Jan 10 - Fitch Ratings expects to rate KKR Financial Holdings LLC's (KFN) cumulative perpetual preferred stock issuance 'BB+'. The preferred issuance will be callable after a period of five years and will be structurally subordinate to subordinated debt. Proceeds are expected to be used for general corporate purposes, including payments made in connection with the repurchase, redemption, or conversion of its outstanding senior indebtedness. Fitch expects to assign the issuance 50% equity credit. At Sept. 30, 2012, KFN's holding company recourse leverage was 0.45x, in-line with Fitch's expectations. With this preferred issuance, leverage will increase modestly, but is expected to remain well below management's articulated ceiling of 1.0x. RATING DRIVERS AND SENSITIVITIES The Stable Outlook reflects Fitch's expectation that KFN will continue to report stable asset quality and relatively consistent core operating performance over the intermediate term, while maintaining low leverage and solid liquidity, even with potential declines in the fair value of portfolio investments given volatility in the capital markets. The Outlook also incorporates the expectation that KKR's willingness and ability to support KFN, as needed, will remain unchanged. Positive rating momentum could result from declines in leverage, improved funding flexibility, and stronger liquidity. Conversely, holding-company leverage above 1.0x, deterioration in asset quality, weaker core earnings performance, outsized portfolio losses, declines in liquidity, and/or a change in Fitch's view of the relationship between KFN and KKR could yield negative rating actions. KFN is a specialty finance company that invests in financial assets, including below investment-grade corporate debt, natural resources, real estate, marketable equity securities, and private equity, with the goal of generating both current income and capital appreciation. The company completed its initial public offering in 2005 and trades on the NYSE under the ticker KFN. KFN is externally managed and advised by KKR Financial Advisors LLC (KFA), a wholly owned subsidiary of KKR Asset Management LLC (KAM), which is a wholly owned subsidiary of KKR & Co. L.P. KFA receives a monthly base management fee equal to 1/12 of KFN equity, as defined by its management agreement, multiplied by 1.75%, in addition to a quarterly incentive fee, if return hurdles are met. Fitch expects to assign the following rating: KKR Financial Holdings LLC -- Preferred Stock at 'BB+'. Existing ratings for KFN are as follows: KKR Financial Holdings LLC -- Long-term Issuer Default Rating (IDR) at 'BBB'; -- Unsecured debt rating at 'BBB'. The Rating Outlook is Stable.