Fitch Expects to Rate KKR & Co. L.P.'s Preferred Issuance 'BBB+'

NEW YORK--()--Fitch Ratings expects to rate KKR & Co. L.P.'s (KKR) Series B perpetual preferred securities 'BBB+'.

The preferred securities are expected to be subordinated to existing unsecured debt, rank equally with existing preferred securities, but be senior to common units. Distributions, when and if declared by the board of directors, will be payable quarterly. Distributions on the preferred units are non-cumulative. Unless distributions have been declared on the preferred units, KKR may not declare or pay distributions on its common units. The preferred units are perpetual in nature, but may be redeemed, at KKR's option, five years after issuance. Proceeds from the issuance are expected to be used for general corporate purposes, including to fund acquisitions and investments.

KEY RATING DRIVERS

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The instrument is expected to be rated two notches lower than KKR's Long-Term Issuer Default Rating (IDR) in accordance with Fitch's 'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (November 2014). The preferred stock rating includes two notches for loss severity, reflecting its subordination and heightened risk of non-performance relative to other obligations, namely existing unsecured debt.

Fitch expects to afford the issuance 100% equity credit given the non-cumulative nature of the dividends, the fact that the preferred securities are perpetual, and the existence of a coupon step-up of up to 500 basis points in the event of a change of control.

The preferred instrument will not benefit from joint and several guarantees from the KKR Group Partnerships, given the registration requirements. However, KKR will contribute the proceeds from the issuance to the KKR Group Partnerships, which will each issue to KKR a new series of preferred units with economic terms designed to mirror those of the preferred issuance. This will include an inability to declare distributions on common units unless distributions have been declared and paid on the preferred units. These terms help to provide a credit benefit to offset the lack of a guarantee by structurally prioritizing the preferred units above all common units.

RATING SENSITIVITIES

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The preferred unit rating is sensitive to changes in KKR's long-term IDR and would move in tandem with any changes to the IDR. For more information on KKR's rating sensitivities, please see the press release 'Fitch Affirms KKR at 'A' and KKR Financial Holdings at 'A-'; Outlook Stable' dated Nov. 5, 2015.

Fitch has assigned the following expected ratings:

KKR & Co. LP

--Preferred Units at 'BBB+(EXP)'.

Existing ratings for KKR are as follows:

KKR & Co. L.P.

--Long-term IDR 'A';

--Preferred Units 'BBB+'.

KKR Management Holdings L.P.

--Long-term IDR 'A'.

KKR Fund Holdings L.P.

--Long-term IDR 'A'.

KKR International Holdings L.P.

--Long-term IDR 'A'.

KKR Group Finance Co. LLC

KKR Group Finance Co. II LLC

KKR Group Finance Co. III LLC

--Long-term IDR 'A';

--Unsecured debt 'A'.

KKR Financial Holdings LLC

--Long-term IDR 'A-';

--Unsecured debt 'A-';

--Preferred shares 'BBB'.

The Rating Outlook is Stable.

Date of Relevant Committee: March 4, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005960

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Nathan Flanders
Managing Director
+1-212-908-0827
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Nathan Flanders
Managing Director
+1-212-908-0827
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com