Cramer, KKR, Cooperman and Converts

Chidem Kurdas

Last Friday Jim Cramer recommended KKR Financial Holdings, the publicly-traded credit vehicle from private equity giant Kohlberg Kravis Roberts. The investment idea came with a couple of warnings.

One, it is speculative. They borrow money to buy debt, Mr. Cramer said. They buy primarily below-investment-grade debt as well as distressed or stressed paper.

Two, the main reason Mr. Cramer says he went for KKR Financial is insider buying—-by KKR chief executive William Sonneborn and notably by Leon Cooperman, long-time equity investor and head of Omega Advisors. Surely a good sign.

Mr. Cooperman is a substantial shareholder. The striking thing, though, is something Cramer did not mention. Besides owning the stock, Cooperman has been buying KKR convertible notes. He invested in both KKR stock and bonds in large part for himself, a family foundation and some philanthropies—not the Omega hedge funds.

The notes give him the option to convert to stock in 2012.  Were he to hold only converts, he might have short sold the stock–a common strategy, with the bonds acting as a hedge. But that’s not the way it looks at present, as he has a cache of shares.

A couple of weeks ago KKR Financial announced that it decided not to proceed with a public offering because of unfavorable market conditions.  But it negotiated a four-year $250-million asset-based credit facility with a group of banks, including Citibank, Bank of America, Deutsche Bank and Morgan Stanley.

Between that credit and the sale of convertible notes, KKR has enough purchasing power to go on buying debt and presumably pay good dividends. The share is fluctuating around $7.80, down from almost $30 at its peak in 2007. That’s part of Cramer’s argument and perhaps Cooperman’s as well—the dividend is high and the price low, so the yield is strong.

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One Response to “Cramer, KKR, Cooperman and Converts”

  1. Cooperman Boosts KKR Position « HedgeFundSmarts Says:

    […] In May Jim Cramer recommended KKR Financial as a speculative buy, in part on the basis of insider buying by…. […]

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