evidenced by the lost, destroyed or stolen certificate give the transfer agent for our shares a bond sufficient to indemnify the transfer agent against any claim made against it on account of the
alleged loss, theft or destruction or the issuance of such new certificate. In addition, we may require that a holder of our shares who requests that we call a special meeting of holders of our shares
pay the costs of preparing and mailing the notice of meeting, including the proxy materials.
Grantor Trust
Pursuant to our operating agreement, in the future our board of directors may implement a reorganization, without the consent of
holders of our shares, whereby a Delaware statutory trust, which we refer to as a "Trust," would become the holder of all (or less if so provided by our board of directors) of our outstanding shares
and each holder of our shares (other than any shares excluded by our board of directors) would receive shares of the Trust (representing beneficial interests in the Trust) in exchange for its shares
in us. Our board of directors will have the power to decide in its sole discretion to implement such a trust structure subject to the limitations set forth below. We expect that we would treat the
Trust as a grantor trust for U.S. federal income tax purposes. As such, for U.S. federal income tax purposes, each holder of Trust shares would be treated as the beneficial owner of a pro rata portion
of our shares held by the Trust and holders of Trust shares would receive annual tax information relating to their investment on tax information statements similar to Internal Revenue Service, or
"IRS," Form 1099, rather than on IRS Schedule K-1. Pursuant to the operating agreement, our board of directors will not implement such a trust structure if it determines, in
its sole discretion, that the reorganization would be taxable or would otherwise alter the benefits or burdens of ownership of our shares, including, without limitation, a holder's allocation of items
of income, gain, loss, deduction or credit or the treatment of such items for U.S. federal income tax purposes. Pursuant to the operating agreement, our board of directors will also be required to
implement the reorganization in such a manner that does not have a material adverse effect on the voting or economic rights of our shares.
The
IRS could challenge the Trust's manner of reporting to investors (e.g., if the IRS asserts that the Trust constitutes a partnership or is ignored for U.S. federal income tax
purposes). In addition, the Trust could be subject to penalties if it were determined that the Trust did not satisfy applicable partnership reporting requirements for U.S. federal income tax purposes.
Any of these circumstances could have an adverse effect on the market value of our shares and of any other securities we may issue.
Certain Provisions of the Operating Agreement
Term.
The operating agreement provides that we will remain in existence until terminated in accordance with the operating agreement.
Agreement to be Bound by Operating Agreement; Power of Attorney.
By acquiring a share in KKR Financial Holdings LLC, you will be
admitted as a
member of KKR Financial Holdings LLC and will be deemed to agree to be bound by the terms of the operating agreement. Pursuant to the operating agreement, each holder of our shares agrees to
the consents and waivers contained in the operating agreement and grants to each of our chief executive officer, our president and our secretary (and, if appointed, a liquidator) a power of attorney
to, among other things, execute and file documents required for our qualification, continuance or dissolution and to make certain amendments to the operating agreement.
Election to be Treated as an Association Taxable as a Corporation.
The operating agreement provides that our board of directors may,
without the
consent or vote of holders of our shares, cause us
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to
elect to be treated as an association taxable as a corporation for U.S. federal income tax purposes if the board receives an opinion from a nationally recognized financial adviser to the effect
that our market valuation is expected to be significantly lower as a result of our continuing to be treated as a partnership for U.S. federal income tax purposes than if we instead elected to be
treated as a corporation for U.S. federal income tax purposes.
Dissolution.
The operating agreement provides for our dissolution and winding up upon the occurrence of:
-
-
the adoption of a resolution by a majority vote of our board of directors approving our dissolution and the approval of
such action by the affirmative vote of the holders of a majority of our outstanding shares entitled to vote thereon;
-
-
the unanimous vote of the holders of our outstanding shares to dissolve us;
-
-
the entry of a judicial decree that an event has occurred that makes it not reasonably practicable to carry on our
business as then currently operated as determined in accordance with Section 18-802 of the Delaware Limited Liability Company Act; or
-
-
the termination of the legal existence of our last remaining member or the occurrence of any other event that terminates
the continued membership of our last remaining member, unless we continue without dissolution in a manner provided under the operating agreement or the Delaware Limited Liability Company Act.
We
refer to these events as "dissolution events."
The
operating agreement provides in general that, upon the occurrence of a dissolution event, our property shall be applied and distributed, to the extent permitted by law, in the
following order:
-
-
first, to our creditors (including our Manager and members who are creditors, to the extent permitted by law) in
satisfaction of our debts and other liabilities (whether by payment or making a provision for payment), other than liabilities referred to in the next bullet point;
-
-
second, except as provided in the operating agreement, to our members and former members in satisfaction of liabilities
for certain distributions; and
-
-
the balance, if any, to our members in accordance with positive balances in their respective tax-based capital
accounts required by the operating agreement, after giving effect to all contributions, distributions and allocations for all periods and subject, in the case of holders of our common shares, to any
preferential distributions to which the holders of any of our other shares may be entitled upon dissolution.
The
operating agreement provides that it is intended that each common share shall receive an identical amount under the provision described in the last bullet point above.
Restrictions on Ownership and Transfer.
Because we intend to maintain the flexibility to have a REIT subsidiary, the ownership of our
shares must be
widely held so that no more than 50% of the value of our outstanding shares may be owned, directly or constructively, by five or fewer individuals (as defined in the Code to include certain entities).
The
operating agreement, subject to certain exceptions, contains restrictions on the number of our shares that a person may own. The operating agreement provides that (subject to certain
exceptions described below) no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% in value or in number, whichever is more restrictive, of our
shares.
The
operating agreement, subject to certain exceptions, prohibits any person from beneficially or constructively owning shares that would result in any subsidiary of ours that has
elected to be taxed as a REIT (we sometimes refer to any such subsidiary as, individually, a "REIT subsidiary"), being
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"closely
held" under Section 856(h) of the Code or otherwise cause a REIT subsidiary to fail to qualify as a REIT.
Any
person who acquires or attempts or intends to acquire beneficial or constructive ownership of our shares that will or may violate any of the foregoing restrictions on transferability
and ownership, or who is the intended transferee of shares which are transferred to a charitable trust (as described below), is required by the operating agreement to give written notice to us
immediately, or, in the case of such a proposed or attempted transaction, to give us at least fifteen days prior written notice, and to provide us with such other information as we may request in
order to determine the effect of such transfer on the status of any REIT subsidiary as a REIT. The foregoing restrictions on transferability and ownership may be terminated by our board of directors
if it determines that it is no longer in our best interests for any REIT subsidiary to continue to qualify as a REIT under the Code or that compliance with those restrictions is no longer required. As
a result, our board of directors may terminate those restrictions if, for example, we were to sell or cease to operate any REIT subsidiary. As of the date of this prospectus, we have one REIT
subsidiary, KFH II.
Our
board of directors, in its sole discretion, may exempt a person from the foregoing restrictions. The person seeking an exemption must provide to our board of directors such
representations, covenants and undertakings as the board of directors may deem appropriate in order to conclude that granting the exemption will not cause any REIT subsidiary to lose its status as a
REIT. Our board of directors may also require a ruling from the IRS or an opinion of counsel in order to determine or ensure each REIT subsidiary's status as a REIT.
To
the extent permitted by applicable law, any attempted transfer which, if effective, would result in a violation of the foregoing restrictions, will cause the number of shares causing
the violation (rounded upwards to the nearest whole share) to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the proposed transferee
will not acquire any rights in such shares. The automatic transfer will be deemed to be effective as of the close of business on the business day prior to the date of the transfer. Shares held in the
trust will be issued and outstanding shares. The proposed transferee will not benefit economically from ownership of any shares held in the trust and will have no rights to distributions, rights to
vote or other rights attributable to the shares held in the trust. The trustee of the trust will have all voting rights and rights to distributions with respect to shares held in the trust. These
rights will be exercised for the exclusive benefit of the charitable beneficiary. Any distribution paid to the proposed transferee prior to our discovery that shares have been transferred to the trust
must be paid on demand to the trustee. Any distribution authorized but unpaid will be required to be paid to the trustee when due. Any distribution paid to the trustee will be held in trust for the
charitable beneficiary. Subject to Delaware law, the trustee will have the authority (i) to rescind as void any vote cast by the proposed transferee prior to our discovery that the shares have
been transferred to the trustee and (ii) to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. If we have already taken
irreversible action, however, then the trustee will not have the authority to rescind and recast the vote.
Within
20 days of receiving notice from us that shares have been transferred to the trust, the trustee is required to sell the shares to a person designated by the trustee, whose
ownership of the shares will not violate the above ownership limitations. Upon such sale, the interest of the charitable beneficiary in the shares sold will terminate and the trustee is required to
distribute the net proceeds of the sale to the proposed transferee and to the charitable beneficiary as follows: the proposed transferee will receive the lesser of (i) the price paid by the
proposed transferee for the shares or, if the proposed transferee did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise
or other similar transaction), the market price of the shares on the day of the event causing the shares to be held in the trust and (ii) the price per share received by the trustee from the
sale or other disposition of the shares. The price may be reduced, however, by the
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amount
of any distributions paid to the proposed transferee on the shares and owed by the proposed transferee to the trustee. Any net sales proceeds in excess of the amount payable to the proposed
transferee must be paid immediately to the charitable beneficiary. If, prior to discovery that shares have been transferred to the trustee, the shares are sold by the proposed transferee, then
(i) the shares shall be deemed to have been sold on behalf of the trust and (ii) to the extent that the proposed transferee received an amount for the shares that exceeds the amount the
proposed transferee was entitled to receive, the excess must be paid to the trustee upon demand.
In
addition, shares held in the trust will be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of (i) the price per share in
the transaction that resulted in the transfer to the trust (or, in the case of a devise or gift, the market price at the time of the devise or gift) and (ii) the market price on the date we, or
our designee, accepts the offer. The price may be reduced, however, by the amount of any distributions paid to the proposed transferee on the shares and owed by the proposed transferee to the trustee.
We will have the right to accept the offer until the trustee has sold the shares. Upon a sale to us, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will
distribute the net proceeds of the sale to the proposed transferee.
If
the transfer of shares to a charitable trust would not be effective for any reason to prevent a violation of the foregoing restrictions then, to the fullest extent permitted by law,
the transfer of that number of shares that would otherwise cause that violation shall be void ab initio and the intended transferee will acquire no rights in those shares. In addition, if our board of
directors or any duly authorized committee thereof determines that a transfer or other event has taken place that has resulted in a violation of the foregoing restrictions or that a person intends or
has attempted to acquire ownership of our shares in violation of those restrictions, the board of directors or such committee may take such action as it deems advisable to prevent such transfer or
other event, including, without limitation, causing us to redeem shares, refusing to give effect to such transfer or instituting proceedings to enjoin such transfer or other event.
All
certificates representing our shares will bear a legend referring to the restrictions described above.
Every
owner of 0.5% or more (or such higher percentage as determined by the Manager, in good faith, in order to maintain each REIT subsidiary's status as a REIT) in value of our shares,
within 30 days after the end of each taxable year, is required by our operating agreement to give written notice to us stating the name and address of such owner, the number of shares which the
owner beneficially owns and a description of the manner in which the shares are held. Each such owner of our shares is also required by the operating agreement to provide to us such additional
information as we may request in order to determine the effect, if any, of such beneficial ownership on each REIT subsidiary's status as a REIT and to ensure compliance with the ownership limitations
described above. In addition, each owner of shares is required by our operating agreement to provide to us such information as we may request, in good faith, in order to determine each REIT
subsidiary's status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine and ensure compliance with the ownership limitations described
above.
These
ownership limitations could delay, defer or prevent a transaction or a change in control that might involve a premium price for the shares or might otherwise be in the best
interests of the holders of the shares.
Election of Members of Our Board of Directors; Vacancies.
The operating agreement provides that the term of each director shall be the
period from
the effective date of such director's election until such director's successor is duly elected or appointed and qualified, or until such director's earlier death, resignation or removal, and that,
except as may be provided by our board of directors in setting
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the
terms of any class or series of our shares, any vacancy on the board of directors shall be filled by a majority of the directors then in office, even if the remaining directors do not constitute a
quorum.
Removal of Members of Our Board of Directors.
Subject to the rights of holders of any class or series of our shares that may be issued
in the future,
the operating agreement provides that any director, or the entire board of directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of
our shares holding at least two-thirds of the votes entitled to be cast in the election of directors. "Cause" is defined by the operating agreement to mean, with respect to any particular
director, conviction of a felony or a final judgment of a court of competent jurisdiction holding that such director caused demonstrable, material harm to us through bad faith or active and deliberate
dishonesty.
Duties of Officers and Directors.
The operating agreement provides that, except as otherwise provided therein, the fiduciary duties of
our directors
will generally be consistent with those of a director of a
Delaware corporation. However, our operating agreement further provides that, to the fullest extent permitted by law, none of our directors has any duties, fiduciary or otherwise, with respect to any
action or inaction of our Manager and any actions or inactions of our directors that cause us to act in compliance with or in accordance with the management agreement shall be deemed consistent and
compliant with the fiduciary duties of such directors and shall not constitute a breach of any duty under the operating agreement or existing in law, equity or otherwise. Likewise, the operating
agreement provides that, to the extent permitted by law, none of our officers owes any duty, fiduciary or otherwise, to our members or to us with respect to any action or inaction of our Manager
pursuant to the management agreement.
The
operating agreement also provides that any director, officer, employee or agent of ours may engage in or possess an interest in other profit-seeking or other business ventures of any
nature or description, independently or with others, whether or not such ventures are competitive with us, and the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to such
persons. Our operating agreement further provides that if any director, officer, employee or agent of ours acquires knowledge of a potential transaction, agreement, arrangement or other matter that
may be an opportunity for us, that person has no duty to communicate or offer that opportunity to us and shall not be liable to us or to our members for breach of duty, including fiduciary duty, by
reason of the fact that such person pursues or acquires for or directs that opportunity to another person or does not communicate that opportunity to us; and that neither we nor any of our members has
any rights or obligations by virtue of the operating agreement in or to any such independent ventures or the income or profit or losses derived therefrom, and the pursuit of such ventures, even if
competitive with our activities, shall not be deemed wrongful or improper or a breach of any duty.
Limitation of Liability and Indemnification of Directors and Officers.
The operating agreement provides that none of our directors will
be liable to
us, or any subsidiary of ours, or any holder of our shares, for monetary damages for any acts or omissions arising from the performance of any of such director's obligations or duties in connection
with our company, including any breach of fiduciary duty, except (1) for any breach of the director's duty of loyalty to us or the holders of our shares; (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of law; or (3) for any transaction from which the director derived an improper benefit.
The
operating agreement further provides that, to the fullest extent permitted by law, none of our directors shall be liable to us, to any holder of our shares or to any other person for
(1) any action taken or not taken as required by the operating agreement; (2) any action taken or not taken as permitted by the operating agreement and with respect to which such
director acted on an informed basis, in good faith and with the honest belief that such action, taken or not taken, was in our best interests; or (3) our compliance with an obligation incurred
or the performance of any agreement entered into prior to that director having become one of our directors.
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The
operating agreement further provides that a director shall not be liable to us, to any other director, to any holder of our shares or to any other person that is a party to or
otherwise bound by the operating agreement for breach of fiduciary duty for such director's good faith reliance on the provisions of the operating agreement.
The
operating agreement provides that we may indemnify, to the fullest extent permitted by law, each person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by us or in our right) by reason of the fact that the person is or was a
director, officer, employee, tax matters member (as defined in the operating agreement) or agent of ours, or is or was serving at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by
the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to our best interests, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful.
The
operating agreement provides that we may, to the fullest extent permitted by law, indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of our company to procure a judgment in our favor by reason of the fact that such person is or was a director, officer, employee, tax matters
member or agent of ours, or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of that action or suit if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to our best interests and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person has been
adjudged to be liable to us unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem
proper.
The
operating agreement provides that, to the extent that a present or former director, officer or tax matters member of ours has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in either of the two preceding paragraphs, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection therewith.
The
operating agreement provides that each of the persons entitled to be indemnified for expenses and liabilities as contemplated above may, in the performance of his, her or its duties,
consult with legal counsel and accountants, and any act or omission by such person on our behalf in furtherance of our interests in good faith in reliance upon, and in accordance with, the advice of
such legal counsel or accountants will be full justification for any such act or omission, and such person will be fully protected for such acts and omissions; provided that such legal counsel or
accountants were selected with reasonable care by or on our behalf.
The
operating agreement also authorizes us, to the fullest extent permitted by law, to pay expenses (including attorneys' fees) incurred by a director, officer, employee, tax matters
member or agent of ours in defending any civil, criminal, administrative or investigative action, suit or proceeding in advance of its final disposition upon receipt of an undertaking by or on behalf
of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by us as authorized in the operating agreement. The operating agreement
provides that the indemnification provisions therein are intended to comply with the requirements of and to provide
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indemnification
and advancement rights substantially similar to those made available to directors, officers, employees and agents of a corporation incorporated under the Delaware General Corporation
Law.
Limitation on Special Meetings and Actions by Written Consent.
The operating agreement provides that special meetings of the holders of
our shares
may only be called by the chairman of the board of directors, the president, the chief executive officer or the board of directors, or by the secretary upon the written request of the holders entitled
to cast not less than a majority of all the votes entitled to be cast at such meeting. In addition, the operating agreement provides that action may only be taken by written consent of holders of our
shares if the unanimous written consent of all of the holders of our shares entitled to vote or consent to such matter is received. The inability of holders of our shares to easily call a special
meeting or take action by written consent could render more difficult or discourage an attempt to obtain control of us.
Advance Notice Requirements for Director Nominations and Proposals by Holders of Our Shares.
The operating agreement provides that
nominations of
individuals for election to the board of directors at an annual meeting of holders of our shares and the proposal of business to be considered at an annual meeting of holders of our shares may be made
only:
(1) pursuant
to our notice of the meeting,
(2) by
or at the direction of our board of directors, or
(3) by
a holder of our shares who was a holder of our shares of record both at the time of giving of notice by such holder of our shares as provided for in the operating
agreement and at the time of the annual meeting and who is entitled to vote at the meeting and who has complied with the advance notice procedures of the operating agreement.
With
respect to special meetings of holders of our shares, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of individuals for
election to the board of directors at a special meeting may be made only:
(1) pursuant
to our notice of the meeting,
(2) by
or at the direction of our board of directors, or
(3) provided
that the board of directors has determined that directors will be elected at the meeting, by a holder of our shares who was a holder of record both at the time
of giving of notice by such holder as provided for in the operating agreement and at the time of the special meeting and who is entitled to vote at the meeting and who has complied with the advance
notice provisions of the operating agreement.
The
operating agreement provides that holders of our shares seeking to bring business before an annual meeting of holders of our shares or to nominate candidates for election as
directors at an annual meeting of holders of our shares must generally provide notice thereof in writing to us not less than 120 days and not more than 150 days prior to the anniversary
date of the mailing of the notice of the preceding year's annual meeting of holders of our shares. The operating agreement also provides that in the event we call a special meeting of holders of our
shares for the purpose of electing one or more individuals to the board of directors, any holder of our shares seeking to nominate a candidate for election at that meeting must provide notice thereof
to us in writing not earlier than the 120th day prior to such special meeting and not later than the later of the 90th day prior to such special meeting or the tenth day following the
day on which public announcement is first made of the date of the special meeting and of the nominees for director to be elected at such meeting.
Mergers and Sales of Assets.
Subject to the provisions described in the second paragraph under "Provisions in the Operating
Agreement
that may have an Anti-Takeover Effect" below, the
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operating
agreement provides that we may not merge or consolidate with or into any limited liability company, corporation, statutory trust, business trust or association, real estate investment trust,
common-law trust or any other unincorporated business, including a partnership, or sell, lease or exchange all or substantially all of our property or assets, unless, in each case, our
board of directors adopts a resolution by a majority vote approving such action and unless such action is approved by the affirmative vote of the holders of a majority of each class of our shares then
outstanding and entitled to vote thereon, except that no vote by the holders of our shares is required in the case of a transaction described above under "Grantor Trust" or, in general,
any transaction involving any of our subsidiaries or their assets.
Replacement of Our Manager.
The operating agreement provides that, if our management agreement is terminated and the board of directors
determines
that a replacement manager should be retained, the affirmative vote of a majority of the outstanding shares is required to retain such replacement manager.
Amendment of the Operating Agreement.
The operating agreement (including the distribution provisions thereof) may be amended only by a
majority vote
of our board of directors, except that amending specified provisions of the operating agreement that relate to the following matters requires an affirmative vote of holders of at least a majority of
the shares present in person or represented by proxy at a meeting of holders of our shares:
-
-
provisions requiring the approval by our board of directors and by the holders of at least a majority of our outstanding
shares to increase the number of our authorized shares or the authorized number of any class of our shares;
-
-
provisions to the effect that, except as may otherwise be specified by our board of directors in establishing the terms of
any class of our shares, each of our shares is entitled to one vote on all matters submitted for the approval of our shareholders, and giving our board of directors the right to reclassify shares into
one or more classes or series;
-
-
the provisions described under "Replacement of Our Manager" and "Mergers and Sales of Assets";
-
-
some of the provisions described in the second paragraph under "Provisions in the Operating Agreement that
may have an Anti-Takeover Effect";
-
-
the provisions described in the first two bullet points of the first paragraph under "Dissolution"; and
-
-
the provision of the operating agreement governing amendments thereof.
As
a result of its broad authority to amend the operating agreement, our board of directors could, in the future, choose to amend the operating agreement to include provisions that have
the intention or effect of discouraging takeover attempts.
In
addition, the operating agreement gives our board of directors broad authority to effect amendments to the provisions of the operating agreement that can change many of the terms of
our shares without the consent of holders of our shares. As a result, our board of directors may, without the approval of holders of our shares, make changes to many of the terms of our shares that
are adverse to the holders of our shares.
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Provisions in the Operating Agreement that may have an Anti-Takeover Effect
Some of the provisions in the operating agreement described above could make it more difficult for a third party to acquire, or may
discourage a third party from acquiring, control of us. These provisions include, among others:
-
-
allowing only our board or directors to fill newly created directorships;
-
-
requiring that directors may be removed only for cause (as defined in the operating agreement) and then only by a vote of
at least two-thirds of the votes entitled to be cast in the election of directors;
-
-
requiring advance notice for holders of our shares to nominate candidates for election to our board of directors or to
propose business to be considered by holders of our shares at a meeting of holders of our shares;
-
-
our ability to issue additional securities, including, but not limited to, preferred shares, without approval by holders
of our shares;
-
-
a prohibition on any person directly or indirectly owning more than 9.8% in value or number of our shares, whichever is
more restrictive;
-
-
the ability of our board of directors to amend the operating agreement without the approval of the holders of our shares
except under certain specified circumstances; and
-
-
limitations on the ability of holders of our shares to call special meetings of holders of our shares or to act by written
consent.
In
addition, the operating agreement contains provisions based on Section 203 of the Delaware General Corporation Law which in general prohibit us from engaging in a "business
combination" with an "interested member" (as those terms are defined in the operating agreement), unless such business combination is approved by the affirmative vote of the holders of
66
2
/
3
% of each class of our outstanding shares, excluding shares held by the interested member or any affiliate of the interested member. However, if, as described in clause (1)
of the following paragraph, a majority of our board of directors approves the transaction pursuant to which a person would have become an "interested member," such person will not be deemed an
"interested member" and the foregoing prohibition on business combinations with such person will not apply.
An
"interested member" is, in general and subject to exceptions, (1) a person who is, or was at any time within the prior three-year period immediately prior to the
date in question, the beneficial owner of 15% or more of our outstanding shares and who did not become the beneficial owner of such amount of shares pursuant to a transaction that was approved by a
majority of our board of directors or (2) a person who is an assignee of, or has otherwise succeeded to, any of our shares of which an interested member was the beneficial owner at any time
within the three-year period immediately prior to the date in question, if such assignment or succession occurred in a transaction, or series of transactions, not involving a public
offering within the meaning of the Securities Act of 1933.
A
"business combination" includes, in general and among other things,
(1) any
merger or consolidation of us or any of our subsidiaries with an interested member or any other person that is, or after that transaction would be, an affiliate of
an interested member;
(2) any
sale, lease, exchange, mortgage, pledge or transfer or other disposition, in one transaction or a series of transactions, to or with, or proposed by or on behalf of,
an interested member or an affiliate of an interested member, of any property or assets of us or any of our subsidiaries having an aggregate fair market value of not less than 10% of our "net
investment value;"
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(3) the
issue or transfer by us or any of our subsidiaries, in one transaction or a series of transactions, of any securities issued by us or that subsidiary to, or proposed
by or on behalf of, an interested member or an affiliate of an interested member in exchange for cash, securities or other property having an aggregate fair market value of not less than 10% of our
"net investment value;"
(4) any
spin-off or split-up of any kind of us or any of our subsidiaries proposed by or on behalf of an interested member or any of its affiliates;
or
(5) any
reclassification of our shares or the securities of any of our subsidiaries or recapitalization of us or such subsidiary, or any merger or consolidation of us or
such subsidiary with another subsidiary, or any other transaction that has the effect, directly or indirectly, of increasing the proportionate share of our outstanding shares or the securities of such
subsidiary that are beneficially owned by an interested member or any of its affiliates.
The
operating agreement defines "net investment value" as, in general, the aggregate market value of our outstanding shares, plus the amount of our borrowings (other than intercompany
borrowings), plus the value of certain future investments we have committed to make, less the amount of our cash and cash equivalents, subject to certain adjustments.
Certain
provisions of the management agreement also could make it more difficult for third parties to acquire control of us by various means, including limitations on our right to
terminate the management
agreement and a requirement that, under certain circumstances, we make a substantial payment to the Manager in the event of a termination.
Transfer Agent and Registrar
The transfer agent and registrar for the common shares is American Stock Transfer & Trust Company.
DESCRIPTION OF DEPOSITARY SHARES
We may offer (either separately or together with other securities offered by this prospectus) depositary shares representing fractional
interests in the preferred shares of any class or series. In connection with the issuance of any depositary shares, we will enter into a deposit agreement (a "deposit agreement") with a bank, trust
company or other financial institution, as depositary (with respect to such deposit agreement, the "Depositary"), all as described in the prospectus supplement or free writing prospectus relating to
the particular issue of depositary shares. Depositary shares will be evidenced by depositary receipts ("depositary receipts") issued pursuant to the related deposit agreement. The form of deposit
agreement, including the form of depositary receipt for the applicable depositary shares, that will be entered into with respect to a particular offering of depositary shares will be filed as an
exhibit to the registration statement of which this prospectus is a part or a document that is incorporated or deemed to be incorporated by reference in this prospectus. The following summary of some
of the terms of the depositary shares, depositary receipts and deposit agreements and the summary of some of the terms of the particular depositary shares and the related depositary receipts and
deposit agreement described in the applicable prospectus supplement or free writing prospectus are not complete and are subject to, and are qualified in their entirety by reference to, all of the
provisions of the particular depositary shares and the related depositary receipts and deposit agreement, which you may obtain as described under "Where You Can Find More Information."
The
following description of depositary shares contains certain general terms and provisions of the depositary shares and the related depositary receipts and deposit agreement to which
any prospectus supplement or free writing prospectus may relate. Certain other terms of any depositary shares and the related depositary receipts and deposit agreement will be described in the
applicable prospectus supplement or free writing prospectus. To the extent that any particular terms of any depositary shares
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or
the related depositary receipts or deposit agreement described in a prospectus supplement or free writing prospectus differ from any of the terms described in this prospectus, then those particular
terms described in this prospectus shall be deemed to have been superseded by that prospectus or free writing prospectus.
General
We may, at our option, elect to offer interests in fractional preferred shares of any class or series, rather than full preferred
shares. In the event such option is exercised, we will deposit preferred shares of such class or series with a Depositary and cause such Depositary to issue depositary receipts evidencing the related
depositary shares, each of which will represent a fractional interest (to be set forth in the applicable prospectus supplement) of a share of such class or series, as the case may be, of preferred
shares.
The
preferred shares of any class or series represented by depositary shares will be deposited under a separate deposit agreement between us and the applicable Depositary, which shall be
a bank, trust company or other financial institution selected by us having an office in the United States and which has, or whose parent entity has, a combined capital and surplus (calculated on a
consolidated basis) of at least $50,000,000. Subject to the terms of the deposit agreement, each holder of a depositary receipt issued under that deposit agreement will be entitled, in proportion to
the applicable fraction of a preferred share represented by the related depositary share, to all the rights and preferences of the preferred shares represented thereby (including, if applicable and
subject to the matters discussed below, any distribution, voting, redemption, conversion, exchange and liquidation rights).
Depositary
shares may be issued in respect of preferred shares of any class or series. Upon the issuance of any such preferred shares, we will deposit such preferred shares with the
relevant Depositary and will cause the Depositary to issue, on our behalf, the related depositary receipts.
Reference
is made to the applicable prospectus supplement or free writing prospectus relating to the depositary shares offered thereby for their specific terms, including, where
applicable:
-
-
the terms of the class or series of preferred shares deposited by us under the related deposit agreement, the number of
such depositary shares and the fraction of one share of such preferred shares represented by one such depositary share;
-
-
whether such depositary shares will be listed on any securities exchange; and
-
-
any other specific terms of such depositary shares and the related deposit agreement.
Depositary
receipts may be surrendered for transfer or exchange at any office or agency of the relevant Depositary maintained for that purpose, subject to the terms of the related
deposit agreement. Unless otherwise specified in the applicable prospectus supplement, depositary receipts will be issued in denominations evidencing any whole number of depositary shares. No service
charge will be made for any permitted transfer or exchange of depositary receipts, but we or the Depositary may require payment of any tax or other governmental charge payable in connection therewith.
Pending
the preparation of definitive depositary receipts, the Depositary may, upon our written order, execute and deliver temporary depositary receipts which are substantially similar
to, and entitle the holders thereof to all the rights pertaining to, the definitive depositary receipts. Depositary receipts will be prepared thereafter and, when definitive depositary receipts are
available, temporary depositary receipts will be exchangeable for definitive depositary receipts at our expense.
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Distributions
The Depositary will distribute all cash distributions received in respect of the deposited preferred shares to the record holders, as
of the relevant record date, of depositary receipts relating to such preferred shares in proportion, insofar as possible, to the numbers of such depositary shares owned by such holders on such record
date. The Depositary will distribute only such amount, however, as can be distributed without distributing to any holder of depositary receipts a fraction of one cent, and any balance not so
distributed will be added to and treated as part of the next sum, if any, received by the Depositary for distribution to record holders of those depositary receipts.
In
the event of a distribution other than in cash, the Depositary will distribute property received by it to the record holders, as of the relevant record date, of depositary receipts
entitled thereto in proportion, insofar as possible, to the number of depositary shares owned by such holders on such record date. If, however, the Depositary determines that it is not feasible to
make such distribution, it may, with our approval, adopt such method as it deems equitable and practicable for the purpose of effecting such distribution, including the sale (public or private) of
such property and the distribution of the net proceeds from such sale to such holders.
The
deposit agreement may also contain provisions relating to the manner in which any subscription or similar rights offering offered by us to holders of the related class or series of
preferred shares will be made available to holders of depositary receipts.
The
amount distributed in any of the foregoing cases will be reduced by any amount required to be withheld by us or the Depositary on account of taxes.
Redemption and Repurchase of Preferred Shares
If a class or series of preferred shares represented by depositary shares is redeemable at our option and is to be redeemed, in whole
or in part, the depositary shares will be redeemed from the proceeds received by the Depositary resulting from the redemption, in whole or in part, of such class or series of preferred shares held by
the Depositary. The depositary shares will be redeemed by the Depositary at a price per depositary share equal to the applicable fraction of the redemption price and of any other amounts or property
per share payable upon such redemption with respect to the preferred shares so redeemed. Whenever we redeem preferred shares held by the Depositary, the Depositary will redeem as of the same date the
number of depositary shares representing the preferred shares so redeemed, provided that we have paid in full to the Depositary the redemption price of the preferred shares to be redeemed plus any
other amounts or property payable upon such redemption with respect to the shares to be so redeemed. If fewer than all the depositary
shares are to be redeemed at our option, the depositary shares to be redeemed will be selected by the Depositary by lot or pro rata or by any other equitable method as may be determined by the
Depositary. If the depositary shares evidenced by a depositary receipt are to be redeemed in part only, a new depositary receipt will be issued for any depositary shares not so redeemed.
After
the date fixed for redemption, the depositary shares so called for redemption will no longer be deemed to be outstanding and all rights of the holders of the related depositary
receipts with respect to the depositary shares so called for redemption will cease, except the right to receive any monies or other property payable upon redemption upon surrender of such depositary
receipts to the Depositary.
Depositary
shares, as such, are not subject to repurchase by us at the option of the holders. Nevertheless, if the preferred shares represented by depositary shares are subject to
repurchase at the option of the holders, then, on the terms and subject to the conditions applicable to such preferred shares, the related depositary receipts may be surrendered by the holders thereof
to the Depositary with written instructions to the Depositary to instruct us to repurchase the preferred shares represented by the depositary shares evidenced by such depositary receipts at the
applicable repurchase price. Upon
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receipt
of such instructions and subject to our having funds legally available therefor, we will repurchase the requisite whole number of such preferred shares from the Depositary, who in turn will
repurchase such depositary receipts. Notwithstanding the foregoing, holders shall only be entitled to request the repurchase of depositary shares representing one or more whole shares of the related
preferred shares. The repurchase price per depositary share will be equal to the repurchase price and any other amounts or property payable per share upon such redemption with respect to the preferred
shares multiplied by the fraction of a preferred share represented by one depositary share. If the depositary shares evidenced by a depositary receipt are to be repurchased in part only, one or more
new depositary receipts will be issued for any depositary shares not to be repurchased.
Withdrawal of Preferred Shares
Any holder of depositary receipts may, upon surrender of the depositary receipts at the applicable office or agency of the Depositary
(unless the related depositary shares have previously been called for redemption), receive the number of whole shares of the related class or series of preferred shares and any money or other property
represented by such depositary receipts. Holders shall only be entitled to request the withdrawal of one or more whole shares of the related preferred shares and must surrender depositary receipts
evidencing depositary shares that in turn represent such whole preferred shares. Holders of depositary receipts making such withdrawals will be entitled to receive whole preferred shares on the basis
set forth in the related prospectus supplement or free writing prospectus, but holders of such whole preferred shares will not thereafter be entitled to deposit such preferred shares under the deposit
agreement or to receive depositary receipts therefor. If
the depositary receipts surrendered by the holder in connection with such withdrawal evidence a number of depositary shares representing more than the number of whole preferred shares to be withdrawn,
the Depositary will deliver to such holder at the same time a new depositary receipt evidencing such excess number of depositary shares.
Voting Deposited Preferred Shares
Upon receipt of notice of any meeting at which the holders of any class or series of deposited preferred shares are entitled to vote,
the applicable Depositary will mail the information contained in such notice of meeting to the record holders of the depositary receipts relating to such class or series of preferred shares. Each
record holder of such depositary receipts on the record date (which will be the same date as the record date for the relevant class or series of preferred shares) will be entitled to instruct the
Depositary as to the exercise of the voting rights pertaining to the amount of the preferred shares represented by such depositary shares. The Depositary will endeavor, insofar as practicable, to vote
the number of preferred shares represented by such depositary shares in accordance with such instructions, and we will agree to take all reasonable actions that may be deemed necessary by the
Depositary in order to enable the Depositary to do so. The Depositary will abstain from voting preferred shares to the extent it does not receive specific instructions from the holders of depositary
receipts evidencing the depositary shares representing such preferred shares.
Conversion and Exchange of Preferred Shares
If the preferred shares represented by depositary shares are exchangeable at our option for other securities, then, whenever we
exercise our option to exchange all or a portion of such preferred shares held by the Depositary, the Depositary will exchange as of the same date a number of such depositary shares representing such
preferred shares so exchanged, provided we shall have issued and delivered to the Depositary the securities for which such preferred shares are to be exchanged. The exchange rate per depositary share
shall be equal to the exchange rate per preferred share multiplied by the fraction of a preferred share represented by one depositary share. If less than all of the depositary shares are to be
exchanged, the depositary shares to be exchanged will be selected by the Depositary by lot or pro rata or other equitable method, in each case as may be determined by us. If the depositary shares
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evidenced
by a depositary receipt are to be exchanged in part only, a new depositary receipt or receipts will be issued for any depositary shares not to be exchanged.
Depositary
shares, as such, are not convertible or exchangeable at the option of the holders into other securities or property. Nevertheless, if the preferred shares represented by
depositary shares are convertible into or exchangeable for other securities or property at the option of the holders, then, on the terms and subject to the conditions applicable to such preferred
shares, the related depositary receipts may be surrendered by holders thereof to the Depositary with written instructions to the Depositary to instruct us to cause conversion or exchange, as the case
may be, of the preferred shares represented by the depositary shares evidenced by such depositary receipts into such number or amount of other securities, in authorized denominations, or other
property, as the case may be, as specified in the related prospectus supplement or free writing prospectus. We, upon receipt of such instructions and any amounts payable in respect thereof, will cause
the conversion or exchange, as the case may be, and will deliver to the holders (or cause the Depositary to deliver to the holders) such number or amount of other securities, in authorized
denominations, or other property, as the case may be (and, if required by the terms of the applicable preferred shares, cash in lieu of any fractional share). Notwithstanding the foregoing, holders
shall only be entitled to request the conversion or exchange of depositary shares representing one or more whole shares of the related preferred shares. The exchange or conversion rate per depositary
share shall be equal to the exchange or conversion rate per preferred share multiplied by the fraction of a preferred share represented by one depositary share. If the depositary shares evidenced by a
depositary receipt are to be converted or exchanged in part only, a new depositary receipt or receipts will be issued for any depositary shares not to be converted or exchanged.
Amendment and Termination of Deposit Agreement
The form of depositary receipt evidencing the depositary shares and any provision of the deposit agreement may at any time be amended
by agreement between us and the Depositary. However, any amendment which materially and adversely alters the rights of the holders of the depositary receipts issued under any deposit agreement or the
related depositary shares will not be effective unless such amendment has been approved by the holders of at least a majority of such depositary shares then outstanding (or such greater proportion as
may be required by the rules of any securities exchange on which such depositary shares may be listed). In no event may any such amendment impair the right of any holder of depositary receipts,
subject to the conditions specified in the deposit agreement, to receive the related preferred shares upon surrender of such depositary receipts as described above under "Withdrawal of
Preferred Shares." Every holder of an outstanding depositary receipt at the time any such amendment becomes effective, or any transferee of such holder, shall be deemed, by continuing to hold such
depositary receipt, or by reason of the acquisition thereof, to consent and agree to such amendment and to be bound by the deposit agreement as amended thereby.
The
deposit agreement automatically terminates if:
-
-
all outstanding depositary shares issued thereunder have been redeemed or repurchased by us;
-
-
each preferred share deposited thereunder has been converted into or exchanged for other securities or other property or
has been withdrawn; or
-
-
there has been a final distribution in respect of the preferred shares deposited thereunder in connection with any
liquidation, dissolution or winding up of us and such distribution has been distributed to the holders of related depositary receipts.
Charges of Depositary
We will pay all taxes and governmental charges arising solely from the existence of the depositary arrangements. We will pay all fees
and expenses of the Depositary in connection with the initial deposit of the relevant class or series of preferred shares or arising in connection with the performance of its
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duties
under the deposit agreement. Holders of depositary receipts will pay all other transfer and other taxes and governmental charges and such other charges or expenses as are expressly provided in
the deposit agreement to be for their accounts.
Resignation and Removal of Depositary
The Depositary may resign at any time by delivering to us notice of its election to do so, and we may at any time remove the
Depositary, any such resignation or removal to take effect upon the appointment by us of a successor Depositary and its acceptance of such appointment. Such successor Depositary must be a bank, trust
company or other financial institution selected by us having an office in the United States and which has, or whose parent entity has, a combined capital and surplus (calculated on a consolidated
basis) of at least $50,000,000.
Miscellaneous
The Depositary will forward to the holders of the applicable depositary receipts all reports and communications from us which are
delivered to the Depositary and which are intended for delivery to holders of the deposited preferred shares.
Neither
the Depositary nor we will be liable if either of us is prevented or delayed by law or any circumstances beyond its control in performing its obligations under the deposit
agreement. The obligations of us and the Depositary under the deposit agreement will be limited to performance of our respective duties thereunder without gross negligence and willful misconduct and
neither of us will be obligated to prosecute or defend any legal proceeding in respect of any depositary shares, depositary receipts or preferred shares unless satisfactory indemnity is furnished. We
and any Depositary may rely upon written advice of counsel or accountants or upon information provided by holders of depositary receipts or other person believed to be competent and on documents
believed to be genuine.
DESCRIPTION OF WARRANTS
We may issue (either separately or together with other securities) warrants for the purchase of common shares, or "common share
warrants," warrants for the purchase of preferred shares, or "preferred share warrants," warrants for the purchase of depositary shares, or "depositary share warrants," and warrants for the purchase
of debt securities (including guaranteed debt securities), or "debt security warrants" and, together with the common share warrants, preferred share warrants and depositary share warrants, "warrants."
The warrants are to be issued under warrant agreements, or "warrant agreements," each to be entered into between us and a bank, trust company or other financial institution, as warrant agent, all as
described in the prospectus supplement or free writing prospectus relating to the particular issue of warrants. The form of warrant agreement, including the form of certificate representing the
applicable warrants, or "warrant certificate," that will be entered into with respect to a particular offering of warrants will be filed as an exhibit to the registration statement of which this
prospectus is a part or a document that is incorporated or deemed to be incorporated by reference in this prospectus. The following summary of some of the terms of the warrant agreements and warrants
and the summary of some of the terms of the particular warrant agreement and warrants described in the applicable prospectus supplement or free writing prospectus are not complete and are subject to,
and are qualified in their entirety by reference to, all the provisions of the particular warrant agreement and the related warrant certificate, which you may obtain as described under "Where You Can
Find More Information."
The
following description of the warrants provides certain general terms and provisions of the warrants and the related warrant agreements to which any prospectus supplement or free
writing prospectus may relate. Certain other terms of any warrants and the related warrant agreement will be described in the applicable prospectus supplement or free writing prospectus. To the extent
that any particular terms of any warrants or the related warrant agreement described in a prospectus
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supplement
or free writing prospectus differ from any of the terms described in this prospectus, then those particular terms described in this prospectus shall be deemed to have been superseded by
that prospectus supplement or free writing prospectus.
General
Reference is made to the applicable prospectus supplement or free writing prospectus for the terms of the warrants to be offered,
including (where applicable):
-
-
the title and aggregate number of the applicable warrants;
-
-
the number of common shares, preferred shares or depositary shares or the amount of debt securities, as the case may be,
that may be purchased upon exercise of each warrant;
-
-
the price, or the manner of determining the price, at which the common shares, preferred shares, depositary shares or debt
securities, as the case may be, may be purchased upon exercise of each warrant;
-
-
if other than cash, the property and manner in which the exercise price for the warrants may be paid;
-
-
any minimum or maximum number of warrants that are exercisable at any one time;
-
-
the time or times at which, or period or periods during which, the warrants may be exercised and the expiration date of
those warrants;
-
-
the terms of any mandatory or optional redemption provisions relating to the warrants;
-
-
the terms of any right we have to accelerate the exercise of the warrants upon the occurrence of certain events;
-
-
whether the warrants will be sold with any other securities, and the date, if any, on and after which those warrants and
any other securities will be separately transferable;
-
-
the identity of the warrant agent; and
-
-
any other terms of the warrants.
Exercise of Warrants
Each warrant will entitle the holder to purchase such number of common shares, preferred shares or depositary shares or such amount of
debt securities, as the case may be, at such exercise price as shall be set forth in, or shall be determinable as set forth in, the applicable prospectus supplement or free writing prospectus.
Warrants may be exercised at the times and in the manner set forth in the applicable prospectus supplement or free writing prospectus. The applicable
prospectus supplement or free writing prospectus will specify how the exercise price of any warrants is to be paid, which may include payment in cash or by surrender of other warrants issued under the
same warrant agreement (a so-called "cashless exercise"). Upon receipt of payment of the exercise price and, if required, the certificate representing the warrants being exercised properly
completed and duly executed at the office or agency of the applicable warrant agent or at any other office or agency designated for that purpose, we will promptly deliver the securities to be
delivered upon such exercise.
No Rights as Holders of Shares
Holders of common share warrants, preferred share warrants or depositary share warrants will not be entitled, by virtue of being such
holders, to vote, consent or receive notice as holders of our outstanding shares in respect of any meeting of holders of our shares for the election of our directors
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or
any other matter, or to exercise any other rights whatsoever as holders of our shares, or to receive distributions, if any, on our shares.
DESCRIPTION OF SUBSCRIPTION RIGHTS
We may issue subscription rights to purchase common shares, preferred shares, depository shares or debt securities. These subscription
rights may be issued independently or together with any other security offered hereby and may or may not be transferable by the person receiving the subscription rights in such offering. In connection
with any offering of subscription rights, we may enter into a standby arrangement with one or more underwriters or other purchasers pursuant to which the underwriters or other purchasers may be
required to purchase all or a portion of any securities remaining unsubscribed for after such offering.
The
following description of subscription rights provides certain general terms and provisions of subscription rights that we may offer. Certain other terms of any subscription rights
will be described in the applicable prospectus supplement. To the extent that any particular terms of any subscription rights described in a prospectus supplement differ from any of the terms
described in this prospectus, then those particular terms described in this prospectus shall be deemed to have been superseded by that prospectus supplement. The description in the applicable
prospectus supplement of any subscription rights we offer will not necessarily be complete and will be qualified in its entirety by reference to the applicable subscription rights certificate, which
will be filed as an exhibit to the registration statement
of which this prospectus is a part or to a document that is incorporated or deemed to be incorporated by reference in this prospectus. For more information on how you may obtain copies of any
subscription rights certificate if we offer subscription rights, see "Where You Can Find More Information." We urge you to read the applicable subscription rights certificate and any applicable
prospectus supplement in their entirety.
General
Reference is made to the applicable prospectus supplement for the terms of the subscription rights to be offered, including (where
applicable):
-
-
the price, if any, for the subscription rights;
-
-
the exercise price payable for each common share, preferred share, depositary share or debt security upon the exercise of
the subscription rights;
-
-
the number of subscription rights issued;
-
-
the number and terms of the common shares, preferred shares or depositary shares or the amount and terms of the debt
securities which may be purchased per subscription right;
-
-
the extent to which the subscription rights are transferable;
-
-
the date on which the right to exercise the subscription rights shall commence, and the date on which the subscription
rights shall expire;
-
-
the extent to which the subscription rights may include an over-subscription privilege with respect to
unsubscribed securities;
-
-
if applicable, the material terms of any standby underwriting or purchase arrangement entered into by us in connection
with the offering of subscription rights; and
-
-
any other terms of the subscription rights, including the terms, procedures and limitations relating to the exercise of
the subscription rights.
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Exercise of Subscription Rights
Each subscription right will entitle the holder to purchase such number of common shares, preferred shares or depositary shares or such
amount of debt securities, as the case may be, at such exercise price as shall be set forth in, or shall be determinable as set forth in, the applicable prospectus supplement or free writing
prospectus. Subscription rights may be exercised at the times and in the manner set forth in the applicable prospectus supplement or free writing prospectus. The applicable prospectus supplement or
free writing prospectus will specify how the exercise price of any subscription rights is to be paid. Upon receipt of payment of the exercise price and, if required, the certificate representing the
subscription rights being exercised properly completed and duly executed at the office or agency designated for that purpose, we will promptly deliver the securities to be delivered upon such
exercise.
No Rights as Holders of Shares
Holders of subscription rights to purchase common shares, preferred shares or depositary shares will not be entitled, by virtue of
being such holders, to vote, consent or receive notice as holders of our outstanding shares in respect of any meeting of holders of our shares for the election of our directors or any other matter, or
to exercise any other rights whatsoever as holders of our shares, or to receive distributions, if any, on our shares.
DESCRIPTION OF DEBT SECURITIES AND GUARANTEES
We may issue our debt securities either separately, or together with, or upon the conversion or exercise of or in exchange for, other
securities described in this prospectus. The debt securities will be our unsubordinated and, unless otherwise expressly stated in the applicable prospectus supplement, unsecured obligations and may be
issued in one or more series. The debt securities of any series may have the benefit of guarantees (each, a "Guarantee"), by one or more of our subsidiaries (each, a "Guarantor"). The Guarantees will
be the unsubordinated and, unless otherwise expressly stated in the applicable prospectus supplement, unsecured obligations of the respective Guarantors. If so indicated in the applicable prospectus
supplement, we may issue debt securities that are secured by specified collateral or that have the benefit of one or more Guarantees that are secured by specified collateral. Unless otherwise
expressly stated or the context otherwise requires, as used in this section, the term "guaranteed debt securities" means any debt securities that, as described in the prospectus supplement relating
thereto, are guaranteed by one or more of our subsidiaries pursuant to the applicable indenture (as defined below); the term "secured debt securities" means any debt securities that, as described in
the prospectus supplement relating thereto, are secured by collateral; the term "unsecured debt securities" means any debt securities that are not secured debt securities; and the term "debt
securities" includes both unsecured debt securities and secured debt securities.
The
debt securities (other than guaranteed debt securities) will be issued under one or more indentures, each to be entered into by us and a trustee, and the guaranteed debt securities
will be issued under one or more other indentures, each to be entered into by us, one or more Guarantors and a trustee. The trustee shall be Wells Fargo Bank, National Association or such other
trustee as may be named in the applicable prospectus supplement. Unless otherwise expressly stated in the applicable prospectus supplement, we may issue both secured and unsecured debt securities
under the same indenture. Unless otherwise expressly stated or the context otherwise requires, references in this section to the "indenture" and the "trustee" refer to the applicable indenture
pursuant to which any particular series of debt securities is issued and to the trustee under that indenture. The terms of any series of debt securities and, if applicable, any Guarantees of the debt
securities of such series will be those specified in or pursuant to the applicable indenture and in the certificates evidencing that series of debt securities and those made part of the indenture by
the Trust Indenture Act of 1939, as amended, or the "Trust Indenture Act of 1939."
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The
following summary of selected provisions of the indenture, the debt securities and the Guarantees is not complete, and the summary of selected terms of a particular series of debt
securities and, if applicable, the Guarantees of the debt securities of that series included in the applicable prospectus supplement also will not be complete. You should review the form of applicable
indenture, the form of any applicable supplemental indenture and the form of certificate evidencing the applicable debt securities, which forms have been or will be filed as exhibits to the
registration statement of which this prospectus is a part or as exhibits to documents which have been or will be incorporated by reference in this prospectus. To obtain a copy of the form of
indenture, the form of any such supplemental indenture or the form of certificate for any debt securities, see "Where You Can Find More Information" in this prospectus. The following summary and the
summary in the applicable prospectus supplement are qualified in their entirety by reference to all of the provisions of the applicable indenture, any supplemental indenture and the certificates
evidencing the applicable debt securities, which provisions, including defined terms, are incorporated by reference in this prospectus.
Capitalized
terms used in this section and not defined have the meanings assigned to those terms in the indenture. Unless otherwise expressly stated or the context otherwise requires,
references in this section to "KKR Financial," "we," "our company," "us" and "our" and other similar references mean KKR Financial Holdings LLC, excluding its subsidiaries.
The
following description of debt securities describes general terms and provisions of a series of debt securities and, if applicable, the Guarantees of the debt securities of that
series to which any prospectus supplement may relate. When we offer to sell a series of debt securities, we will describe the specific terms of the series and, if applicable, any Guarantees of the
debt securities of that series in the applicable prospectus supplement. If any particular terms of the debt securities or, if applicable, any Guarantees of the debt securities of that series or the
indenture described in a prospectus supplement differ from any of the terms described in this prospectus, then the terms described in the applicable prospectus supplement will supersede the terms
described in this prospectus.
General
The debt securities may be issued from time to time in one or more series. We can issue an unlimited amount of debt securities under
the indenture. The indenture provides that debt securities of any series may be issued up to the aggregate principal amount which may be authorized from time to time by us. Please read the applicable
prospectus supplement relating
to the series of debt securities being offered for specific terms including, where applicable:
-
-
the title of the series of debt securities;
-
-
any limit on the aggregate principal amount of debt securities of the series;
-
-
the price or prices at which debt securities of the series will be issued;
-
-
the person to whom any interest on a debt security of the series shall be payable, if other than the person in whose name
that debt security is registered on the applicable record date;
-
-
the date or dates on which we will pay the principal of and premium, if any, on debt securities of the series, or the
method or methods, if any, used to determine those dates;
-
-
the rate or rates, which may be fixed or variable, at which debt securities of the series will bear interest, if any, or
the method or methods, if any, used to determine those rates;
-
-
the basis used to calculate interest, if any, on the debt securities of the series if other than a 360-day
year of twelve 30-day months;
-
-
the date or dates, if any, from which interest on the debt securities of the series will begin to accrue, or the method or
methods, if any, used to determine those dates;
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-
-
the dates on which the interest, if any, on the debt securities of the series will be payable and the record dates for the
payment of interest;
-
-
the place or places where amounts due on the debt securities of the series will be payable and where the debt securities
of the series may be surrendered for registration of transfer and exchange, if other than the corporate trust office of the applicable trustee;
-
-
the terms and conditions, if any, upon which we may, at our option, redeem debt securities of the series;
-
-
the terms and conditions, if any, upon which we will repurchase or repay debt securities of the series at the option of
the holders of debt securities of the series;
-
-
the terms of any sinking fund or analogous provision;
-
-
if other than U.S. dollars, the currency in which the purchase price for the debt securities of the series will be
payable, the currency in which payments on the debt securities of the series will be payable, and the ability, if any, of us or the holders of debt securities of the series to have payments made in
any other currency or currencies;
-
-
any addition to, or modification or deletion of, any covenant or Event of Default with respect to debt securities of the
series;
-
-
whether the debt securities of the series are to be issuable, in whole or in part, in bearer form ("bearer debt
securities");
-
-
whether any debt securities of the series will be issued in temporary or permanent global form ("global debt securities")
and, if so, the identity of the depositary for the global debt securities if other than The Depository Trust Company ("DTC");
-
-
if and under what circumstances we will pay additional amounts ("Additional Amounts") on the debt securities of the series
in respect of specified taxes, assessments or other governmental charges and, if so, whether we will have the option to redeem the debt securities of the series rather than pay the Additional Amounts;
-
-
the manner in which, or the person to whom, any interest on any bearer debt security of the series will be payable, if
other than upon presentation and surrender of the coupons relating to the bearer debt security;
-
-
the extent to which, or the manner in which, any interest payable on a temporary global debt security will be paid, if
other than in the manner provided in the indenture;
-
-
the portion of the principal amount of the debt securities of the series which will be payable upon acceleration if other
than the full principal amount;
-
-
the authorized denominations in which the debt securities of the series will be issued, if other than denominations of
$1,000 and any integral multiples of $1,000, in the case of debt securities in registered form ("registered debt securities") or $5,000, in the case of bearer debt securities;
-
-
the terms, if any, upon which debt securities of the series may be convertible into or exchangeable for other securities
or property;
-
-
if the amount of payments on the debt securities of the series may be determined with reference to an index, formula or
other method or methods and the method used to determine those amounts;
-
-
whether the debt securities of the series will be guaranteed by any Guarantors and, if so, the names of the Guarantors of
the debt securities of the series and a description of the Guarantees;
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-
-
if the debt securities of the series or, if applicable, any Guarantees of those debt securities will be secured by any
collateral and, if so, a general description of the collateral and of some of the terms of any related security, pledge or other agreements;
-
-
any listing of the debt securities on any securities exchange; and
-
-
any other terms of the debt securities of the series and, if applicable, any Guarantees of the debt securities (whether or
not such other terms are consistent or inconsistent with any other terms of the indenture).
As
used in this prospectus and any prospectus supplement relating to the offering of debt securities of any series, references to the principal of and premium, if any, and interest, if
any, on the debt securities of the series include the payment of Additional Amounts, if any, required by the debt securities of the series to be paid in that context.
Debt
securities may be issued as original issue discount securities to be sold at a substantial discount below their principal amount. In the event of an acceleration of the maturity of
any original issue discount security, the amount payable to the holder upon acceleration will be determined in the manner described in the applicable prospectus supplement. Certain U.S. federal income
tax considerations applicable to original issue discount securities will be described in the applicable prospectus supplement.
If
the purchase price of any debt securities is payable in a foreign currency or if the principal of, or premium, if any, or interest, if any, on any debt securities is payable in a
foreign currency, the specific terms of those debt securities and the applicable foreign currency will be specified in the prospectus supplement relating to those debt securities.
The
terms of the debt securities of any series may differ from the terms of the debt securities of any other series, and the terms of particular debt securities within any series may
differ from each other. Unless otherwise expressly provided in the prospectus supplement relating to any series of debt securities, we may, without the consent of the holders of the debt securities of
any series, reopen an existing series of debt securities and issue additional debt securities of that series.
Unless
otherwise described in a prospectus supplement relating to any series of debt securities and except to the limited extent set forth below under "Merger, Consolidation
and Transfer of Assets," the indenture does not contain any provisions that would limit our ability or the ability of any of our subsidiaries to incur indebtedness or other liabilities or that would
afford holders of debt securities protection in the event of a business combination, takeover, recapitalization or highly leveraged or similar transaction involving us. Accordingly, we and our
subsidiaries may in the future enter into transactions that could increase the amount of our consolidated indebtedness and other liabilities or otherwise adversely affect our capital structure or
credit rating without the consent of the holders of the debt securities of any series.
Registration, Transfer and Payment
Unless otherwise indicated in the applicable prospectus supplement, each series of debt securities will be issued in registered form
only, without coupons. The indenture,
however, provides that we may also issue a series of debt securities in bearer form only, or in both registered and bearer form.
Unless
otherwise indicated in the applicable prospectus supplement, registered debt securities will be issued in denominations of $1,000 or any integral multiples of $1,000, and bearer
debt securities will be issued in denominations of $5,000.
Unless
otherwise indicated in the applicable prospectus supplement, the debt securities will be payable and may be surrendered for registration of transfer or exchange and, if
applicable, for conversion into or exchange for other securities or property, at an office or agency maintained by us in
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the
United States of America. However, we, at our option, may make payments of interest on any registered debt security by check mailed to the address of the person entitled to receive that payment or
by wire transfer to an account maintained by the payee with a bank located in the United States of America. Unless otherwise indicated in the applicable prospectus supplement, no service charge shall
be made for any registration of transfer or exchange, redemption or repayment of debt securities, or for any conversion or exchange of debt securities for other securities or property, but we may
require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with that transaction.
Unless
otherwise indicated in the applicable prospectus supplement, payment of principal, premium, if any, and interest, if any, on bearer debt securities will be made, subject to any
applicable laws and regulations, at an office or agency outside the United States. Unless otherwise indicated in the applicable prospectus supplement, payment of interest due on bearer debt securities
on any interest payment date will be made only against surrender of the coupon relating to that interest payment date. Unless otherwise indicated in the applicable prospectus supplement, no payment of
principal, premium, if any, or interest, if any, with respect to any bearer debt security will be made at any office or agency in the United States or by check mailed to any address in the United
States or by wire transfer to an account maintained with a bank located in the United States. However, if any bearer debt securities are payable in U.S. dollars, payments on those bearer securities
may be made at the corporate trust office of the relevant trustee or at any office or agency designated by us in the United States of America if, but only if, payment of the full amount due on the
bearer debt securities for principal, premium, if any, or interest, if any, at all offices outside of the United States maintained for that purpose by us is illegal or effectively precluded by
exchange controls or similar restrictions.
Unless
otherwise indicated in the applicable prospectus supplement, we will not be required to:
-
-
issue, register the transfer of or exchange debt securities of any series during a period beginning at the opening of
business 15 days before any selection of debt securities of that series of like tenor and terms to be redeemed and ending at the close of business on the day of that selection;
-
-
register the transfer of or exchange any registered debt security, or portion of any registered debt security, selected
for redemption, except the unredeemed portion of any registered debt security being redeemed in part;
-
-
exchange any bearer debt security selected for redemption, except to exchange a bearer debt security for a registered debt
security of that series of like tenor and terms that is simultaneously surrendered for redemption; or
-
-
issue, register the transfer of or exchange a debt security which has been surrendered for repayment at the option of the
holder, except the portion, if any, of the debt security not to be repaid.
Ranking of Debt Securities
The unsecured debt securities of each series will be our unsecured unsubordinated obligations and will rank on a parity in right of
payment with all of our other unsecured and unsubordinated indebtedness. The secured debt securities of each series will be our unsubordinated obligations and will rank on a parity in right of payment
with all of our other unsecured and unsubordinated indebtedness, except that the secured debt securities of any series will effectively rank senior to our unsecured and unsubordinated indebtedness in
respect of claims against the collateral that is pledged to secure those secured debt securities.
The
debt securities will be our obligations exclusively. We are a holding company and substantially all of our consolidated assets are held and substantially all of our consolidated
revenues are generated by our subsidiaries. Accordingly, our cash flow and our ability to service our debt, including the debt
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securities,
depend on the results of operations of our subsidiaries and upon the ability of our subsidiaries to provide cash to us, whether in the form of dividends, loans or otherwise, to pay amounts
due on our obligations, including the debt securities. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to make payments on the debt
securities (except, in the case of any subsidiary that has guaranteed any debt securities, its obligations under its Guarantee of those debt securities for so long as that Guarantee remains in effect)
or to make any funds available to us. Certain debt and security agreements entered into by certain of our subsidiaries contain various restrictions, including restrictions on payments and loans by our
subsidiaries to us and the transfer by our subsidiaries of assets pledged as collateral. In addition, dividends, loans or other distributions from our subsidiaries to us may be subject to additional
contractual and other restrictions, are dependent upon the results of operations of our subsidiaries and are subject to other business considerations.
The
unsecured debt securities will be effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the collateral securing that
indebtedness. Consequently, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding with respect to us, the holders of our secured indebtedness will be entitled to
proceed directly against the collateral that secures that secured indebtedness and such collateral will not be available for satisfaction of any amounts owed by us under our unsecured indebtedness,
including the unsecured debt securities, until that secured indebtedness is satisfied in full. Unless otherwise provided in the applicable prospectus supplement, the indenture will not limit our
ability to incur secured indebtedness.
The
unsecured debt securities (other than any unsecured debt securities that have been guaranteed by any of our subsidiaries for so long as the Guarantees of those debt securities remain
in effect) will be effectively subordinated to all existing and future liabilities and preferred equity of our subsidiaries. These liabilities may include indebtedness, trade payables, other
guarantees, lease obligations, swaps and letter of credit obligations. Therefore, our rights and the rights of our creditors, including the holders of unsecured debt securities, to participate in the
assets of any subsidiary upon that subsidiary's bankruptcy, liquidation, dissolution, reorganization or similar circumstances will be subject (except in the case of any subsidiary that has guaranteed
any unsecured debt securities for so long as its Guarantee of those debt securities remains in effect) to the prior claims of the subsidiary's creditors, except to the extent that we may ourselves be
a creditor with recognized claims against the subsidiary. However, even if we are a creditor of one or more of our subsidiaries, our claims would still be effectively subordinate to any security
interest in, or mortgages or other liens on, the assets of the subsidiary and would be subordinate to any indebtedness of the subsidiary senior to that held by us. Unless otherwise provided in the
applicable prospectus supplement, the indenture will not limit the ability of any of our subsidiaries to incur additional secured or unsecured indebtedness, guarantees or other liabilities.
Guarantees
The debt securities of any series may be guaranteed by one or more of the following subsidiaries: KKR Financial Holdings, Inc.,
a Delaware corporation, KKR Financial Holdings II, LLC, a Delaware limited liability company, KKR Financial Holdings III, LLC, a Delaware limited liability company, and KKR Financial
Holdings IV, LLC, a Delaware limited liability company. However, the indenture governing the guaranteed debt securities will not require that any of the foregoing subsidiaries be a Guarantor of
any series of guaranteed debt securities and will permit us to appoint other Guarantors for any series of guaranteed debt securities in addition to or instead of any of the foregoing subsidiaries. As
a result, the Guarantors of any series of guaranteed debt securities may differ from the Guarantors of any other series of guaranteed debt securities. In the event we issue a series of
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guaranteed
debt securities, the specific Guarantors of the debt securities of that series will be identified in the applicable prospectus supplement.
If
we issue a series of guaranteed debt securities, a description of some of the terms of Guarantees of those debt securities will be set forth in the applicable prospectus supplement.
Unless otherwise provided in the prospectus supplement relating to a series of guaranteed debt securities, each Guarantor of the debt securities of such series will unconditionally guarantee the due
and punctual payment of the principal of, and premium, if any, and interest, if any, on and any other amounts payable with respect to, each debt security of such series and the due and punctual
performance of all of our other obligations under the indenture with respect to the debt securities of such series, all in accordance with the terms of such debt securities and the indenture.
Notwithstanding
the foregoing, unless otherwise provided in the prospectus supplement relating to a series of guaranteed debt securities, the applicable indenture will contain provisions
to the effect that the obligations of each Guarantor under its Guarantees and such indenture shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed
liabilities of such Guarantor, result in the obligations of such Guarantor under such Guarantees and such indenture not constituting a fraudulent conveyance or fraudulent transfer under applicable
law. However, there can be no assurance that, notwithstanding such limitation, a court would not determine that a Guarantee constituted a fraudulent conveyance or fraudulent transfer under applicable
law. If that were to occur, the court could void the applicable Guarantor's obligations under that Guarantee, subordinate that Guarantee to other debt and other liabilities of that Guarantor or take
other action detrimental to holders of the debt securities of the applicable series, including directing the holders to return any payments received from the applicable Guarantor.
The
applicable prospectus supplement relating to any series of guaranteed debt securities will specify other terms of the applicable Guarantees, which may include provisions that allow a
Guarantor to be
released from its obligations under its Guarantee under specified circumstances or that provide for one or more Guarantees to be secured by specified collateral.
Unless
otherwise expressly stated in the applicable prospectus supplement, each Guarantee will be the unsubordinated and unsecured obligation of the applicable Guarantor and will rank on
a parity in right of payment with all other unsecured and unsubordinated indebtedness and guarantees of such Guarantor. Each Guarantee (other than a secured Guarantee) will be effectively subordinated
to all existing and future secured indebtedness and secured guarantees of the applicable Guarantor to the extent of the value of the collateral securing that indebtedness and those guarantees.
Consequently, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding with respect to any Guarantor that has provided an unsecured Guarantee of any debt
securities, the holders of that Guarantor's secured indebtedness and secured guarantees will be entitled to proceed directly against the collateral that secures that secured indebtedness or those
secured guarantees, as the case may be, and such collateral will not be available for satisfaction of any amount owed by such Guarantor under its unsecured indebtedness and unsecured guarantees,
including its unsecured Guarantees of any debt securities, until that secured debt and those secured guarantees are satisfied in full. Unless otherwise provided in the applicable prospectus
supplement, the indenture will not limit the ability of any Guarantor to incur secured indebtedness or issue secured guarantees.
Unless
otherwise expressly stated in the applicable prospectus supplement, each secured Guarantee will be an unsubordinated obligation of the applicable Guarantor and will rank on a
parity in right of payment with all other unsecured and unsubordinated indebtedness and guarantees of such Guarantor, except that such secured Guarantee will effectively rank senior to such
Guarantor's unsecured and unsubordinated indebtedness and guarantees in respect of claims against the collateral securing that secured Guarantee.
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Book-entry Debt Securities
The debt securities of a series may be issued in whole or in part in the form of one or more global debt securities. Global debt
securities will be deposited with, or on behalf of, a depositary which, unless otherwise specified in the applicable prospectus supplement relating to the series, will be DTC. Global debt securities
may be issued in either registered or bearer form and in either temporary or permanent form. Unless and until it is exchanged in whole or in part for individual certificates evidencing debt
securities, a global debt security may not be transferred except as a whole by the depositary to its nominee or by the nominee to the depositary, or by the depositary or its nominee to a successor
depositary or to a nominee of the successor depositary.
We
anticipate that global debt securities will be deposited with, or on behalf of, DTC and that global debt securities will be registered in the name of DTC's nominee,
Cede & Co. All interests in global debt securities deposited with, or on behalf of, DTC will be subject to the operations and procedures of DTC and, in the case of any interests in
global debt securities held through Euroclear Bank S.A./N.V. ("Euroclear") or Clearstream Banking, société anonyme ("Clearstream, Luxembourg"), the operations and
procedures of Euroclear or Clearstream, Luxembourg, as the case may be. We also anticipate that the following provisions will apply to the depository arrangements with respect to global debt
securities. Additional or differing terms of the depository arrangements may be described in the applicable prospectus supplement.
DTC
has advised us that it is:
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a limited-purpose trust company organized under the New York Banking Law;
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a "banking organization" within the meaning of the New York Banking Law;
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a member of the Federal Reserve System;
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a "clearing corporation" within the meaning of the New York Uniform Commercial Code; and
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a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934.
DTC
holds securities that its participants deposit with DTC. DTC also facilitates the settlement among its participants of securities transactions, including transfers and pledges, in
deposited securities through electronic computerized book-entry changes in participants' accounts, which eliminates the need for physical movement of securities certificates. Direct
participants include securities brokers and dealers, banks, trust companies, clearing corporations and other organizations. Access to the DTC system is also available to others, sometimes referred to
in this prospectus as indirect participants, that
clear transactions through or maintain a custodial relationship with a direct participant either directly or indirectly. Indirect participants include securities brokers and dealers, banks and trust
companies. The rules applicable to DTC and its participants are on file with the Securities and Exchange Commission.
Purchases
of debt securities within the DTC system must be made by or through direct participants, which will receive a credit for the debt securities on DTC's records. The ownership
interest of the actual purchaser or beneficial owner of a debt security is, in turn, recorded on the direct and indirect participants' records. Beneficial owners will not receive written confirmation
from DTC of their purchases, but beneficial owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the
direct or indirect participants through which they purchased the debt securities. Transfers of ownership interests in debt securities are to be accomplished by entries made on the books of
participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in the debt securities, except under the limited
circumstances described below.
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To
facilitate subsequent transfers, all debt securities deposited by participants with DTC will be registered in the name of DTC's nominee, Cede & Co. The deposit of debt
securities with DTC and their registration in the name of Cede & Co. will not change the beneficial ownership of the debt securities. DTC has no knowledge of the actual beneficial owners
of the debt securities. DTC's records reflect only the identity of the direct participants to whose accounts the debt securities are credited. Those participants may or may not be the beneficial
owners. The participants are responsible for keeping account of their holdings on behalf of their customers.
Conveyance
of notices and other communications by DTC to direct participants, by direct participants to indirect participants and by direct and indirect participants to beneficial owners
will be governed by arrangements among them, subject to any legal requirements in effect from time to time.
Redemption
notices shall be sent to DTC or its nominee. If less than all of the debt securities of a series are being redeemed, DTC will reduce the amount of the interest of each direct
participant in the debt securities under its procedures.
In
any case where a vote may be required with respect to the debt securities of any series, neither DTC nor Cede & Co. will give consents for or vote the global debt
securities. Under its usual procedures, DTC will mail an omnibus proxy to us after the record date. The omnibus proxy assigns the consenting or voting rights of Cede & Co. to those
direct participants to whose accounts the debt securities are credited on the record date identified in a listing attached to the omnibus proxy.
Principal
and premium, if any, and interest, if any, on the global debt securities will be paid to Cede & Co., as nominee of DTC. DTC's practice is to credit direct
participants' accounts on the relevant payment date unless DTC has reason to believe that it will not receive payments on the payment date. Payments by direct and indirect participants to beneficial
owners will be governed by standing instructions and customary practices, as is the case with securities held for the account of customers in bearer form or registered in "street name." Those payments
will be the responsibility of DTC's direct and indirect participants and not of DTC, us, any trustee or any underwriters or agents involved in the offering or sale of any debt securities. Payment of
principal, premium, if any, and interest, if any, to DTC is our responsibility, disbursement of payments to direct participants is the responsibility of DTC, and disbursement of payments to the
beneficial owners is the responsibility of direct and indirect participants.
Except
under the limited circumstances described below, beneficial owners of interests in a global debt security will not be entitled to have debt securities registered in their names
and will not receive physical delivery of debt securities. Accordingly, each beneficial owner must rely on the procedures of DTC to exercise any rights under the debt securities and the indenture.
The
laws of some jurisdictions may require that some purchasers of securities take physical delivery of securities in definitive form. These laws may impair the ability to transfer or
pledge beneficial interests in global debt securities.
DTC
is under no obligation to provide its services as depositary for the debt securities of any series and may discontinue providing its services at any time. Neither we nor any trustee
nor any underwriters or agents involved in the offering or sale of any debt securities will have any responsibility for the performance by DTC or its participants or indirect participants under the
rules and procedures governing DTC. As noted above, beneficial owners of interests in global debt securities generally will not receive certificates representing their ownership interests in the debt
securities. However, if
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DTC notifies us that it is unwilling or unable to continue as a depositary for the global debt securities of any series or
if DTC ceases to be a clearing agency registered under the Securities Exchange Act of 1934 (if so required by applicable law or regulation) and a successor depositary for the debt securities of such
series is not appointed within 90 days of the notification to us or of our becoming aware of DTC's ceasing to be so registered, as the case may be,
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we determine, in our sole discretion, not to have the debt securities of any series represented by one or more global debt
securities, or
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an Event of Default under the indenture has occurred and is continuing with respect to the debt securities of any series,
we
will prepare and deliver certificates for the debt securities of that series in exchange for beneficial interests in the global debt securities of that series. Any beneficial interest in a global
debt security that is exchangeable under the circumstances described in the preceding sentence will be exchangeable for debt securities in definitive certificated form registered in the names and in
the authorized denominations that the depositary shall direct. It is expected that these directions will be based upon directions received by the depositary from its participants with respect to
ownership of beneficial interests in the global debt securities.
Clearstream,
Luxembourg and Euroclear hold interests on behalf of their participating organizations through customers' securities accounts in Clearstream, Luxembourg's and Euroclear's
names on the books of their respective depositaries, which hold those interests in customers' securities accounts in the depositaries' names on the books of DTC. At the present time, Citibank, N.A.
acts as U.S. depositary for Clearstream, Luxembourg and JPMorgan Chase Bank, N.A. acts as U.S. depositary for Euroclear (the "U.S. Depositaries").
Clearstream,
Luxembourg holds securities for its participating organizations ("Clearstream Participants") and facilitates the clearance and settlement of securities transactions between
Clearstream Participants through electronic book-entry changes in accounts of Clearstream Participants, thereby eliminating the need for physical movement of certificates. Clearstream,
Luxembourg provides to Clearstream Participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and
borrowing.
Clearstream,
Luxembourg is registered as a bank in Luxembourg, and as such is subject to regulation by the Commission de Surveillance du Secteur Financier and the Banque Centrale du
Luxembourg, which supervise and oversee the activities of Luxembourg banks. Clearstream Participants are financial institutions including underwriters, securities brokers and dealers, banks, trust
companies and clearing corporations, and may include any underwriters or agents involved in the offering or sale of any debt securities or their respective affiliates. Indirect access to Clearstream,
Luxembourg is available to other institutions that clear through or maintain a custodial relationship with a Clearstream Participant. Clearstream, Luxembourg has established an electronic bridge with
Euroclear as the operator of the Euroclear System (the "Euroclear Operator") in Brussels to facilitate settlement of trades between Clearstream, Luxembourg and the Euroclear Operator.
Distributions
with respect to global debt securities held beneficially through Clearstream, Luxembourg will be credited to cash accounts of Clearstream Participants in accordance with
its rules and procedures, to the extent received by the U.S. Depositary for Clearstream, Luxembourg.
Euroclear
holds securities and book-entry interests in securities for participating organizations ("Euroclear Participants") and facilitates the clearance and settlement of
securities transactions between Euroclear Participants, and between Euroclear Participants and participants of certain other securities intermediaries through electronic book-entry changes
in accounts of such participants or other securities intermediaries. Euroclear provides Euroclear Participants, among other things, with safekeeping, administration, clearance and settlement,
securities lending and borrowing, and related services. Euroclear Participants are investment banks, securities brokers and dealers, banks, central banks, supranationals, custodians, investment
managers, corporations, trust companies and certain other organizations, and may include any underwriters or agents involved in the offering or sale of any debt securities or their respective
affiliates. Non-participants in Euroclear may hold and transfer beneficial interests in a global debt security through accounts with a participant in the Euroclear System or any
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other
securities intermediary that holds a book-entry interest in a global debt security through one or more securities intermediaries standing between such other securities intermediary
and Euroclear.
Securities
clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of
the Euroclear System, and applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear Participants, and has no record of or relationship with
persons holding through Euroclear Participants.
Distributions
on interests in global debt securities held beneficially through Euroclear will be credited to the cash accounts of Euroclear Participants in accordance with the Terms and
Conditions, to the extent received by the U.S. Depositary for Euroclear.
Transfers
between Euroclear Participants and Clearstream Participants will be effected in the ordinary way in accordance with their respective rules and operating procedures.
Cross-market
transfers between direct participants in DTC, on the one hand, and Euroclear Participants or Clearstream Participants, on the other hand, will be effected through DTC in
accordance with DTC's rules on behalf of Euroclear or Clearstream, Luxembourg, as the case may be, by its U.S. Depositary; however, such cross-market transactions will require delivery of instructions
to Euroclear or Clearstream, Luxembourg, as the case may be, by the counterparty in such system in accordance with the applicable rules and procedures and within the established deadlines (European
time) of such system. Euroclear or Clearstream, Luxembourg, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its U.S. Depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in global debt securities in DTC, and making or receiving payment in accordance with normal procedures for
same-day fund settlement applicable to DTC. Euroclear Participants and Clearstream Participants may not deliver instructions directly to their respective U.S. Depositaries.
Due
to time zone differences, the securities accounts of a Euroclear Participant or Clearstream Participant purchasing an interest in a global debt security from a direct participant in
DTC will be credited, and any such crediting will be reported to the relevant Euroclear Participant or Clearstream Participant, during the securities settlement processing day (which must be a
business day for Euroclear or Clearstream, Luxembourg) immediately following the settlement date of DTC. Cash received in Euroclear or Clearstream, Luxembourg as a result of sales of interests in a
global debt security by or through a Euroclear Participant or Clearstream Participant to a direct participant in DTC will be received with value on the settlement date of DTC but will be available in
the relevant Euroclear or Clearstream, Luxembourg cash account only as of the business day for Euroclear or Clearstream, Luxembourg following DTC's settlement date.
Euroclear
and Clearstream, Luxembourg are under no obligation to perform or to continue to perform the foregoing procedures and such procedures may be discontinued at any time without
notice. Neither we nor any trustee nor any underwriters or agents involved in the offering or sale of any debt securities will have any responsibility for the performance by Euroclear or Clearstream,
Luxembourg or their respective participants of their respective obligations under the rules and procedures governing their operations.
The
information in this section concerning DTC, Euroclear and Clearstream, Luxembourg and their book-entry systems has been obtained from sources that we believe to be
reliable, but we take no responsibility for the accuracy of that information.
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Redemption and Repurchase
The debt securities of any series may be redeemable at our option or may be subject to mandatory redemption by us as required by a
sinking fund or otherwise. In addition, the debt securities of any series may be subject to repurchase or repayment by us at the option of the holders. The applicable prospectus supplement will
describe the terms, the times and the prices regarding any optional or mandatory redemption by us or any repurchase or repayment at the option of the holders of any series of debt securities.
Conversion and Exchange
The terms, if any, on which debt securities of any series are convertible into or exchangeable for our common shares or any other
securities or property will be set forth in the applicable prospectus supplement. Such terms may include provisions for conversion or exchange, either mandatory, at the option of the holders or at our
option. Unless otherwise expressly stated in the applicable prospectus supplement or the context otherwise requires, references in this prospectus and
any prospectus supplement to the conversion or exchange of debt securities of any series for other securities or property shall be deemed not to refer to or include any exchange of any debt securities
of a series for other debt securities of the same series.
Secured Debt Securities
The debt securities of any series and the Guarantees, if any, of the debt securities of any series may be secured by collateral. The
applicable prospectus supplement will describe any such collateral and the terms of such secured debt securities.
Merger, Consolidation and Transfer of Assets
The indenture provides that we will not, in any transaction or series of related transactions, consolidate with, or sell, lease or
convey all or substantially all of our property and assets to, or merge with or into, any person unless:
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either (1) we shall be the continuing person (in the case of a merger) or (2) the successor person (if other
than us) formed by or resulting from the consolidation or merger or which shall have received the transfer of assets shall be an entity organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia and shall expressly assume the due and punctual payment of the principal of, premium, if any, and interest, if any, on all the debt securities
outstanding under the indenture and the due and punctual performance and observance of all covenants and conditions in such outstanding debt securities and the indenture to be performed or satisfied
by us (including, without limitation, the obligation to convert or exchange any debt securities that are convertible into or exchangeable for other securities or property in accordance with the
provisions of such debt securities and the indenture) by a supplemental indenture reasonably satisfactory in form to the trustee;
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immediately after giving effect to the transaction described above, no Event of Default under the indenture, and no event
which, after notice or lapse of time or both would become an Event of Default under the indenture, shall have occurred and be continuing; and
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the trustee shall have received the officers' certificate and opinion of counsel called for by the indenture.
In
the case of any such consolidation, sale, lease, conveyance or merger in which we are not the continuing entity and upon execution and delivery by the successor person of the
supplemental indenture described above, such successor person shall succeed to, and be substituted for, us and may exercise every right and power of ours under the indenture with the same effect as if
such successor
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person
had been named as us therein, and we shall be automatically released and discharged from all obligations and covenants under the indenture and the debt securities issued under that indenture.
Events of Default
Unless otherwise specified in the applicable prospectus supplement, an Event of Default with respect to the debt securities of any
series is defined in the indenture as being:
(1) default
in payment of any interest, if any, on, or any Additional Amounts, if any, payable in respect of any interest, if any, on, any of the debt securities of that
series when due, and continuance of such default for a period of 30 days;
(2) default
in payment of any principal of or premium, if any, on, or any Additional Amounts, if any, payable in respect of any principal of or premium, if any, on, any of
the debt securities of that series when due (whether at maturity, upon redemption, upon repayment or repurchase at the option of the holder or otherwise and whether payable in cash or in our common
shares or other securities or property);
(3) default
in the deposit of any sinking fund payment or payment under any analogous provision when due with respect to any of the debt securities of that series;
(4) default
in the delivery when due of any securities, cash or other property (including, without limitation, any of our common shares) when required to be delivered upon
conversion of any convertible debt security of that series or upon the exchange of any debt security of that series which is
exchangeable for our common shares or other securities or property (other than an exchange of debt securities of that series for other debt securities of the same series);
(5) default
in the performance, or breach, of any other covenant or warranty applicable to us or, if the debt securities of that series are guaranteed debt securities, any
Guarantor of the debt securities of that series, as the case may be, in the indenture or in any debt security of that series or, if the debt securities of that series are guaranteed debt securities,
in any Guarantee of the debt securities of that series, other than a covenant or warranty included in the indenture solely for the benefit of a series of debt securities other than that series, and
continuance of that default or breach (without that default or breach having been cured or waived in accordance with the indenture) for a period of 60 days after notice to us and, if the debt
securities of that series are guaranteed debt securities, the Guarantors of such debt securities by the trustee or the holders of not less than 25% in aggregate principal amount of the debt securities
of that series then outstanding;
(6) default
after the expiration of any applicable grace period in the payment of principal when due, or resulting in acceleration of, other indebtedness (other than
Non-recourse Debt) of us or any Significant Subsidiary of ours for borrowed money where the aggregate principal amount with respect to which the default or acceleration has occurred
exceeds $60.0 million and such indebtedness has not been discharged, or such default in payment or acceleration has not been cured or rescinded, prior to written notice of acceleration of the
debt securities of that series;
(7) failure
by us or any of our Subsidiaries to pay final judgments entered by a court or courts of competent jurisdiction aggregating in excess of $60.0 million,
which judgments are not paid, discharged or stayed for a period of 30 calendar days after such judgments become final and non-appealable;
(8) if
the debt securities of that series are guaranteed debt securities, the Guarantee of the debt securities of that series by any Guarantor shall for any reason cease to
be, or shall for any reason be asserted in writing by such Guarantor or us not to be, in full force and effect and
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enforceable
in accordance with its terms, except to the extent contemplated or permitted by the indenture or the terms of the debt securities of that series;
(9) specified
events of bankruptcy, insolvency or reorganization with respect to us or any Significant Subsidiary of ours; or
(10) any
other Event of Default established for the debt securities of that series.
No
Event of Default with respect to any particular series of debt securities necessarily constitutes an Event of Default with respect to any other series of debt securities. The
indenture provides that, within 90 days after the occurrence of any default with respect to the debt securities of any series, the trustee will mail to all holders of the debt securities of
that series notice of that default if known to the trustee, unless that default has been cured or waived. However, the indenture provides that the trustee may withhold notice of a default with respect
to the debt securities of that series, except a default in payment of principal, premium, if any, interest, if any, Additional Amounts, if any, or sinking fund payments, if any, if the trustee
considers it in the best interest of the holders to do so. As used in this paragraph, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of
Default with respect to the debt securities of any series.
The
indenture provides that if an Event of Default (other than an Event of Default specified in clause (9) of the second preceding paragraph with respect to us) occurs and is
continuing with respect to any series of debt securities, either the trustee or the holders of at least 25% in principal amount of the debt securities of that series then outstanding may declare the
principal of, or if debt securities of that series are original issue discount securities, such lesser amount as may be specified in the terms of that series of debt securities, and accrued and unpaid
interest, if any, on all the debt securities of that series to be due and payable immediately. The indenture also provides that if an Event of Default specified in clause (9) of the second
preceding paragraph with respect to us occurs with respect to any series of debt securities, then the principal of, or if debt securities of that series are original issue discount securities, such
lesser amount as may be specified in the terms of that series of debt securities, and accrued and unpaid interest, if any, on all the debt securities of that series will automatically become and be
immediately due and payable without any declaration or other action on the part of the trustee or any holder of the debt securities of that series. However, upon specified conditions, the holders of a
majority in principal amount of the debt securities of a series then outstanding may rescind and annul an acceleration of the debt securities of that series and its consequences. For purposes of
clarity, references to an Event of Default specified in clause (9) of the second preceding paragraph with respect to us shall not include any Event of Default specified in clause (9) of
the second preceding paragraph with respect to any Significant Subsidiary of ours.
Subject
to the provisions of the Trust Indenture Act of 1939 requiring the trustee, during the continuance of an Event of Default under the indenture, to act with the requisite standard
of care, the trustee is under no obligation to exercise any of its rights or powers under the indenture at the request or direction of any of the holders of debt securities of any series unless those
holders have offered the trustee indemnity reasonably satisfactory to the trustee against the costs, fees and expenses and liabilities which might be incurred in compliance with such request or
direction. Subject to the foregoing, holders of a majority in principal amount of the outstanding debt securities of any series issued under the indenture have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the trustee under the indenture with respect to that series. The indenture requires the annual filing by us with the trustee of a
certificate which states whether or not we are in default under the terms of the indenture.
No
holder of any debt securities of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to the indenture, or for the appointment of a
receiver or trustee, or for any other remedy under the indenture, unless
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such holder has previously given written notice to the trustee of a continuing Event of Default with respect to the debt
securities of such series;
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the holders of not less than 25% in aggregate principal amount of the outstanding debt securities of such series shall
have made written request to the trustee to institute proceedings in respect of such Event of Default in its own name as trustee under the indenture;
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such holder or holders have offered to the trustee indemnity reasonably satisfactory to the trustee against the costs,
fees and expenses and liabilities which might be incurred in compliance with such request;
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the trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute
any such proceeding; and
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no direction inconsistent with such written request has been given to the trustee during such 60 day period by the
holders of a majority in principal amount of the outstanding debt securities of such series.
Notwithstanding
any other provision of the indenture, the holder of a debt security will have the right, which is absolute and unconditional, to receive payment of the principal of and
premium, if any, and interest, if any, on that debt security on the respective due dates for those payments and, in the case of any debt security which is convertible into or exchangeable for other
securities or property, to convert or exchange, as the case may be, that debt security in accordance with its terms, and to institute suit for the enforcement of those payments and any right to effect
such conversion or exchange, and this right shall not be impaired without the consent of the holder.
Modification, Waivers and Meetings
The indenture permits us, any Guarantors party to such indenture and the trustee, with the consent of the holders of a majority in
principal amount of the outstanding debt securities of each series issued under the indenture and affected by a modification or amendment, to modify or amend any of the provisions of the indenture or
of the debt securities of the applicable series or the rights of the holders of the debt securities of that series under the indenture. However, no such modification or amendment shall, among other
things:
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change the stated maturity of the principal of, or premium, if any, or any installment of interest, if any, on or any
Additional Amounts, if any, with respect to any debt securities issued under the indenture;
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reduce the principal of or any premium on any debt securities or reduce the rate of interest on any debt securities or
reduce the price payable upon the redemption of any debt security, whether such redemption is mandatory or at our option, or upon the repurchase of any debt security at the option of the holder, or
reduce any Additional Amounts with respect to any debt securities, or change our obligation to pay Additional Amounts;
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reduce the amount of principal of any original issue discount securities that would be due and payable upon an
acceleration of the maturity thereof;
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adversely affect any right of repayment or repurchase of any debt securities at the option of any holder;
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change any place where or the currency in which debt securities are payable;
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impair the holder's right to institute suit to enforce the payment of any debt securities on or after their stated
maturity or, in the case of any debt security which is convertible into or exchangeable for other securities or property, to institute suit to enforce the right to convert or exchange that debt
security in accordance with its terms;
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make any change that adversely affects the right, if any, to convert or exchange any debt securities for other securities
or property;
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reduce the percentage of debt securities of any series issued under the indenture whose holders must consent to any
modification or amendment or any waiver of compliance with specific provisions of such indenture or specified defaults under the indenture and their consequences;
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if the indenture relates to guaranteed debt securities, release any Guarantor from any of its obligations under any of its
Guarantees or the indenture, except in accordance with the terms of the indenture; or
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reduce the requirements for a quorum or voting at a meeting of holders of the applicable debt securities,
without
in each case obtaining the consent of the holder of each outstanding debt security issued under such indenture affected by the modification or amendment.
The
indenture also contains provisions permitting us, any Guarantors party to such indenture and the trustee, without the consent of the holders of any debt securities issued under the
indenture, to modify or amend the indenture, among other things:
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to evidence the succession of another person to us or, if applicable, any Guarantor under the indenture and the assumption
by that successor of our covenants or the covenants of such Guarantor, as the case may be, contained in the indenture and in the debt securities or, if applicable, the Guarantees issued under the
indenture, as the case may be;
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to add to our covenants or, if applicable, the covenants of any Guarantor for the benefit of the holders of all or any
series of debt securities issued under the indenture or to surrender any right or power conferred upon us or, if applicable, any Guarantor in the indenture with respect to all or any series of debt
securities issued under the indenture;
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to add to or change any provisions of the indenture to facilitate the issuance of bearer securities;
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to establish the form or terms of debt securities of any series and any related coupons and, if applicable, any Guarantees
of those debt securities, including, without limitation, conversion and exchange provisions applicable to debt securities which are convertible into or exchangeable for other securities or property
and to establish, if applicable, the Guarantors of the debt securities of such series and the terms of the Guarantees of such debt securities, and to establish any provisions with respect to any
security or other collateral for such debt securities or, if applicable, Guarantees, and to make any deletions from or additions or changes to the indenture in connection with any of the matters
referred to in this bullet point so long as those deletions, additions and changes are not applicable to any other series of debt securities then outstanding;
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-
to evidence and provide for the acceptance of the appointment of a successor trustee in respect of the debt securities of
one or more series;
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-
to cure any ambiguity or correct or supplement any provision in such indenture which may be defective or inconsistent with
other provisions in the indenture, or to make any other provisions with respect to matters or questions arising under the indenture which shall not adversely affect the interests of the holders of the
debt securities of any series then outstanding in any material respect;
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to add any additional Events of Default with respect to all or any series of debt securities;
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to supplement any of the provisions of the indenture to permit or facilitate defeasance, covenant defeasance and/or
satisfaction and discharge of any series of debt securities, provided that such
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The
holders of a majority in aggregate principal amount of the outstanding debt securities of any series may waive our compliance with the provisions described above under
"Merger, Consolidation and Transfer of Assets" and certain other provisions of the indenture and, if specified in the prospectus supplement relating to such series of debt securities, any
additional covenants applicable to the debt securities of such series. The holders of a majority in aggregate principal amount of the outstanding debt securities of any series may, on behalf of all
holders of debt securities of that series, waive any past default under the indenture with respect to debt securities of that series and its consequences, except a default in the payment of the
principal of, or premium, if any, or interest, if any, on debt securities of that series or, in the case of any debt securities which are convertible into or exchangeable for other securities or
property, a default in any such conversion or exchange, or a default in respect of a covenant or provision which cannot be modified or amended without the consent of the holder of each outstanding
debt security of the affected series.
The
indenture contains provisions for convening meetings of the holders of a series of debt securities if (and only if) debt securities of such series are issued or issuable, in whole or
in part, in the form of bearer debt securities. A meeting may be called at any time by the trustee, and also upon our request or the request of holders of at least 33
1
/
3
% in principal
amount of the outstanding debt securities of a series. Notice of a meeting must be given in accordance with the provisions of the
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indenture.
Except for any consent which must be given by the holder of each outstanding debt security affected in the manner described above, any resolution presented at a meeting or adjourned meeting
duly reconvened at which a quorum, as described below, is present may be adopted by the affirmative vote of the holders of a majority in principal amount of the outstanding debt securities of that
series. However, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which the indenture provides may be made, given or taken by the
holders of a specified percentage, which is less or more than a majority, in principal amount of the outstanding debt securities of a series may be adopted at a meeting or adjourned meeting duly
reconvened at which a quorum is present by the affirmative vote of the holders of that specified percentage in principal amount of the outstanding debt securities of that series. Any resolution passed
or decision taken at any
meeting of holders of debt securities of any series duly held in accordance with the indenture will be binding on all holders of debt securities of that series and the related coupons, if any. The
quorum at any meeting called to adopt a resolution, and at any reconvened meeting, will be persons entitled to vote a majority in principal amount of the outstanding debt securities of a series, or,
if any action is to be taken at a meeting with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which the indenture provides may be given by holders of
a greater percentage in principal amount of outstanding debt securities of a series, the persons entitled to vote at such greater percentage in principal amount of the outstanding debt securities of
such series.
Discharge, Defeasance and Covenant Defeasance
Unless otherwise provided in the applicable prospectus supplement, upon our direction, the indenture shall cease to be of further
effect with respect to any series of debt securities issued under the indenture specified by us, subject to the survival of specified provisions of the indenture (including the obligation to pay
Additional Amounts to the extent described below and the obligation, if applicable, to exchange or convert debt securities of that series into other securities or property in accordance with their
terms) when:
(A) all
outstanding debt securities of that series and, in the case of bearer securities, all related coupons, have been delivered to the trustee for cancellation, subject
to exceptions, or
(B) all
debt securities of that series and, if applicable, any related coupons have become due and payable or will become due and payable at their stated maturity within one
year or are to be called for redemption within one year and we have deposited with the trustee, in trust, funds in U.S. dollars or in the foreign currency in which the debt securities of that series
are payable in an amount sufficient to pay the entire indebtedness on the debt securities of that series in respect of principal, premium, if any, and interest, if any (and, to the extent that
(x) the debt securities of that series provide for the payment of Additional Amounts upon the occurrence of specified events of taxation, assessment or governmental charge with respect to
payments on the debt securities and (y) the amount of any Additional Amounts which are or will be payable is at the time of deposit reasonably determinable by us, in the exercise of our sole
and absolute discretion, those Additional Amounts) to the date of such deposit, if the debt securities of that series have become due and payable, or to the maturity or redemption date of the debt
securities of that series, as the case may be;
-
-
we have paid all other sums payable under the indenture with respect to the debt securities of that series; and
-
-
the trustee has received an officers' certificate and an opinion of counsel called for by the indenture.
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At
such time as we shall have satisfied the conditions set forth in the immediately preceding paragraph with respect to any series of guaranteed debt securities, each Guarantor of the
debt securities of that series shall (except as provided in the next succeeding sentence and subject to other limited exceptions) be automatically and unconditionally released and discharged from all
of its obligations under its Guarantee of the debt securities of that series and all of its other obligations under indenture in respect of the debt securities of that series, without any action by
us, any Guarantor or the trustee and without the consent of the holders of any debt securities. If the debt securities of any series provide for the payment of Additional Amounts, we will remain
obligated, following the deposit described above, to pay, and any Guarantees of the debt securities of that series will continue to guarantee (on the terms and subject to the conditions set forth in
the applicable indenture, subject to any other terms of the indenture providing for the release and discharge of a Guarantor from its obligations under its Guarantees of such debt securities and under
the indenture in respect of such debt securities) the payment of, Additional Amounts with respect to those debt securities to the extent (and only to the extent) that they exceed the amount deposited
in respect of those Additional Amounts as described above.
Unless
otherwise provided in the applicable prospectus supplement, we may elect with respect to any series of debt securities either:
-
-
to defease and be discharged from all of our obligations with respect to that series of debt securities ("defeasance"),
except for:
(1) the
obligation to pay Additional Amounts, if any, upon the occurrence of specified events of taxation, assessment or governmental charge with respect to payments on that
series of debt securities to the extent (and only to the extent) that those Additional Amounts exceed the amount deposited in respect of those Additional Amounts as provided below,
(2) the
obligation, if applicable, to exchange or convert debt securities of that series into other securities or property in accordance with their terms, and
(3) certain
other limited obligations.
-
-
to be released from our obligations with respect to the debt securities of such series under such covenants as may be
specified in the applicable prospectus supplement, and any omission to comply with those obligations shall not constitute a default or an Event of Default with respect to that series of debt
securities ("covenant defeasance"),
in
either case upon the irrevocable deposit with the trustee, or other qualifying trustee, in trust for that purpose, of an amount in U.S. dollars or in the foreign currency in which those debt
securities are payable at stated maturity or, if applicable, upon redemption, and/or Government Obligations which through the payment of principal and interest in accordance with their terms will
provide money, in an amount sufficient to pay the principal of and any premium and any interest on (and, to the extent that (x) the debt securities of that series provide for the payment of
Additional Amounts and (y) the amount of the Additional Amounts which are or will be payable is at the time of deposit reasonably determinable by us, in the exercise of our sole and absolute
discretion, the Additional Amounts with respect to) that series of debt securities, and any mandatory sinking fund or analogous payments on that series of debt securities, on the due dates for those
payments.
Upon
the effectiveness of defeasance with respect to any series of guaranteed debt securities, each Guarantor of the debt securities of such series shall (except as provided in the next
succeeding sentence and subject to other limited exceptions) be automatically and unconditionally released and discharged from all of its obligations under its Guarantee of the debt securities of such
series and all of its other obligations under indenture in respect of the debt securities of that series, without any action by us, any Guarantor or the trustee and without the consent of the holders
of any debt securities. If we effect defeasance with respect to the debt securities of any series and those debt securities provide for
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the
payment of Additional Amounts, we will remain obligated, following the effectiveness of such defeasance, to pay, and any Guarantees of the debt securities of that series will continue to guarantee
(on the terms and subject to the conditions set forth in the indenture, subject to any other terms of the indenture providing for the release and discharge of a Guarantor from its obligations under
its Guarantees of such debt securities and under the indenture in respect of such debt securities) the payment of, Additional Amounts with respect to those debt securities to the extent (and only to
the extent) that they exceed the amount deposited in respect of those Additional Amount as described above.
The
defeasance or covenant defeasance described above shall only be effective if, among other things:
-
-
it shall not result in a breach or violation of, or constitute a default under, the indenture;
-
-
in the case of defeasance, we shall have delivered to the trustee an opinion of independent counsel reasonably acceptable
to the trustee confirming that (A) we have received from or there has been published by the Internal Revenue Service a ruling or (B) since the date of the indenture there has been a
change in applicable U.S. federal income tax law, in either case to the effect that, and based on this ruling or change the opinion of counsel shall confirm that, the holders of the debt securities of
the applicable series will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the defeasance and will be subject to U.S. federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if the defeasance had not occurred;
-
-
in the case of covenant defeasance, we shall have delivered to the trustee an opinion of independent counsel reasonably
acceptable to the trustee to the effect that the holders of the debt securities of the applicable series will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the
covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if the covenant defeasance had not
occurred;
-
-
if the cash and Government Obligations deposited are sufficient to pay the outstanding debt securities of that series
provided those debt securities are redeemed on a particular redemption date, we shall have given the trustee irrevocable instructions to redeem those debt securities on that date; and
-
-
no Event of Default or event which with notice or lapse of time or both would become an Event of Default with respect to
debt securities of that series shall have occurred and be continuing on the date of the deposit into trust; and, solely in the case of defeasance, no Event of Default arising from specified events of
bankruptcy, insolvency or reorganization with respect to us or event which with notice or lapse of time or both would become such an Event of Default with respect to us shall have occurred and be
continuing during the period through and including the 91st day after the date of the deposit into trust.
The
applicable prospectus supplement may further describe the provisions, if any, permitting or restricting satisfaction and discharge, defeasance or covenant defeasance with respect to
the debt securities of a particular series.
Definitions
As used in the indenture, the following terms have the meanings specified below:
The
term "Corporation" includes corporations, partnerships, associations, limited liability companies and other companies and business trusts. The term "corporation" means a corporation
and
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does
not include partnerships, associations, limited liability companies or other companies or business trusts.
"Non-recourse
Debt" means any indebtedness the terms of which provide that the claim for repayment of such indebtedness by the holder thereof is limited solely to a claim
against the property or assets (including, without limitation, securities or interests in securities) that secure such indebtedness; provided, however, that any obligations or liabilities of the
debtor or obligor or any other person solely for indemnities, covenants or breaches of warranties, representations or covenants or similar matters in respect of any indebtedness will not prevent such
indebtedness from constituting Non-recourse Debt.
"Person"
or "person" means any individual, Corporation, joint venture, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision
thereof.
"Significant
Subsidiary" means, as of any date of determination, a Subsidiary of ours that would constitute a "significant subsidiary" as such term is defined under
Rule 1-02(w) of Regulation S-X of the Securities and Exchange Commission as in effect on the date of the indenture.
"Subsidiary"
means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of capital
stock or other equity interests
entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of such Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or managing general partner of which is
such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof).
Governing Law
The indenture (including any Guarantees) and the debt securities will be governed by, and construed in accordance with, the laws of the
State of New York.
Regarding the Trustees
The Trust Indenture Act of 1939 limits the rights of a trustee, if the trustee becomes a creditor of us, to obtain payment of claims or
to realize on property received by it in respect of those claims, as security or otherwise. Any trustee is permitted to engage in other transactions with us and our subsidiaries from time to time.
However, if a trustee acquires any conflicting interest it must eliminate the conflict upon the occurrence of an Event of Default under the applicable indenture or resign as trustee.
Wells
Fargo Bank, National Association may act as trustee under one or more of the indentures. Wells Fargo Bank, National Association provides commercial banking services to us in the
ordinary course of business.
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DESCRIPTION OF SHARE PURCHASE CONTRACTS
AND SHARE PURCHASE UNITS
We may offer share purchase contracts and share purchase units either separately or together with other securities offered hereby. The
applicable prospectus supplement or free writing prospectus will describe the specific terms of any share purchase contracts or share purchase units and, if applicable, any prepaid securities (as
defined below). The form of share purchase contract and, if applicable, the form of any related pledge or depositary agreement relating to any particular offering of share purchase contracts or share
purchase units will be filed as an exhibit to the registration statement of which this prospectus is a part or a document that is incorporated or deemed to be incorporated by reference in this
prospectus. The foregoing summary of some of the terms of the share purchase contracts and share purchase units and the summary of some of the terms of the particular share purchase contracts and
share purchase units and, if applicable, any related pledge or depositary agreements described in the applicable prospectus supplement or free writing prospectus are not complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of the particular share purchase contracts or share purchase units, as the case may be, and any related pledge or depositary
agreement, which you may obtain as described under "Where You Can Find More Information."
The
following description of the share purchase contracts and share purchase units provides certain general terms and provisions of the share purchase contracts and share purchase units
to which any prospectus supplement or free writing prospectus may relate. Certain other terms of any share purchase contracts or share purchase units, as the case may be, and, if applicable, any
related pledge or depositary agreement will be described in the applicable prospectus supplement or free writing prospectus. To the extent that any particular terms of any share purchase contracts or
share purchase warrants or, if applicable, any related pledge or depositary agreement described in a prospectus supplement or free writing prospectus differ from any of the terms described in this
prospectus, then those particular terms described in this prospectus shall be deemed to have been superseded by that prospectus supplement or free writing prospectus.
We
may issue share purchase contracts, including contracts obligating or entitling holders to purchase from us, and us to sell to holders, a specified number of our common shares at a
future date or dates. The consideration per common share and the number of common shares may be fixed at the time the share purchase contracts are issued or may be determined by reference to a
specific formula in the share purchase contracts and may be subject to adjustment under anti-dilution or other formulas or provisions. We may issue the share purchase contracts separately
or as a part of share purchase units consisting of a share purchase contract and our preferred shares, our depositary shares, our debt securities, debt obligations of third parties (including U.S.
Treasury securities), any other security described in the applicable prospectus supplement or free writing prospectus, or any combination of the foregoing, which may secure the holders' obligations to
purchase the common shares under the share purchase contracts. The share purchase contracts may require us to make periodic payments to the holders of the share purchase contracts or share purchase
units, as the case may be, or vice versa. These payments may be unsecured or prefunded on some basis. The share purchase contracts may require holders to secure their obligations in a specified
manner, and in certain circumstances, we may deliver newly issued prepaid share purchase contracts, which are referred to as "prepaid securities," upon release to a holder of any collateral securing
such holders' obligations under the original share purchase contract. Each share purchase contract and any related pledge or depositary agreement will be governed by, and construed in accordance with,
the laws of the State of New York.
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PLAN OF DISTRIBUTION
We may sell the securities offered by this prospectus:
-
-
through underwriters or dealers;
-
-
through agents; or
-
-
directly to purchasers.
The
securities may be sold in one or more transactions at a fixed price or prices, which may be changed, or at market prices prevailing at the time of sale, at prices relating to prevailing market
prices or at negotiated prices.
We
will describe in a prospectus supplement or a free writing prospectus the particular terms of the offering of the securities, including the following:
-
-
the method of distribution of the securities offered thereby;
-
-
the names of any underwriters or agents;
-
-
the proceeds we will receive from the sale;
-
-
any discounts and other items constituting underwriters' or agents' compensation;
-
-
any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers; and
-
-
any securities exchanges on which the applicable securities may be listed.
The
securities may be offered to the public through underwriting syndicates represented by managing underwriters or by underwriters without a syndicate, and may also be offered through
standby underwriting or purchase arrangements entered into by us. We may also sell securities through agents or dealers designated by us. We also may sell securities directly, in which case no
underwriters or agents would be involved.
Underwriters,
dealers and agents that participate in the distribution of the securities may be underwriters as defined in the Securities Act, and any discounts or commissions received by
them from us and any profit on the resale of the securities by them may be treated as underwriting discounts and commissions under the Securities Act.
We
and, in the case of offerings of guaranteed debt securities, the applicable Guarantors may have agreements with the underwriters, dealers and agents involved in the offering of the
securities to indemnify them against certain liabilities, including liabilities under the Securities Act, or to contribute with respect to payments which the underwriters, dealers or agents may be
required to make.
Underwriters,
dealers and agents involved in the offering of the securities may engage in transactions with, or perform services for, us or our subsidiaries or other affiliates
(including, without limitation, any Guarantors) in the ordinary course of their businesses.
In
order to facilitate the offering of the securities, any underwriters or agents, as the case may be, involved in the offering of such securities may engage in transactions that
stabilize, maintain or otherwise affect the market price of such securities or other securities that may be issued upon conversion, exchange or exercise of such securities or the prices of which may
be used to determine payments on such securities. Specifically, the underwriters or agents, as the case may be, may overallot in connection with the offering, creating a short position in such
securities for their own account. In addition, to cover overallotments or to stabilize the price of the securities or of such other securities, the underwriters or agents, as the case may be, may bid
for, and purchase, such securities in the open market. Finally, in any offering of securities through a syndicate of underwriters, the underwriting
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syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for distributing such securities in the offering if the syndicate repurchases previously distributed securities in
transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may
stabilize or maintain the market price of the securities above independent market levels. The underwriters or agents, as the case may be, are not required to engage in these activities and, if they
engage in any of these activities, may end any of these activities at any time without notice.
Some
or all of the securities may be new issues of securities with no established trading market. We cannot give any assurances as to the liquidity of the trading market for any of our
securities.
LEGAL MATTERS
Certain federal income tax matters in connection with the securities have been passed on for us by Hunton & Williams LLP.
Richards, Layton & Finger, P.A. have passed upon the validity of the common shares and the preferred shares. Andrew J. Sossen, Esq., our General Counsel and Secretary, has passed upon the
validity of the deposit agreements relating to depository shares, warrants, subscription rights, debt securities, guarantees, share purchase contracts and share purchase units offered hereby under the
laws of the State of New York. Andrew J. Sossen, Esq., owns 35,000 of our common shares. Sidley Austin LLP has provided certain legal services to us in connection with this prospectus. Paul C.
Pringle and Eric S. Haueter, both partners of Sidley Austin LLP, beneficially own approximately 12,286 and 2,313 of our common shares, respectively.
EXPERTS
The consolidated financial statements incorporated in this prospectus by reference from our Annual Report on
Form 10-K and the effectiveness of our internal control over financial reporting have been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their reports (which report on the consolidated financial statements expresses an unqualified opinion and includes an explanatory paragraph relating to our adoption of
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
, and Statement of Financial Accounting Standards No. 159,
The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
, effective
January 1, 2007), which are incorporated herein by reference. Such financial statements have been so incorporated in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 under the Securities Act, of which this prospectus
is a part, with respect to the securities to be sold pursuant to this prospectus. This prospectus does not contain all of the information set forth in the registration statement and exhibits to the
registration statement. For further information with respect to us and the securities to be sold pursuant to this prospectus, reference is made to the registration statement, including the exhibits to
the registration statement. Statements contained in this prospectus and in the documents incorporated and deemed to be incorporated by reference herein or in any prospectus supplement or free writing
prospectus as to the contents of any contract or other document do not purport to be complete and, where that contract or document is an exhibit to the registration statement or an exhibit to a
document incorporated or deemed to be incorporated by reference in the registration statement, each statement is qualified in all respects by reference to the exhibit to which the reference relates.
Copies of the registration statement, including the exhibits to the registration statement, and other documents we file with the SEC may be examined without charge at the public reference room of the
SEC, 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the public reference room may be obtained by calling the SEC at
1-800-SEC-0300. Copies of the registration statement, including the exhibits, and the other documents we file with the SEC can be obtained from
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the
public reference room of the SEC upon payment of prescribed fees. Our SEC filings, including our registration statement, are also available to you for free on the SEC's website at
http://www.sec.gov
.
You may also inspect information that we file with the NYSE at the offices of the NYSE at 20 Broad Street, New York, New York 10005.
We are subject to the information and reporting requirements of the Exchange Act, and file periodic reports, proxy statements and other information with the SEC.
INCORPORATION BY REFERENCE
We "incorporate by reference" certain documents we have filed with the SEC into this prospectus, which means that we can disclose
important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and any information contained in this prospectus or
in any document incorporated or deemed to be incorporated by reference in this prospectus will be deemed to have been modified or superseded to the extent that a statement contained in this
prospectus, or in any other document we subsequently file with the SEC that also is incorporated or deemed to be incorporated by reference in this prospectus, or in any prospectus supplement or free
writing prospectus we may provide to you in connection with an offering of securities pursuant to this prospectus, modifies or supersedes the original statement. Any statement so modified or
superseded will not be deemed, except as so modified
or superseded, to be a part of this prospectus. We incorporate by reference the document listed below that we have filed with the SEC and any future filings made by us with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act between the date of this prospectus and the termination of the offering of securities described in this prospectus; provided, however,
that we are not incorporating by reference any documents, portions of documents, exhibits or other information that is deemed to have been "furnished" to and not "filed" with the
SEC:
-
-
Annual Report on Form 10-K for the year ended December 31, 2008.
You
may request a copy of the filings referred to above at no cost by writing or telephoning us at the following address:
KKR
Financial Holdings LLC
555 California Street, 50th Floor
San Francisco, California 94104
Attention: Investor Relations
(415) 315-3620
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25,000,000 Shares
KKR Financial Holdings LLC
Common Shares
PROSPECTUS SUPPLEMENT
Joint Book-Runners
BofA Merrill Lynch
Citi
Deutsche Bank Securities
KKR
Morgan Stanley
Co-Managers
FBR Capital Markets
JMP Securities
Keefe, Bruyette & Woods
Sandler O'Neill + Partners, L.P.
May , 2010
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