KKR Financial Holdings LLC - FORM 10-Q

Attached files

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EX-32 - EXHIBIT 32 - KKR Financial Holdings LLC	kfn-2017630xex32.htm
EX-31.2 - EXHIBIT 31.2 - KKR Financial Holdings LLC	kfn-2017630xex312.htm
EX-31.1 - EXHIBIT 31.1 - KKR Financial Holdings LLC	kfn-2017630xex311.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-33437

KKR FINANCIAL HOLDINGS LLC

(Exact name of registrant as specified in its charter)



Delaware	11-3801844
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

555 California Street, 50th Floor San Francisco, CA	94104
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (415) 315-3620

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o	Accelerated filer o

Non-accelerated filer x (Do not check if a smaller reporting company)	Smaller reporting company o

Emerging growth company o

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý No

The number of shares of the registrant’s common shares outstanding as of August 3, 2017 was 100.

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TABLE OF CONTENTS



		Page
Part I.
FINANCIAL INFORMATION
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	74
Item 4.	Controls and Procedures	74

Part II.
OTHER INFORMATION
Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosure	75
Item 5.	Other Information	75
Item 6.	Exhibits	75

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except share information)



	June 30, 2017			December 31, 2016
Assets
Cash and cash equivalents	$	432,680		$	627,237
Restricted cash and cash equivalents	310,598			512,312
Securities, at estimated fair value	263,055			229,206
Corporate loans, at estimated fair value	3,635,589			3,305,264
Equity investments, at estimated fair value	444,373			168,658
Oil and gas properties, net	107,702			110,934
Interests in joint ventures and partnerships, at estimated fair value	1,009,737			793,996
Derivative assets	23,876			46,447
Interest and principal receivable	19,888			10,937
Receivable for investments sold	17,416			35,522
Other assets	11,447			10,544
Total assets	$	6,276,361		$	5,851,057
Liabilities
Collateralized loan obligation secured notes, at estimated fair value	$	2,916,680		$	3,087,941
Collateralized loan obligation junior secured notes to affiliates, at estimated fair value	88,415			89,607
Collateralized loan obligation warehouse facility	240,000			20,000
Senior notes	367,728			123,008
Junior subordinated notes	235,330			250,154
Payable for investments purchased	356,871			315,773
Accounts payable, accrued expenses and other liabilities	30,426			43,297
Accrued interest payable	29,484			14,577
Related party payable	7,494			5,810
Derivative liabilities	33,277			32,705
Total liabilities	4,305,705			3,982,872
Equity
Preferred shares, no par value, 50,000,000 shares authorized and 14,950,000 issued and outstanding as of both June 30, 2017 and December 31, 2016	—			—
Common shares, no par value, 500,000,000 shares authorized and 100 shares issued and outstanding as of both June 30, 2017 and December 31, 2016	—			—
Paid-in-capital	2,764,061			2,764,061
Accumulated deficit	(864,081		)	(967,452		)
Total KKR Financial Holdings LLC and Subsidiaries shareholders’ equity	1,899,980			1,796,609
Noncontrolling interests	70,676			71,576
Total equity	1,970,656			1,868,185
Total liabilities and equity	$	6,276,361		$	5,851,057

See notes to condensed consolidated financial statements.

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KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands)



	For the three months ended June 30, 2017			For the three months ended June 30, 2016			For the six months ended June 30, 2017		For the six months ended June 30, 2016
Revenues
Loan interest income	$	42,420		$	57,526		$	81,596	$	124,434
Securities interest income	1,977			6,892			4,560		11,956
Oil and gas revenue	4,256			3,257			7,966		5,898
Other	8,969			1,487			10,633		16,179
Total revenues	57,622			69,162			104,755		158,467
Investment costs and expenses
Interest expense	35,479			54,389			66,496		105,307
Interest expense to affiliates	5,460			1,009			10,113		1,009
Oil and gas production costs	284			240			531		455
Oil and gas depreciation, depletion and amortization	1,734			1,258			3,232		2,324
Other	665			1,157			1,529		1,956
Total investment costs and expenses	43,622			58,053			81,901		111,051
Other income (loss)
Net realized and unrealized gain (loss) on investments	(13,662		)	30,511			103,244		(107,521		)
Net realized and unrealized gain (loss) on derivatives and foreign exchange	16,749			(3,180		)	22,460		(13,396		)
Net realized and unrealized gain (loss) on debt	15,258			(802		)	30,474		(63,975		)
Net realized and unrealized gain (loss) on debt to affiliates	3,805			(2,984		)	1,192		(2,984		)
Net gain (loss) on extinguishment of debt	7,868			—			10,283		—
Other income (loss)	2,906			1,401			6,772		2,940
Total other income (loss)	32,924			24,946			174,425		(184,936		)
Other expenses
Related party management compensation	8,706			6,767			16,264		14,043
General, administrative and directors' expenses	4,706			1,415			6,373		17,191
Professional services	1,051			1,010			2,213		2,022
Total other expenses	14,463			9,192			24,850		33,256
Income (loss) before income taxes	32,461			26,863			172,429		(170,776		)
Income tax expense (benefit)	144			(187		)	597		(127		)
Net income (loss)	$	32,317		$	27,050		$	171,832	$	(170,649	)
Net income (loss) attributable to noncontrolling interests	(259		)	(1,281		)	1,716		(16,816		)
Net income (loss) attributable to KKR Financial Holdings LLC and Subsidiaries	32,576			28,331			170,116		(153,833		)
Preferred share distributions	6,891			6,891			13,782		13,782
Net income (loss) available to common shares	$	25,685		$	21,440		$	156,334	$	(167,615	)

See notes to condensed consolidated financial statements.

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KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)



	For the three months ended June 30, 2017		For the three months ended June 30, 2016		For the six months ended June 30, 2017		For the six months ended June 30, 2016
Net income (loss)	$	32,317	$	27,050	$	171,832	$	(170,649	)
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale	—		—		—		—
Unrealized gains (losses) on cash flow hedges	—		—		—		—
Total other comprehensive income (loss)	—		—		—		—
Comprehensive income (loss)	$	32,317	$	27,050	$	171,832	$	(170,649	)
Less: Comprehensive income (loss) attributable to noncontrolling interests	—		—		—		—
Comprehensive income (loss) attributable to KKR Financial Holdings LLC and Subsidiaries	$	32,317	$	27,050	$	171,832	$	(170,649	)

See notes to condensed consolidated financial statements.

KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

(Amounts in thousands, except share information)



	KKR Financial Holdings LLC and Subsidiaries
	Preferred Shares			Common Shares			Accumulated Deficit			Noncontrolling Interests			Total Equity
	Shares	Paid-In Capital		Shares	Paid-In Capital		Accumulated Deficit			Noncontrolling Interests			Total Equity
Balance at January 1, 2016	14,950,000	$	378,983	100	$	2,385,078	$	(895,950	)	$	82,879		$	1,950,990
Capital contributions	—	—		—	—		—			5,049			5,049
Capital distributions	—	—		—	—		—			(6,849		)	(6,849		)
Net income (loss)	—	—		—	—		(153,833		)	(16,816		)	(170,649		)
Distributions declared on preferred shares	—	—		—	—		(13,782		)	—			(13,782		)
Distributions to Parent	—	—		—	—		(194,851		)	—			(194,851		)
Balance at June 30, 2016	14,950,000	$	378,983	100	$	2,385,078	$	(1,258,416	)	$	64,263		$	1,569,908



	KKR Financial Holdings LLC and Subsidiaries
	Preferred Shares			Common Shares			Accumulated Deficit			Noncontrolling Interests			Total Equity
	Shares	Paid-In Capital		Shares	Paid-In Capital		Accumulated Deficit			Noncontrolling Interests			Total Equity
Balance at January 1, 2017	14,950,000	$	378,983	100	$	2,385,078	$	(967,452	)	$	71,576		$	1,868,185
Effect from de-consolidation of subsidiaries	—	—		—	—		(500		)	—			(500		)
Capital contributions	—	—		—	—		—			2,482			2,482
Capital distributions	—	—		—	—		—			(5,098		)	(5,098		)
Net income (loss)	—	—		—	—		170,116			1,716			171,832
Distributions declared on preferred shares	—	—		—	—		(13,782		)	—			(13,782		)
Distributions to Parent	—	—		—	—		(487,147		)	—			(487,147		)
Contributions from Parent	—	—		—	—		434,684			—			434,684
Balance at June 30, 2017	14,950,000	$	378,983	100	$	2,385,078	$	(864,081	)	$	70,676		$	1,970,656

See notes to condensed consolidated financial statements.

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KKR Financial Holdings LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)



	For the six months ended June 30, 2017			For the six months ended June 30, 2016
Cash flows from operating activities
Net income (loss)	$	171,832		$	(170,649	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net realized and unrealized (gain) loss on derivatives and foreign exchange	(22,460		)	13,396
Net (gain) loss on extinguishment of debt	(10,283		)	—
Unrealized (depreciation) appreciation on investments allocable to noncontrolling interests	(1,716		)	(16,816		)
Net realized and unrealized (gain) loss on investments	(101,528		)	124,337
Depreciation and net amortization	4,295			26,483
Net realized and unrealized (gain) loss on debt	(30,474		)	63,975
Net realized and unrealized (gain) loss on debt to affiliates	(1,192		)	2,984
Changes in assets and liabilities:
Interest receivable	4,097			6,397
Other assets	(4,750		)	(9,599		)
Related party payable	1,684			(1,697		)
Accounts payable, accrued expenses and other liabilities	(14,651		)	(15,117		)
Accrued interest payable	15,000			1,313
Net cash provided by (used in) operating activities	9,854			25,007
Cash flows from investing activities
Principal payments from corporate loans	716,978			767,143
Principal payments from securities	29,563			25,034
Proceeds from sales of corporate loans	274,085			915,725
Proceeds from sales of securities	21,424			115,464
Proceeds from equity and other investments	67,716			105,263
Purchases of corporate loans	(1,656,055		)	(649,320		)
Purchases of securities	(2,842		)	(5,068		)
Purchases of equity and other investments	(69,065		)	(60,278		)
Net change in proceeds, purchases and settlements of derivatives	7,879			17,233
Net change in restricted cash and cash equivalents	(14,284		)	(328,107		)
Net cash provided by (used in) investing activities	(624,601		)	903,089
Cash flows from financing activities
Issuance of collateralized loan obligation secured notes	1,068,162			—
Retirement of collateralized loan obligation secured notes	(604,865		)	(847,764		)
Proceeds from collateralized loan obligation warehouse facility	523,000			—
Repayment of collateralized loan obligation warehouse facility	(303,000		)	—
Issuance of senior notes	372,356			—
Repayment of senior notes	(115,000		)	—
Repayment of junior subordinated notes	(13,168		)	—
Distributions on common shares	(53,432		)	(62,888		)
Distributions on preferred shares	(13,782		)	(13,782		)
Distributions to Parent	(433,715		)	—
Capital distributions to noncontrolling interests	(5,098		)	(6,849		)
Capital contributions from noncontrolling interests	2,482			5,049
Other capitalized costs	(3,750		)	—
Net cash provided by (used in) financing activities	420,190			(926,234		)
Net increase (decrease) in cash and cash equivalents	(194,557		)	1,862
Cash and cash equivalents at beginning of period	627,237			320,122
Cash and cash equivalents at end of period	$	432,680		$	321,984
Supplemental cash flow information
Cash paid for interest	$	63,704		$	87,614
Net cash paid (refunded) for income taxes	$	70		$	23
Non-cash investing and financing activities
Assets contributed from Parent	$	434,684		$	(131,963	)
Redemption of CLO 2007-A subordinated notes	$	—		$	(15,587	)
Preferred share distributions declared, not yet paid	$	6,891		$	6,891

See notes to condensed consolidated financial statements.

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KKR FINANCIAL HOLDINGS LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION

KKR Financial Holdings LLC together with its subsidiaries (the “Company” or “KFN”) is a specialty finance company with expertise in a range of asset classes. The Company’s core business strategy is to leverage the proprietary resources of KKR Financial Advisors LLC (the “Manager”) with the objective of generating current income. The Company’s holdings primarily consist of below investment grade syndicated corporate loans, also known as leveraged loans, high yield debt securities and interests in joint ventures and partnerships. The corporate loans that the Company holds are typically purchased via assignment or participation in the primary or secondary market.

The majority of the Company’s holdings consist of corporate loans and high yield debt securities held in collateralized loan obligation (“CLO”) transactions that are structured as balance sheet securitizations and are used as long term financing for the Company’s investments in corporate debt. The senior secured debt issued by the CLO transactions is primarily owned by unaffiliated third party investors and the Company owns the majority of the subordinated notes in the CLO transactions. The Company executes its core business strategy through its subsidiaries, including CLOs.

The Company is a subsidiary of KKR & Co. L.P. ("KKR & Co." and, together with its subsidiaries, "KKR"). KKR Fund Holdings L.P., a subsidiary of KKR & Co., is the sole holder of all of the outstanding common shares of the Company and is the parent of the Company ("Parent"). The Company is externally managed and advised by its Manager pursuant to an amended and restated management agreement (as amended the “Management Agreement”). The Manager is a subsidiary of KKR & Co.

The Company’s 7.375% Series A LLC Preferred Shares (“Series A LLC Preferred Shares”) trade on the New York Stock Exchange (“NYSE”).

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The majority of the Company's significant accounting policies have remained unchanged from the Company's Annual Report on Form 10-K filed with the SEC on March 29, 2017 ("2016 Annual Report"). As such, in addition to the below, refer to the Company's 2016 Annual Report for further discussion.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company’s results for the interim periods presented. The condensed consolidated financial statements include the accounts of the Company and entities established to complete secured financing transactions that are considered to be variable interest entities (“VIEs”) and for which the Company is the primary beneficiary. Also included in the condensed consolidated financial statements are the financial results of certain entities, which are not considered VIEs, but in which the Company is presumed to have control. The ownership interests held by third parties are reflected as noncontrolling interests in the accompanying financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company uses historical experience and various other assumptions and information that are believed to be reasonable under the circumstances in developing its estimates and judgments. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. While the Company believes that the estimates and assumptions used in the preparation of the condensed consolidated financial statements are appropriate, actual results could differ from those estimates.

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Consolidation

KKR Financial CLO 2012-1, Ltd. (“CLO 2012-1"), KKR Financial CLO 2013-1, Ltd. (“CLO 2013-1"), KKR Financial CLO 2013-2, Ltd. (“CLO 2013-2"), KKR CLO 9, Ltd. (“CLO 9”), KKR CLO 10, Ltd. (“CLO 10”), KKR CLO 15, Ltd. ("CLO 15") and KKR CLO 16, Ltd. ("CLO 16") (collectively the “Cash Flow CLOs”) are entities established to complete secured financing transactions. During 2016, the Company called KKR 2016-1, Ltd. ("CLO 2016-1"), KKR Financial CLO 2007-1 (“CLO 2007-1") and KKR Financial CLO 2011-1 (“CLO 2011-1") and during 2015, the Company called KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2"), KKR Financial CLO 2005-1, Ltd. ("CLO 2005-1") and KKR Financial CLO 2006-1, Ltd ("CLO 2006-1"), whereby the Company repaid all senior and mezzanine notes outstanding. These entities are VIEs which the Company consolidates as the Company has determined it has the power to direct the activities that most significantly impact these entities’ economic performance and the Company has both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. In CLO transactions, subordinated notes have the first risk of loss and conversely, the residual value upside of the transactions.

In addition, during 2016, the Company declared a distribution in kind on its common shares of certain subordinated notes of KKR CLO 11, Ltd. ("CLO 11") and KKR CLO 13, Ltd. ("CLO 13") to its Parent as the sole holder of its common shares. CLO 11 and CLO 13 had previously been consolidated by the Company as they were VIEs which the Company determined it had the power to direct the activities that most significantly impacted these entities’ economic performance and the Company had both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. Following the distribution, the Company determined that it no longer met the consolidation criteria and de-consolidated CLO 11 and CLO 13, resulting in a reduction in both consolidated assets and liabilities of approximately $1.0 billion as of December 31, 2016. Also, as a result of the de-consolidation, the related CLO interest expense and management fees that were previously consolidated were no longer included in the Company's condensed consolidated statements of operations.

The Company finances the majority of its corporate debt investments through its CLOs. As of June 30, 2017, the Company’s CLOs held $3.1 billion par amount, or $3.0 billion estimated fair value, of corporate debt investments. As of December 31, 2016, the Company's CLOs also held $3.1 billion par amount, or $3.1 billion estimated fair value, of corporate debt investments. The assets in each CLO can be used only to settle the debt of the related CLO. As of June 30, 2017 and December 31, 2016, the aggregate par amount of CLO debt to unaffiliated and affiliated parties totaled $3.0 billion and $3.2 billion, respectively.

The Company consolidates all non‑VIEs in which it holds a greater than 50 percent voting interest. Specifically, the Company consolidates majority owned entities for which the Company is presumed to have control. The ownership interests of these entities held by third parties are reflected as noncontrolling interests in the accompanying financial statements. The Company began consolidating a majority of these non‑VIE entities as a result of the asset contributions from its Parent during the second half of 2014. For certain of these entities, the Company previously held a percentage ownership, but following the incremental contributions from its Parent, was presumed to have control.

In addition, the Company has noncontrolling interests in joint ventures and partnerships that do not qualify as VIEs and do not meet the control requirements for consolidation as defined by GAAP.

All inter‑company balances and transactions have been eliminated in consolidation.

Recent Accounting Pronouncements

Accounting Changes and Error Corrections and Investments - Equity Method and Joint Ventures

In January 2017, FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 232) – Amendments to SEC Paragraphs Pursuant to staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (“ASU 2017-03”). The amendments included in this update expand required qualitative disclosures when registrants cannot reasonably estimate the impact that adoption of the ASU will have on the financial statements. Such qualitative disclosures would include a comparison of the registrant’s new accounting policies, if determined, to current accounting policies, a description of the status of the registrant’s process to implement the new standard and a description of the significant implementation matters yet to be addressed by the registrant. Other than enhancements to the qualitative disclosures regarding future adoption of new ASUs, adoption of the provisions of this standard is not expected to have any material impact on the Company’s condensed consolidated financial statements.

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Consolidation

In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties under Common Control ("ASU 2016-17"). This guidance states that reporting entities deciding whether they are primary beneficiaries no longer have to consider indirect interests held through related parties that are under common control to be the equivalent of direct interests in their entirety. Decision makers would include those indirect interests on a proportionate basis. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.

Financial Instruments

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Liabilities (“ASU 2016-01”). The amended guidance (i) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at fair value; (iii) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments and (iv) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amended guidance related to equity securities without readily determinable fair values (including the disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company is currently evaluating the impact on its financial statements.

Cash Flow Classification

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amended guidance adds or clarifies guidance on eight cash flow matters: (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The guidance must be applied retrospectively to all periods presented but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. The Company is currently evaluating the impact on its financial statements.

NOTE 3. SECURITIES

The Company accounts for all of its securities, including RMBS, at estimated fair value. The following table summarizes the Company’s securities as of June 30, 2017 and December 31, 2016 (amounts in thousands):



	June 30, 2017						December 31, 2016
	Par		Amortized Cost		Estimated Fair Value		Par		Amortized Cost		Estimated Fair Value
Securities, at estimated fair value	$	327,462	$	248,592	$	263,055	$	371,785	$	304,628	$	229,206
Total	$	327,462	$	248,592	$	263,055	$	371,785	$	304,628	$	229,206

Net Realized and Unrealized Gains (Losses)

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are computed as the difference between the estimated fair value of the asset and the amortized cost basis of such asset. Unrealized gains or losses primarily reflect the change in asset values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. The following table presents the Company’s realized and unrealized gains (losses) from securities (amounts in thousands):



	Three months ended June 30, 2017		Three months ended June 30, 2016		For the six months ended June 30, 2017		For the six months ended June 30, 2016
Net realized gains (losses)	$	3,402	$	5,779	$	5,258	$	4,186
Net (increase) decrease in unrealized losses	2,372		15,030		87,367		(35,096		)
Net realized and unrealized gains (losses)	$	5,774	$	20,809	$	92,625	$	(30,910	)

Defaulted Securities

As of both June 30, 2017 and December 31, 2016, the Company had no corporate debt securities in default.

Concentration Risk

The Company’s corporate debt securities portfolio has certain credit risk concentrated in a limited number of issuers. As of June 30, 2017, the Company’s corporate debt securities portfolio was concentrated in three issuers: Preferred Proppants LLC, LCI Helicopters Limited and Avoca Capital CLO XII Limited, which combined represented $219.0 million, or approximately 92% of the estimated fair value of the Company’s corporate debt securities. As of December 31, 2016, approximately 97% of the estimated fair value of the Company’s corporate debt securities portfolio was concentrated in ten issuers, with the three largest concentrations of debt securities in securities issued by LCI Helicopters Limited, Preferred Proppants LLC and Mizuho Bank Ltd., which combined represented $134.7 million, or approximately 71% of the estimated fair value of the Company’s corporate debt securities.

Pledged Assets

Note 6 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged assets for borrowings. The following table summarizes the estimated fair value of securities pledged as collateral as of June 30, 2017 and December 31, 2016 (amounts in thousands):



	June 30, 2017		December 31, 2016
Pledged as collateral for collateralized loan obligation secured debt	$	2,131	$	13,337
Total	$	2,131	$	13,337

NOTE 4. LOANS

The Company accounts for all of its loans at estimated fair value. The following table summarizes the Company’s loans as of June 30, 2017 and December 31, 2016 (amounts in thousands):



	June 30, 2017						December 31, 2016
	Par		Amortized Cost		Estimated Fair Value		Par		Amortized Cost		Estimated Fair Value
Corporate loans, at estimated fair value	$	3,753,842	$	3,724,482	$	3,635,589	$	3,433,059	$	3,419,483	$	3,305,264
Total	$	3,753,842	$	3,724,482	$	3,635,589	$	3,433,059	$	3,419,483	$	3,305,264

Net Realized and Unrealized Gains (Losses)

Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the asset without regard to unrealized gains or losses previously recognized. Unrealized gains or losses are computed as the difference between the estimated fair value of the asset and the amortized cost basis of such asset. Unrealized gains or losses primarily reflect the change in asset values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. The following tables present the Company’s realized and unrealized gains (losses) from loans (amounts in thousands):

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	Three months ended June 30, 2017			Three months ended June 30, 2016			For the six months ended June 30, 2017			For the six months ended June 30, 2016
Net realized gains (losses)	$	(30,490	)	$	(180,238	)	$	(34,376	)	$	(210,952	)
Net (increase) decrease in unrealized losses	17,877			190,503			15,991			235,426
Net realized and unrealized gains (losses)	$	(12,613	)	$	10,265		$	(18,385	)	$	24,474

For the corporate loans measured at estimated fair value under the fair value option of accounting, $23.5 million and $170.2 million of net gains were attributable to changes in instrument specific credit risk for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, $29.0 million and $197.7 million of net gains were attributable to changes in instrument specific credit risk, respectively. Gains and losses attributable to changes in instrument specific credit risk were determined by excluding the non-credit components of gains and losses, such as those due to changes in interest rates and general market conditions. In addition, gains and losses attributable to those loans on non-accrual status or specifically identified as more volatile based on financial or operating performance, restructuring or other factors, were considered instrument specific.

Non-Accrual Loans

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. A loan may be placed on non-accrual status regardless of whether or not such loan is considered past due. As of June 30, 2017, the Company held a total par value and estimated fair value of $93.8 million and $26.4 million, respectively, of non-accrual loans carried at estimated fair value. As of December 31, 2016, the Company held a total par value and estimated fair value of $114.1 million and $26.0 million, respectively, of non-accrual loans carried at estimated fair value. As of both June 30, 2017 and December 31, 2016, there were no corporate loans past due 90 or more days and still accruing.

Defaulted Loans

As of both June 30, 2017 and December 31, 2016, the Company held no corporate loans that were in default.

Concentration Risk

The Company’s corporate loan portfolio has certain credit risk concentrated in a limited number of issuers. As of June 30, 2017, approximately 21% of the total estimated fair value of the Company’s corporate loan portfolio was concentrated in twenty issuers, with no single issuer individually greater than 2% of the aggregate estimated fair value of the Company’s corporate loans. As of December 31, 2016, approximately 21% of the total estimated fair value of the Company’s corporate loan portfolio was concentrated in twenty issuers, with no single issuer individually greater than 2% of the aggregate estimated fair value of the Company’s corporate loans.

Pledged Assets

Note 6 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged assets for borrowings. The following table summarizes the corporate loans, at estimated fair value, pledged as collateral as of June 30, 2017 and December 31, 2016 (amounts in thousands):



	June 30, 2017		December 31, 2016
Pledged as collateral for collateralized loan obligation secured debt	$	3,041,168	$	3,048,841
Total	$	3,041,168	$	3,048,841

NOTE 5. EQUITY INVESTMENTS AND INTERESTS IN JOINT VENTURES AND PARTNERSHIPS

The Company holds interests in joint ventures and partnerships, certain of which (i) the Company participates alongside affiliates of the Manager through which the Company contributes capital for assets, including development projects related to commercial real estate and specialty lending focused businesses or (ii) are held as interests in private or public funds managed by KKR. Refer to Note 10 to these condensed consolidated financial statements for further discussion. As of June 30, 2017 and December 31, 2016, the Company held $1.0 billion and $794.0 million, respectively, of interests in joint ventures and partnerships carried at estimated fair value.

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In addition, as of June 30, 2017 and December 31, 2016, the Company held $444.4 million and $168.7 million, respectively, of equity investments, which were carried at estimated fair value and comprised primarily of common and preferred stock.

Net Realized and Unrealized Gains (Losses)

The following tables present the Company’s realized and unrealized gains (losses), which are accounted for similarly to securities and loans, from equity investments and interests in joint ventures and partnerships (amounts in thousands):



	Three months ended June 30, 2017						Three months ended June 30, 2016						Six months ended June 30, 2017						Six months ended June 30, 2016
	Equity Investments			Interests in Joint Ventures and Partnerships(1)			Equity Investments			Interests in Joint Ventures and Partnerships(1)			Equity Investments			Interests in Joint Ventures and Partnerships(1)			Equity Investments			Interests in Joint Ventures and Partnerships(1)
Net realized gains (losses)	$	(4,094	)	$	(2,137	)	$	(4,496	)	$	9,736		$	(4,094	)	$	(36,262	)	$	(3,771	)	$	7,574
Net (increase) decrease in unrealized losses	(2,800		)	2,209			(457		)	(5,346		)	2,792			66,569			(16,449		)	(88,439		)
Net realized and unrealized gains (losses)	$	(6,894	)	$	72		$	(4,953	)	$	4,390		$	(1,302	)	$	30,307		$	(20,220	)	$	(80,865	)

(1) Includes net loss attributable to noncontrolling interests of $0.3 million and net gain of $1.7 million for the three and six months ended June 30, 2017, respectively, and net loss of $1.3 million and $16.8 million for the three and six months ended June 30, 2016, respectively.

Equity Method Investments

The Company holds certain investments where the Company does not control the investee and where the Company is not the primary beneficiary, but can exert significant influence over the financial and operating policies of the investee. Significant influence typically exists if the Company has a 20% to 50% ownership interest in the investee unless predominant evidence to the contrary exists.

Under the equity method of accounting, the Company records its proportionate share of net income or loss based on the investee’s financial results. Given that the Company elected the fair value option to account for these equity method investments, the Company’s share of the investee’s underlying net income or loss predominantly represents fair value adjustments in the investments. Changes in estimated fair value are recorded in net realized and unrealized gain (loss) on investments in the condensed consolidated statements of operations.

As of June 30, 2017 and December 31, 2016, the Company had equity method investments, at estimated fair value, totaling $858.1 million and $408.3 million, respectively. As of June 30, 2017, the Company's equity method investments were comprised primarily of the following issuers with the respective ownership percentages: (i) Port Aventura Entertainment S.A., in which the Company holds an approximately 48% ownership interest through its ownership of KKR Gaudi S.a.r.l., (ii) KKR Real Estate Finance Trust Inc., in which the Company holds an approximately 15% ownership interest through its ownership of KKR REFT Asset Holdings LLC, and (iii) Maritime Credit Corporation Ltd., in which the Company holds an approximately 31% ownership interest through its ownership of KKR Nautilus Aggregator Limited. As of December 31, 2016, the Company's equity method investments were comprised primarily of the following issuers with the respective ownership percentages: (i) Maritime Credit Corporation Ltd., which the Company held approximately 31% through its ownership of KKR Nautilus Aggregator Limited, (ii) LCI Helicopters Limited, which the Company held approximately 33% common equity interest in, and (iii) Mineral Acquisition Company, which the Company held approximately 70% through its ownership of KKR Royalty Aggregator LLC. KKR Royalty Aggregator LLC is an investment company for accounting purposes and accordingly, does not consolidate Mineral Acquisition Company, which it wholly-owns. The Company consolidates both KKR Nautilus Aggregator Limited and KKR Royalty Aggregator LLC and reflects all ownership interests held by third parties as noncontrolling interests in its financial statements.

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Pledged Assets

There were no equity investments or interests in joint ventures and partnerships pledged as collateral as of June 30, 2017 and December 31, 2016.

NOTE 6. BORROWINGS

The Company accounts for its collateralized loan obligation secured notes at estimated fair value, with changes in estimated fair value recorded in the condensed consolidated statements of operations, and all of its other borrowings at amortized cost.

Certain information with respect to the Company’s borrowings as of June 30, 2017 is summarized in the following table (dollar amounts in thousands):



	Par		Carrying Value(1)		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Collateral(2)
CLO 2012-1 secured notes	$	223,636	$	225,965	3.67	%	2725	$	200,856
CLO 2012-1 subordinated notes(3)	18,000		11,287		12.25		2725	16,167
CLO 2012-1 subordinated notes to affiliates(3)	19,663		12,330		12.25		2725	17,660
CLO 2013-1 secured notes	463,000		465,129		3.00		4307	470,202
CLO 2013-1 subordinated notes to affiliates(3)	23,063		13,635		16.87		4307	23,422
CLO 2013-2 secured notes	339,250		341,843		3.14		3129	325,498
CLO 2013-2 subordinated notes to affiliates(3)	30,959		17,778		13.75		3129	29,704
CLO 9 secured notes	463,750		469,563		3.17		3394	443,317
CLO 9 subordinated notes(3)	15,000		9,674		15.28		3394	14,339
CLO 9 subordinated notes to affiliates(3)	33,400		21,542		15.28		3394	31,928
CLO 10 secured notes	368,000		373,404		3.44		3090	351,022
CLO 10 subordinated notes to affiliates(3)	39,146		23,131		11.66		3090	37,340
CLO 15 secured notes	368,000		371,193		3.22		4128	383,520
CLO 15 subordinated notes(3)	12,100		9,672		13.19		4128	12,610
CLO 16 secured notes	644,300		634,853		3.16		4222	680,956
CLO 16 subordinated notes(3)	4,500		4,096		—		4222	4,756
Total collateralized loan obligation secured debt	3,065,767		3,005,095					3,043,297
CLO warehouse facility(4)	240,000		240,000		2.57		27	483,425
5.50% Senior notes	375,000		367,728		5.50		5387	—
Junior subordinated notes	264,767		235,330		3.63		7035	—
Total borrowings	$	3,945,534	$	3,848,153				$	3,526,722


(1)	Carrying value represents estimated fair value for the collateralized loan obligation secured debt and amortized cost for all other borrowings.


(2)	Collateral for borrowings consists of the estimated fair value of certain corporate loans, securities and equity investments at estimated fair value. For purposes of this table, collateral for CLO secured and subordinated notes are calculated pro rata based on the par amount for each respective CLO.


(3)	Subordinated notes to unaffiliated and affiliated parties do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from each respective CLO. Accordingly, weighted average borrowing rates for the subordinated notes were calculated based on annualized cash distributions during the year, if any.


(4)	Represents a $470.0 million CLO warehouse facility ("CLO 18 warehouse"), which was repaid in full on July 27, 2017, upon the closing of KKR CLO 18, Ltd. ("CLO 18"), and totaled $310.0 million prior to repayment.

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Certain information with respect to the Company’s borrowings as of December 31, 2016 is summarized in the following table (dollar amounts in thousands):



	Par		Carrying Value(1)		Weighted Average Borrowing Rate		Weighted Average Remaining Maturity (in days)	Collateral(2)
CLO 2012-1 secured notes	$	367,500	$	378,978	3.01	%	2906	$	333,931
CLO 2012-1 subordinated notes(3)	18,000		9,613		15.40		2906	16,356
CLO 2012-1 subordinated notes to affiliates(3)	19,663		10,501		—		2906	17,867
CLO 2013-1 secured notes	458,500		470,354		2.59		3118	450,836
CLO 2013-1 subordinated notes to affiliates(3)	23,063		14,970		—		3118	22,678
CLO 2013-2 secured notes	339,250		343,208		2.88		3310	323,644
CLO 2013-2 subordinated notes to affiliates(3)	30,959		19,074		—		3310	29,535
CLO 9 secured notes	463,750		471,824		2.89		3575	437,048
CLO 9 subordinated notes(3)	15,000		10,170		15.58		3575	14,136
CLO 9 subordinated notes to affiliates(3)	33,400		22,646		6.11		3575	31,477
CLO 10 secured notes	368,000		377,369		3.18		3271	356,393
CLO 10 subordinated notes to affiliates(3)	39,146		22,416		7.53		3271	37,912
CLO 15 secured notes	370,500		370,632		3.06		4309	376,971
CLO 15 subordinated notes(3)	12,100		11,430		—		4309	12,311
CLO 16 secured notes	644,300		640,386		3.16		4403	596,916
CLO 16 subordinated notes(3)	4,500		3,977		—		4403	4,169
Total collateralized loan obligation secured debt	3,207,631		3,177,548					3,062,180
CLO warehouse facility(4)	20,000		20,000		2.25		305	101,976
7.500% Senior notes	115,043		123,008		7.50		9210	—
Junior subordinated notes	283,517		250,154		3.34		7218	—
Total borrowings	$	3,626,191	$	3,570,710				$	3,164,156


(1)	Carrying value represents estimated fair value for the collateralized loan obligation secured debt and amortized cost for all other borrowings.


(2)	Collateral for borrowings consists of the estimated fair value of certain corporate loans, securities and equity investments at estimated fair value. For purposes of this table, collateral for CLO secured and subordinated notes are calculated pro rata based on the par amount for each respective CLO.


(3)	Subordinated notes to unaffiliated and affiliated parties do not have a contractual coupon rate, but instead receive a pro rata amount of the net distributions from each respective CLO. Accordingly, weighted average borrowing rates for the subordinated notes were calculated based on cash distributions during the year, if any.


(4)	Represents a $200.0 million CLO warehouse facility.

CLO Debt

For the CLO secured notes, there were no gains (losses) attributable to changes in instrument specific credit risk for the three and six months ended June 30, 2017 and 2016.

The indentures governing the Company’s CLO transactions stipulate the reinvestment period during which the collateral manager, which is an affiliate of the Company’s Manager, can generally sell or buy assets at its discretion and can reinvest principal proceeds into new assets. CLO 2013-1, CLO 2013-2, CLO 9, CLO 10, CLO 15 and CLO 16 will end their reinvestment periods during April 2022, January 2018, October 2018, December 2018, October 2020 and January 2021, respectively.

Pursuant to the terms of the indentures governing our CLO transactions, the Company has the ability to call its CLO transactions after the end of the respective non-call periods. During August 2016, the Company called CLO 2007-1 and repaid

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all senior and mezzanine notes totaling $945.6 million par amount. In addition, during October 2016, the remaining $134.5 million par amount of CLO 2007-1 subordinated notes owned by third parties were deemed repaid in full, whereby the Company distributed assets held as collateral in CLO 2007-1 to the subordinated note holders. As described below in Note 7 to these condensed consolidated financial statements, the Company used pay-fixed, receive-variable interest rate swaps to hedge interest rate risk associated with its CLOs. In connection with the repayment of the CLO 2007-1 notes, the related interest rate swap, with a contractual notional amount of $142.3 million was terminated.

During the three months ended June 30, 2017, the Company repaid $63.5 million par amount of original CLO 2012-1 secured notes and $2.5 million par amount of original CLO 15 secured notes. During the six months ended June 30, 2017, the Company repaid $143.9 million par amount of original CLO 2012-1 secured notes and $2.5 million par amount of original CLO 15 secured notes. During the three and six months ended June 30, 2016, $486.3 million and $598.5 million par amount, respectively, of original CLO 2007-1 senior notes were repaid.

CLO 2011-1 and CLO 2016-1 do not have reinvestment periods and all principal proceeds from holdings in the respective CLOs are used to amortize the transaction. During the year ended December 31, 2016, $348.4 million par amount of original CLO 2016-1 secured and subordinated notes were repaid in full. In addition, during December 2016, the remaining $8.2 million par amount of CLO 2016-1 subordinated notes owned by third parties were deemed paid in full, whereby the Company distributed assets held as collateral in CLO 2016-1 to subordinated note holders. During March 2016, the Company called CLO 2011-1 and repaid all senior debt totaling $249.3 million par amount.

On April 17, 2017, the Company refinanced the senior CLO notes of CLO 2013-1. Senior secured notes totaling $458.5 million were paid down in full and refinanced into $463.0 million of senior secured notes with a weighted-average coupon of three-month LIBOR plus 1.84% maturing on April 15, 2029.

On March 30, 2017, the Company closed KKR CLO 17 LLC ("CLO 17"), a $608.5 million secured financing transaction maturing on April 15, 2029. The Company issued $552.0 million par amount of senior secured notes to unaffiliated investors, all of which was floating rate with a weighted-average coupon of three-month LIBOR plus 1.81%. The Company also issued $22.0 million par amount of subordinated notes to unaffiliated investors and $34.5 million par amount of subordinated notes to affiliated investors. Upon closing CLO 17, it was determined that the Company no longer met the consolidation criteria and therefore de-consolidated CLO 17, resulting in a reduction of both consolidated assets and liabilities of approximately $760.0 million.

During December 2016, the Company declared a distribution in kind on its common shares of certain subordinated notes to its Parent as the sole holder of its common shares and distributed an aggregate $106.5 million par amount of CLO 2012-1, CLO 2013-1, CLO 2013-2, CLO 9, CLO 10, CLO 11 and CLO 13 subordinated notes. These notes were previously owned by the Company and eliminated in consolidation. Following the distribution, certain of the subordinated notes were held by an affiliate of the Manager and reflected as collateralized loan obligation junior secured notes to affiliates, at estimated fair value, on the Company's consolidated balance sheets. However, for certain CLOs, specifically CLO 11 and CLO 13, it was determined that the Company no longer met the consolidation criteria and therefore de-consolidated these two CLOs, resulting in a reduction of consolidated CLO liabilities of approximately $967.3 million.

On December 15, 2016, the Company closed CLO 16, a $711.3 million secured financing transaction maturing on January 20, 2029. The Company issued $644.3 million par amount of senior secured notes to unaffiliated investors, $634.8 million of which was floating rate with a weighted-average coupon of three-month LIBOR plus 2.04% and $9.5 million of which was fixed rate with a coupon of 4.80%. The Company also issued $4.5 million par amount of subordinated notes to unaffiliated investors. The investments that are owned by CLO 16 collateralize the CLO 16 debt, and as a result, those investments are not available to the Company, its creditors or shareholders.

On September 14, 2016, the Company closed CLO 15, a $410.8 million secured financing transaction maturing on October 18, 2028. The Company issued $370.5 million par amount of senior secured notes to unaffiliated investors, all of which was floating rate with a weighted-average coupon of three-month LIBOR plus 2.05%. The Company also issued $12.1 million par amount of subordinated notes to unaffiliated investors. The investments that are owned by CLO 15 collateralize the CLO 15 debt, and as a result, those investments are not available to the Company, its creditors or shareholders.

During August 2016, the Company issued $3.6 million par amount of CLO 13 class F notes for proceeds of $3.0 million. During September 2016, the Company issued $3.4 million par amount of CLO 13 class F notes for proceeds of $2.9 million.

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On June 7, 2016, the Company closed CLO 2016-1, a $426.4 million secured financing transaction maturing on June 7, 2018, which was funded during the third quarter of 2016. The Company issued $330.9 million par amount of senior secured notes to unaffiliated investors at a rate of three-month LIBOR plus 1.70% and $25.7 million par amount of subordinated notes to unaffiliated investors. The investments that are owned by CLO 2016-1 collateralize the CLO 2016-1 debt, and as a result, those investments are not available to the Company, its creditors or shareholders.

During May 2016, the Company declared a distribution in kind on its common shares of certain subordinated notes to its Parent as the sole holder of its common shares and distributed an aggregate $96.5 million par amount of CLO 9, CLO 10, CLO 11 and CLO 13 subordinated notes. These notes were previously owned by the Company and eliminated in consolidation. Following the distribution, the subordinated notes were held by an affiliate of the Manager and reflected as collateralized loan obligation junior secured notes to affiliates, at estimated fair value, on the Company's condensed consolidated balance sheets.

During April 2016, the remaining $15.1 million par amount of CLO 2007-A subordinated notes owned by third parties were deemed repaid in full, whereby the Company distributed assets held as collateral in CLO 2007-A to the subordinated note holders.

CLO Warehouse Facility

On March 10, 2017, CLO 18 entered into the CLO 18 Warehouse, a $470.0 million CLO warehouse facility, which matured upon the closing of CLO 18. The CLO 18 Warehouse was used to purchase assets for the CLO transaction in advance of its closing date upon which the proceeds of the CLO closing were used to repay the CLO 18 Warehouse in full. Debt issued under the CLO 18 warehouse was non-recourse to the Company beyond the assets of CLO 18 and bore interest rates ranging from three-month LIBOR plus 1.10% to 1.75%. Upon the closing of CLO 18 on July 27, 2017, the aggregate amount outstanding under the CLO 18 Warehouse was repaid.

On November 1, 2016, CLO 17 entered into a $200.0 million CLO warehouse facility ("CLO 17 Warehouse"), which matured upon the closing of CLO 17. The CLO 17 Warehouse was used to purchase assets for the CLO transaction in advance of its closing date upon which the proceeds of the CLO closing were used to repay the CLO 17 Warehouse in full. Debt issued under the CLO 17 warehouse was non-recourse to the Company beyond the assets of CLO 17 and bore interest rates ranging from three-month LIBOR plus 1.25% to 2.20%. Upon the closing of CLO 17 on March 30, 2017, as discussed above, the aggregate amount outstanding under the CLO 17 Warehouse was repaid.

Senior Notes

On April 24, 2017, the Company redeemed $115.0 million aggregate principal amount of 7.500% Senior Notes due 2042 (the "Notes due 2042") in accordance with the optional redemption provisions provided in the documents governing the Notes due 2042. The transaction resulted in a gain on extinguishment of debt of $7.9 million. Prior to the redemption, the Company's Notes due 2042 traded on the NYSE.

On March 30, 2017, the Company issued $375.0 million aggregate principal amount of 5.50% senior unsecured notes due March 30, 2032 ("Notes due 2032") in a private placement, resulting in net proceeds of $368.6 million. Interest on the Notes due 2032 is payable semi-annually on March 30 and September 30 of each year. The Company may redeem the Notes due 2032 in whole, but not in part, at a redemption price equal to 100% of the outstanding principal amount plus accrued and unpaid interest to, but excluding, the date of redemption on or after March 30, 2022 and annually thereafter, after providing notice to noteholders of such redemption not less than 30 and no more than 60 business days prior to such redemption date. At any time prior to March 30, 2022, the Company may redeem the Notes due 2032 in whole, but not in part, at a redemption price equal to (i) 100% of the outstanding principal amount, (ii) plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) plus the excess, if any, of (a) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes due 2032 (as if the Notes due 2032 matured on March 30, 2022), discounted to the redemption date on a semi-annual basis (assuming a 360-day year of twelve 30-day months) at a rate equal to the sum of the applicable treasury rate plus 50 basis points, minus accrued and unpaid interest, if any, on the Notes due 2032 being redeemed to, but excluding, the redemption date over (b) the principal amount of the Notes due 2032 being redeemed.

On November 15, 2016, the Company redeemed $258.8 million aggregate principal amount of 8.375% Senior Notes due 2041 (the "Notes due 2041"), in accordance with the optional redemption provisions provided in the documents governing the Notes due 2041. The transaction resulted in the Company recording a gain on extinguishment of debt of $29.8 million. Prior to the redemption, the Company's Notes due 2041 traded on the NYSE.

Junior Subordinated Notes

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In January 2017, the Company repurchased $18.8 million par amount of junior subordinated notes, which resulted in a gain on extinguishment of debt of $2.4 million.

NOTE 7. DERIVATIVE INSTRUMENTS

The Company enters into derivative transactions in order to hedge its interest rate and foreign currency exposure to the effects of interest rate and foreign currency changes. Additionally, the Company enters into derivative transactions in the course of its portfolio management activities. The counterparties to the Company’s derivative agreements are major financial institutions with which the Company and its affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, the Company is potentially exposed to losses. The counterparties to the Company’s derivative agreements are major financial institutions and, as a result, the Company does not anticipate that any of the counterparties will fail to fulfill their obligations.

The table below summarizes the aggregate notional amount and estimated net fair value of the derivative instruments as of June 30, 2017 and December 31, 2016 (amounts in thousands):



	As of June 30, 2017						As of December 31, 2016
	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Free-Standing Derivatives:
Interest rate swaps	$	141,000		$	(28,270	)	$	141,000		$	(27,263	)
Foreign exchange forward contracts and options	(407,389		)	15,487			(460,282		)	38,476
Common stock warrants	—			1,795			—			1,528
Options	—			1,587			—			1,001
Total				$	(9,401	)				$	13,742

Free-Standing Derivatives

Free-standing derivatives are derivatives that the Company has entered into in conjunction with its investment and risk management activities, but for which the Company has not designated the derivative contract as a hedging instrument for accounting purposes. Such derivative contracts may include interest rate swaps and foreign exchange contracts and options. Free-standing derivatives may also include investment financing arrangements (total rate of return swaps) whereby the Company receives the sum of all interest, fees and any positive change in fair value amounts from a reference asset with a specified notional amount and pays interest on such notional amount plus any negative change in fair value amounts from such reference asset.

Gains and losses on free-standing derivatives are reported in net realized and unrealized gain (loss) on derivatives and foreign exchange in the condensed consolidated statements of operations. Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.

Interest Rate Swaps

The Company uses interest rate swaps to hedge a portion of the interest rate risk associated with certain of its floating rate junior subordinated notes. The Company had also previously used interest rate swaps to hedge a portion of the interest rate risk associated with its CLOs. As of both June 30, 2017 and December 31, 2016, the Company had interest rate swaps with a notional amount of $141.0 million.

Foreign Exchange Derivatives

The Company holds certain positions that are denominated in a foreign currency, whereby movements in foreign currency exchange rates may impact earnings if the United States dollar significantly strengthens or weakens against foreign currencies. In an effort to minimize the effects of these fluctuations on earnings, the Company will from time to time enter into foreign exchange options or foreign exchange forward contracts related to the assets denominated in a foreign currency. As of June 30, 2017 and December 31, 2016, the net contractual notional balance of our foreign exchange options and forward contract liabilities totaled $407.4 million and $460.3 million, respectively, the majority of which related to certain of our foreign currency denominated assets.

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Free-Standing Derivatives Gain (Loss)

The following table presents the amounts recorded in net realized and unrealized gain (loss) on derivatives and foreign exchange on the condensed consolidated statements of operations (amounts in thousands):



	Three Months Ended June 30, 2017								Three Months Ended June 30, 2016
	Realized gains (losses)		Unrealized gains (losses)			Total			Realized gains (losses)		Unrealized gains (losses)			Total
Interest rate swaps	$	—	$	(2,802	)	$	(2,802	)	$	—	$	(5,934	)	$	(5,934	)
Foreign exchange forward contracts and options(1)	4,988		14,343			19,331			6,400		(5,095		)	1,305
Common stock warrants	—		96			96			—		(165		)	(165		)
Options	—		124			124			—		1,614			1,614
Net realized and unrealized gains (losses)	$	4,988	$	11,761		$	16,749		$	6,400	$	(9,580	)	$	(3,180	)


(1)	Net of foreign exchange remeasurement gain or loss on foreign denominated assets.



	Six Months Ended June 30, 2017								Six Months Ended June 30, 2016
	Realized gains (losses)		Unrealized gains (losses)			Total			Realized gains (losses)		Unrealized gains (losses)			Total
Interest rate swaps	$	—	$	(1,087	)	$	(1,087	)	$	—	$	(17,665	)	$	(17,665	)
Foreign exchange forward contracts and options(1)	7,169		15,525			22,694			17,612		(15,337		)	2,275
Common stock warrants	—		267			267			142		(165		)	(23		)
Options	—		586			586			—		2,017			2,017
Net realized and unrealized gains (losses)	$	7,169	$	15,291		$	22,460		$	17,754	$	(31,150	)	$	(13,396	)


(1)	Net of foreign exchange remeasurement gain or loss on foreign denominated assets.

A master netting arrangement may allow each counterparty to net settle amounts owed between the Company and the counterparty as a result of multiple, separate derivative transactions. The Company has International Swaps and Derivatives Association ("ISDA") agreements or similar agreements with certain financial institutions which contain netting provisions. While these derivative instruments are eligible to be offset in accordance with applicable accounting guidance, the Company has elected to present derivative assets and liabilities on a gross basis in its condensed consolidated balance sheets. As of June 30, 2017, if the Company had elected to offset the asset and liability balances of its derivative instruments, the net positions would total the following with its respective financial institution counterparties: (i) $0.8 million net liability, net of $2.1 million collateral posted, (ii) $0.1 million net asset, net of $4.3 million collateral posted and (iii) $7.3 million net asset, including $25.7 million collateral held. Comparatively, as of December 31, 2016, if the Company had elected to offset the asset and liability balances of its derivative instruments, the net positions would total the following with its respective financial institution counterparties: (i) $2.6 million net asset, net of $3.4 million collateral posted, (ii) $1.0 million net asset, net of $8.0 million collateral posted and (iii) $7.5 million net asset, net of $11.3 million collateral held.

NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Instruments Not Carried at Estimated Fair Value

The Company accounts for its investments, as well as its collateralized loan obligation secured notes at estimated fair value. The following table presents the carrying value and estimated fair value, as well as the respective hierarchy classifications, of the Company’s financial assets and liabilities that are not carried at estimated fair value on a recurring basis as of June 30, 2017 (amounts in thousands):

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	As of June 30, 2017				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash, restricted cash, and cash equivalents	$	743,278	$	743,278	$	743,278	$	—	$	—
Liabilities:
Senior notes	367,728		378,417		—		—		378,417
Junior subordinated notes	235,330		201,365		—		—		201,365

The following table presents the carrying value and estimated fair value, as well as the respective hierarchy classifications, of the Company’s financial assets and liabilities that are not carried at estimated fair value on a recurring basis as of December 31, 2016 (amounts in thousands):




	As of December 31, 2016				Fair Value Hierarchy
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash, restricted cash, and cash equivalents	$	1,139,549	$	1,139,549	$	1,139,549	$	—	$	—
Liabilities:
Senior notes	123,008		116,699		116,699		—		—
Junior subordinated notes	250,154		210,084		—		—		210,084

Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2017, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):

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	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of June 30, 2017
Assets:
Securities:
Corporate debt securities	$	—	$	3,983	$	232,960	$	236,943
Residential mortgage-backed securities	—		—		26,112		26,112
Total securities	—		3,983		259,072		263,055
Loans	—		3,526,184		109,405		3,635,589
Equity investments, at estimated fair value	53,562		—		390,811		444,373
Interests in joint ventures and partnerships, at estimated fair value	—		—		1,009,737		1,009,737
Derivatives:
Foreign exchange forward contracts and options	—		19,874		620		20,494
Warrants	—		—		1,795		1,795
Options	—		—		1,587		1,587
Total derivatives	—		19,874		4,002		23,876
Total	$	53,562	$	3,550,041	$	1,773,027	$	5,376,630
Liabilities:
Collateralized loan obligation secured notes	$	—	$	2,916,680	$	—	$	2,916,680
Collateralized loan obligation junior secured notes to affiliates	—		88,415		—		88,415
Derivatives:
Interest rate swaps	—		28,270		—		28,270
Foreign exchange forward contracts and options	—		4,994		13		5,007
Total derivatives	—		33,264		13		33,277
Total	$	—	$	3,038,359	$	13	$	3,038,372

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The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (amounts in thousands):



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2016
Assets:
Securities:
Corporate debt securities	$	—	$	13,337	$	175,206	$	188,543
Residential mortgage-backed securities	—		—		40,663		40,663
Total securities	—		13,337		215,869		229,206
Corporate loans	—		3,176,070		129,194		3,305,264
Equity investments, at estimated fair value	36,353		—		132,305		168,658
Interests in joint ventures and partnerships, at estimated fair value	—		—		793,996		793,996
Derivatives:							0
Foreign exchange forward contracts and options	—		41,636		2,282		43,918
Options	—		—		1,001		1,001
Warrants	—		—		1,528		1,528
Total derivatives	—		41,636		4,811		46,447
Total	$	36,353	$	3,231,043	$	1,276,175	$	4,543,571
Liabilities:
Collateralized loan obligation secured notes	$	—	$	3,087,941	$	—	$	3,087,941
Collateralized loan obligation junior secured notes to affiliates	—		89,607		—		89,607
Derivatives:
Interest rate swaps	—		27,263		—		27,263
Foreign exchange forward contracts and options	—		4,152		1,290		5,442
Total derivatives	—		31,415		1,290		32,705
Total	$	—	$	3,208,963	$	1,290	$	3,210,253

Level 3 Fair Value Rollforward

The following table presents additional information about assets and liabilities, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended June 30, 2017 (amounts in thousands):

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	Assets
	Corporate Debt Securities			Residential Mortgage- Backed Securities			Corporate Loans			Equity Investments, at Estimated Fair Value			Interests in Joint Ventures and Partnerships			Foreign Exchange Options, Net			Warrants		Options
Beginning balance as of April 1, 2017	$	227,198		$	39,286		$	125,088		$	131,125		$	841,733		$	816		$	1,699	$	1,464
Total gains or losses (for the period):
Included in earnings(1)	5,835			1,811			8,522			982			2,748			(209		)	96		123
Transfers into Level 3	—			—			—			—			—			—			—		—
Transfers out of Level 3 (2)	—			—			—			—			—			—			—		—
Purchases	—			—			3,029			—			32,088			—			—		—
Sales	—			(12,988		)	(696		)	(13,655		)	(6,904		)	—			—		—
Settlements	(73		)	(1,997		)	(26,538		)	272,359			140,072			—			—		—
Ending balance as of June 30, 2017	$	232,960		$	26,112		$	109,405		$	390,811		$	1,009,737		$	607		$	1,795	$	1,587
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	5,835		$	916		$	8,979		$	662		$	2,748		$	(209	)	$	96	$	123


(1)	Amounts are included in net realized and unrealized gain (loss) on investments or net realized and unrealized gain (loss) on derivatives and foreign exchange in the condensed consolidated statements of operations.

The following table presents additional information about assets and liabilities, including derivatives that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the six months ended June 30, 2017 (amounts in thousands):



	Assets
	Corporate Debt Securities			Residential Mortgage- Backed Securities			Corporate Loans			Equity Investments, at Estimated Fair Value			Interests in Joint Ventures and Partnerships				Foreign Exchange Options, Net			Warrants			Options
Beginning balance as of January 1, 2017	$	175,206		$	40,663		$	129,194		$	132,305		$	793,996			$	992		$	1,528		$	1,001
Total gains or losses (for the period):
Included in earnings(1)	91,813			2,975			11,462			(518		)	38,710				(385		)	267			586
Transfers into Level 3	—			—			—			—			—			—	—			—		—	—
Transfers out of Level 3 (2)	—			—			(9,565		)	—			—				—			—			—
Purchases	—			—			9,102			321			50,408				—			—			—
Sales	(8,956		)	(12,988		)	(1,028		)	(13,656		)	(6,903		)		—			—			—
Settlements	(25,103		)	(4,538		)	(29,760		)	272,359			133,526				—			—			—
Ending balance as of June 30, 2017	$	232,960		$	26,112		$	109,405		$	390,811		$	1,009,737			$	607		$	1,795		$	1,587
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	90,675		$	1,703		$	10,463		$	(1,486	)	$	38,710			$	(843	)	$	267		$	586


(1)	Amounts are included in net realized and unrealized gain (loss) on investments or net realized and unrealized gain (loss) on derivatives and foreign exchange in the condensed consolidated statements of operations.


(2)	Corporate loans were transferred out of Level 3 because observable market data became available.

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The following table presents additional information about assets and liabilities, including derivatives, that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the three months ended June 30, 2016 (amounts in thousands):



	Assets
	Corporate Debt Securities			Residential Mortgage- Backed Securities			Corporate Loans			Equity Investments, at Estimated Fair Value			Interests in Joint Ventures and Partnerships			Foreign Exchange Options, Net			Warrants			Options
Beginning balance as of April 1, 2016	$	150,068		$	47,714		$	296,982		$	138,563		$	748,329		$	1,841		$	—		$	498
Total gains or losses (for the period):
Included in earnings(1)	(667		)	748			(44,943		)	(17,377		)	947			(189		)	(165		)	1,614
Transfers into Level 3	—			—			—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—			—			—
Purchases	—			—			997			—			45,756			—			—			—
Sales	—			—			(26,685		)	(5,130		)	—			—			—			—
Settlements	(29		)	(2,662		)	(25,510		)	7,318			(36,711		)	—			2,285			—
Ending balance as of June 30, 2016	$	149,372		$	45,800		$	200,841		$	123,374		$	758,321		$	1,652		$	2,120		$	2,112
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	(667	)	$	748		$	(44,943	)	$	(17,377	)	$	947		$	(189	)	$	(165	)	$	1,614


(1)	Amounts are included in net realized and unrealized gain (loss) on investments or net realized and unrealized gain (loss) on derivatives and foreign exchange in the condensed consolidated statements of operations.

The following table presents additional information about assets and liabilities, including derivatives, that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value, for the six months ended June 30, 2016 (amounts in thousands):



	Assets
	Corporate Debt Securities			Residential Mortgage- Backed Securities			Corporate Loans			Equity Investments, at Estimated Fair Value			Interests in Joint Ventures and Partnerships			Foreign Exchange Options, Net			Warrants			Options
Beginning balance as of January 1, 2016	$	194,986		$	49,621		$	298,734		$	146,648		$	888,408		$	2,887		$	—		$	95
Total gains or losses (for the period):
Included in earnings(1)	(45,549		)	1,080			(51,770		)	(25,462		)	(79,748		)	(1,235		)	(165		)	2,017
Transfers into Level 3	—			—			—			—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—			—			—			—
Purchases	—			—			3,303			—			59,823			—			—			—
Sales	—			—			(26,685		)	(5,130		)	—			—			—			—
Settlements	(65		)	(4,901		)	(22,741		)	7,318			(110,162		)	—			2,285			—
Ending balance as of June 30, 2016	$	149,372		$	45,800		$	200,841		$	123,374		$	758,321		$	1,652		$	2,120		$	2,112
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period(1)	$	(45,549	)	$	1,076		$	(51,770	)	$	(25,462	)	$	(79,748	)	$	(1,235	)	$	(165	)	$	2,017


(1)	Amounts are included in net realized and unrealized gain (loss) on investments or net realized and unrealized gain (loss) on derivatives and foreign exchange in the condensed consolidated statements of operations.

There were no transfers between Level 1 and Level 2 for the Company’s financial assets and liabilities measured at fair value on a recurring and non-recurring basis for the three and six months ended June 30, 2017 and 2016.

Valuation Techniques and Inputs for Level 3 Fair Value Measurements

The following table presents additional information about valuation techniques and inputs used for assets and

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liabilities, including derivatives, that are measured at fair value and categorized within Level 3 as of June 30, 2017 (dollar amounts in thousands):

Balance as

of June 30, 2017

Valuation

Techniques(1)

Unobservable

Inputs(2)

Weighted

Average(3)

Range

Impact to

Valuation

from an

Increase in

Input(4)

Assets:

Corporate debt securities

232,960

Yield analysis

Yield

21%

5% - 22%

Decrease

Net leverage

19x

14x-20x

Decrease

EBITDA multiple

18x

0x - 19x

Increase

Discount margin

1263 bps

1200 -1600 bps

Decrease

Residential mortgage – backed securities

26,112

Discounted cash flows

Probability of default

0% - 3%

Decrease

Loss severity

43%

35% - 50%

Decrease

Constant prepayment rate

15%

12% - 18%

)

Corporate loans

109,405

Inputs to market comparables, discounted cash flow and yield analysis

Weight ascribed to market comparables

0% - 50%

)

Weight ascribed to discounted cash flows

0% - 50%

)

Weight ascribed to yield analysis

98%

0% - 100%

)

Yield Analysis

Yield

11%

9% -14%

Decrease

Net leverage

10x

5x - 15x

Decrease

EBITDA multiple

0x - 14x

Increase

Market comparables

LTM EBITDA multiple

Increase

Forward EBITDA multiple

Increase

Discounted Cash flows

Weighted average cost of capital

12%

Decrease

LTM EBITDA exit multiple

Increase

Black Scholes Options Pricing Model

Risk-Free Rate

Increase

Volatility

28%

Decrease

Equity investments, at estimated fair value(6)

390,811

Inputs to both market comparables and discounted cash flow

Illiquidity discount

10%

0% - 20%

Decrease

Weight ascribed to market comparables

49%

0% - 100%

)

Weight ascribed to discounted cash flows

51%

0% - 100%

)

Market comparables

LTM EBITDA multiple

12x

0x - 15x

Increase

Forward EBITDA multiple

12x

0x - 14x

Increase

Discounted cash flows

Weighted average cost of capital

6% - 14%

Decrease

LTM EBITDA exit multiple

6x - 10x

Increase

Interests in joint ventures and partnerships(10)

1,009,737

Inputs to market comparables, discounted cash flow and yield analysis

Weight ascribed to market comparables

27%

0% - 100%

)

Weight ascribed to discounted cash flows

44%

0% - 100%

)

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Weight ascribed to yield analysis

29%

0% - 100%

)

Market comparables

LTM EBITDA multiple

Increase

Forward EBITDA multiple

Increase

Capitalization rate

3% - 12%

Decrease

Discounted cash flows

Weighted average cost of capital

6% - 20%

Decrease

Average price per BOE(11)

$19.11

$17.53-$20.85

Increase

Yield analysis

Yield

16%

Decrease

Net Leverage

Decrease

EBITDA multiple

10x

Increase

Foreign exchange options, net

607

Option pricing model

Forward and spot rates

13,345

(12

)

Options(13)

1,587

Inputs to both market comparables and discounted cash flow

Illiquidity discount

10%

Decrease

Weight ascribed to market comparables

50%

)

Weight ascribed to discounted cash flows

50%

)

Market comparables

LTM EBITDA multiple

Increase

Forward EBITDA multiple

Increase

Discounted cash flows

Weighted average cost of capital

12%

Decrease

LTM EBITDA exit multiple

Increase

Black Scholes Options Pricing Model

Risk-Free Rate

Increase

Volatility

28%

Decrease

(1)

For the assets that have more than one valuation technique, the Company may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. When determining the weighting ascribed to each valuation methodology, the Company considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among the investments and in certain instances, may result in up to a 100% weighting to a single methodology. Broker quotes obtained for valuation purposes are reviewed by the Company through other valuation techniques.


(2)	In determining certain of these inputs, management evaluates a variety of factors including economic conditions, industry and market developments; market valuations of comparable companies; and company specific developments including exit strategies and realization opportunities.


(3)	Weighted average amounts are based on the estimated fair values.


(4)	Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant increases and decreases in these inputs in isolation could result in significantly higher or lower fair value measurements.


(5)	The impact of changes in prepayment speeds may have differing impacts depending on the seniority of the instrument. Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6)

When determining the illiquidity discount to be applied to equity investments, at estimated fair value, the Company seeks to take a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments carried at estimated fair value. The Company then evaluates such investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include the salability of the investment, whether the issuer is undergoing significant restructuring activity or similar factors, as well as characteristics about the issuer including its size and/or whether it is experiencing, or expected to experience, a significant decline in earnings. Depending on the applicability of these factors, the Company determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time the Company holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by the Company in its valuations. Of the total equity investments, at estimated fair value, $10.6 million was valued solely using a market comparables technique and $11.8 million was valued solely using a discounted cash flow technique.

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(7)

The directional change from an increase in the weight ascribed to the market comparables approach would increase the fair value of the Level 3 investments if the market comparables approach results in a higher valuation than the discounted cash flow or yield analysis approach. The opposite would be true if the market comparables approach results in a lower valuation than the discounted cash flow or yield analysis approach.

(8)

The directional change from an increase in the weight ascribed to the discounted cash flow approach would increase the fair value of the Level 3 investments if the discounted cash flow approach results in a higher valuation than the market comparables or yield analysis approach. The opposite would be true if the discounted cash flow approach results in a lower valuation than the market comparables or yield analysis approach.

(9)

The directional change from an increase in the weight ascribed to the yield analysis approach would increase the fair value of the Level 3 investments if the yield analysis approach results in a higher valuation than the market comparables or discounted cash flow approach. The opposite would be true if the yield analysis approach results in a lower valuation than the market comparables or discounted cash flow approach.

(10)

Inputs exclude $630.1 million of assets, comprised of an investment that was valued using an independent third party valuation firm and interests in an alternative credit fund and holding company of a real estate investment trust that hold multiple investments, which are valued using Level 3 value methodologies similar to those shown for the corporate debt portfolio and equity investments. Of the total interest in joint ventures and partnerships, $45.1 million was valued solely using a discounted cash flow technique, while $9.2 million was valued solely using a market comparables technique and $23.5 million was valued solely using a yield analysis.

(11)

Natural resources assets with an estimated fair value of $78.0 million as of June 30, 2017 were valued using commodity prices. Commodity prices may be measured using a common volumetric equivalent where one barrel of oil equivalent (‘‘BOE’’) is determined using the ratio of six thousand cubic feet of natural gas to one barrel of oil, condensate or natural gas liquids. The price per BOE is provided to show the aggregate of all price inputs for these investments over a common volumetric equivalent although the valuations for specific investments may use price inputs specific to the asset for purposes of our valuations. The discounted cash flows include forecasted production of liquids (oil, condensate, and natural gas liquids) and natural gas with a forecasted revenue ratio of approximately 23% liquids and 77% natural gas.


(12)	Inputs include forward rates for investments in Indian Rupees.


(13)	The total options were valued using 50% a discount cash flow technique and 50% a market comparables technique.

The table above excludes warrants of $1.8 million, comprised of equity-like securities in a company that were valued using an independent third party valuation firm primarily based on the agreement setting forth the terms of the warrant and public disclosures of the expected sale value.

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The following table presents additional information about valuation techniques and inputs used for assets, including derivatives, that are measured at fair value and categorized within Level 3 as of December 31, 2016 (dollar amounts in thousands):

Balance as of
December 31, 2016

Valuation

Techniques(1)

Unobservable

Inputs(2)

Weighted

Average(3)

Range

Impact to

Valuation

from an

Increase in

Input(4)

Assets:

Corporate debt securities

175,206

Yield analysis

Yield

14%

5% - 15%

Decrease

Net leverage

7x-16x

Decrease

EBITDA multiple

0x - 9x

Increase

Discount margin

1105

1100-1150 bps

Decrease

Market comparables

LTM EBITDA multiple

12x

Increase

Black Scholes Options Pricing Model

Risk-Free Rate

Increase

Volatility

85%

Decrease

Broker quotes

Offered quotes

102

101-103

Increase

Residential mortgage – backed securities

40,663

Discounted cash flows

Probability of default

0% - 3%

Decrease

Loss severity

43%

35% - 50%

Decrease

Constant prepayment rate

18%

12% - 23%

)

Corporate loans

129,194

Yield Analysis

Yield

13%

11% - 16%

Decrease

Net leverage

11x

5x - 82x

Decrease

EBITDA multiple

0x - 19x

Increase

Equity investments, at estimated fair value(6)

132,305

Inputs to market comparables and discounted cash flow

Illiquidity discount

5% - 15%

Decrease

Weight ascribed to market comparables

47%

0% - 100%

)

Weight ascribed to discounted cash flows

53%

0% - 100%

)

Market comparables

LTM EBITDA multiple

11x

0x - 14x

Increase

Forward EBITDA multiple

0x - 13x

Increase

Discounted cash flows

Weighted average cost of capital

7% - 14%

Decrease

LTM EBITDA exit multiple

7x - 10x

Increase

Interests in joint ventures and partnerships(10)

793,996

Inputs to both market comparables and discounted cash flow

Weight ascribed to market comparables

27%

0% - 100%

)

Weight ascribed to discounted cash flows

45%

0% - 100%

)

Weight ascribed to yield analysis

28%

0% - 100%

)

Market comparables

LTM EBITDA multiple

1x - 9x

Increase

Forward EBITDA multiple

Increase

Capitalization Rate

3% - 12%

Decrease

Discounted cash flows

Weighted average cost of capital

10%

6% - 20%

Decrease

Average price per BOE(11)

$20.26

$18.81 - $22.38

Increase

Yield analysis

Yield

19%

Decrease

Net leverage

Decrease

EBITDA multiple

Increase

Foreign exchange options, net

992

Option pricing model

Forward and spot rates

10,301

6 -13,550

(12

)

Options(13)

1,001

Inputs to both market comparables and discounted cash flow

Illiquidity discount

10%

Decrease

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Weight ascribed to market comparables

50%

)

Weight ascribed to discounted cash flows

50%

)

Market comparables

LTM EBITDA multiple

Increase

Forward EBITDA multiple

Increase

Discounted cash flows

Weighted average cost of capital

15%

Decrease

LTM EBITDA exit multiple

Increase

(1)


(2)	In determining certain of these inputs, management evaluates a variety of factors including economic conditions, industry and market developments; market valuations of comparable companies; and company specific developments including exit strategies and realization opportunities.


(3)	Weighted average amounts are based on the estimated fair values.


(4)	Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant increases and decreases in these inputs in isolation could result in significantly higher or lower fair value measurements.


(5)	The impact of changes in prepayment speeds may have differing impacts depending on the seniority of the instrument. Generally, an increase in the constant prepayment speed will positively impact the overall valuation of traditional mortgage assets. In contrast, an increase in the constant prepayment rate will negatively impact the overall valuation of interest-only strips.

(6)

When determining the illiquidity discount to be applied to equity investments, at estimated fair value, the Company seeks to take a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments carried at estimated fair value. The Company then evaluates such investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include the salability of the investment, whether the issuer is undergoing significant restructuring activity or similar factors, as well as characteristics about the issuer including its size and/or whether it is experiencing, or expected to experience, a significant decline in earnings. Depending on the applicability of these factors, the Company determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time the Company holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by the Company in its valuations. Of the total equity investments, at estimated fair value, $14.5 million was valued solely using a market comparables technique and $20.0 million was valued solely using a discounted cash flow technique.

(7)

(8)

(9)

(10)

Inputs exclude $408.1 million of assets, comprised of an investment that was valued using an independent third party valuation firm and interests in alternative credit funds that holds multiple investments, which were valued suing Level 3 value methodologies similar to those shown for the corporate debt portfolio and equity investments. Of the total interest in joint ventures and partnerships, $43.5 million was valued solely using a discounted cash flow technique, while $9.8 million was valued solely using a market comparables technique and $24.4 million was valued solely using a yield analysis.

(11)

Natural resources assets with an estimated fair value of $107.3 million as of December 31, 2015 were valued using commodity prices. Commodity prices may be measured using a common volumetric equivalent where one barrel of oil equivalent (‘‘BOE’’) is determined using the ratio of six thousand cubic feet of natural gas to one barrel of oil, condensate or natural gas liquids. The price per BOE is provided to show the aggregate of all price inputs for these investments over a common volumetric equivalent although the valuations for specific investments may use price inputs specific to the asset for purposes of our valuations. The discounted cash flows include forecasted production of liquids (oil, condensate, and natural gas liquids) and natural gas with a forecasted revenue ratio of approximately 23% liquids and 77% natural gas.


(12)	Inputs include forward rates for investments in Chinese Yuan and Indian Rupees.


(13)	The total options were valued using 50% a discount cash flow technique and 50% a market comparables technique.

The table above excludes warrants of $1.5 million, comprised of equity-like securities in a company that were valued using an independent third party valuation firm primarily based on the agreement setting forth the terms of the warrant and public disclosures of the expected sale value.

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NOTE 9. COMMITMENTS AND CONTINGENCIES

Commitments

The Company participates in certain contingent financing arrangements, whereby the Company is committed to provide funding of up to a specific predetermined amount at the discretion of the borrower or has entered into an agreement to acquire interests in certain assets. As of June 30, 2017 and December 31, 2016, the Company had unfunded financing commitments for corporate loans totaling $0.6 million and $3.2 million, respectively. The Company did not have any significant losses as of June 30, 2017, nor does it expect any significant losses related to those assets for which it committed to fund.

The Company participates in joint ventures and partnerships alongside its Manager and its affiliates through which the Company contributes capital for assets, including development projects related to the Company’s interests in joint ventures and partnerships that hold commercial real estate, as well as alternative credit and specialty lending focused businesses. The Company estimated these future contributions to total approximately $271.4 million as of June 30, 2017 and $279.4 million as of December 31, 2016.

Guarantees

As of June 30, 2017 and December 31, 2016, the Company had investments, held alongside KKR and its affiliates, in real estate entities that were financed with non-recourse debt totaling approximately $1.4 billion and $1.1 billion, respectively. Under non-recourse debt, the lender generally does not have recourse against any other assets owned by the borrower or any related parties of the borrower, except for certain specified exceptions listed in the respective loan documents including customary “bad boy” acts and environmental losses. In connection with certain of these investments, joint and several non-recourse carve-out guarantees and environmental indemnities were provided, pursuant to which KFN guarantees losses or the full amount of the applicable loan in the event of specified bad acts or environmental matters. In addition, completion guarantees were provided for certain properties to complete all or portions of development projects, and partial payment guarantees were provided for certain investments. The Company's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against it that have not yet occurred. However, based on prior experience, the Company expects the risk of material loss to be low.

Contingencies

From time to time, the Company may become involved in various legal proceedings, lawsuits and claims incidental to the conduct of the Company’s business. The Company’s business is also subject to regulation, which may result in regulatory investigations or other proceedings against it. It is inherently difficult to predict the ultimate outcome of any legal proceedings, lawsuits, claims, investigations, other proceedings, and an adverse outcome in any matter could at any time have a material effect on the Company’s financial results in any particular period. Based on current discussion and consultation with counsel, management believes that there are no such matters pending that would have a material impact on the Company’s condensed consolidated financial statements.

NOTE 10. MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS

The Manager manages the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors. The Management Agreement expires on December 31 of each year, but is automatically renewed for a 1 year term each December 31 unless terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors, or by a vote of the holders of a majority of the Company’s outstanding common shares, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination under this clause (2) by accepting a mutually acceptable reduction of management fees. The Manager must be provided 180 days prior notice of any such termination and will be paid a termination fee equal to four times the sum of the average annual base management fee and the average annual incentive fee for the two 12-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

The Management Agreement contains certain provisions requiring the Company to indemnify the Manager with respect to all losses or damages arising from acts not constituting bad faith, willful misconduct, or gross negligence. The Company has evaluated the impact of these guarantees on its condensed consolidated financial statements and determined that they are not material.

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The following table summarizes the components of related party management compensation on the Company’s condensed consolidated statements of operations, which are described in further detail below (amounts in thousands):



	Three months ended June 30, 2017		Three months ended June 30, 2016		Six months ended June 30, 2017		Six months ended June 30, 2016
Base management fees, net	$	5,200	$	559	$	9,644	$	1,588
CLO management fees	3,506		6,208		6,620		12,455
Incentive fees	—		—		—		—
Total related party management compensation	$	8,706	$	6,767	$	16,264	$	14,043

Base Management Fees

The Company pays its Manager a base management fee quarterly in arrears. During 2017 and 2016, certain related party fees received by affiliates of the Manager were credited to the Company via an offset to the base management fee (“Fee Credits”). Specifically, as described in further detail under “CLO Management Fees” below, a portion of the CLO management fees received by an affiliate of the Manager for certain of the Company’s CLOs were credited to the Company via an offset to the base management fee.

The table below summarizes the aggregate base management fees (amounts in thousands):



	Three months ended June 30, 2017			Three months ended June 30, 2016			Six months ended June 30, 2017			Six months ended June 30, 2016
Base management fees, gross	$	6,504		$	5,002		$	12,326		$	10,785
CLO management fees credit(1)	(1,304		)	(4,443		)	(2,682		)	(9,197		)
Total base management fees, net	$	5,200		$	559		$	9,644		$	1,588


(1)	See “CLO Management Fees” for further discussion.

CLO Management Fees

An affiliate of the Manager entered into separate management agreements with the respective investment vehicles for all of the Company’s Cash Flow CLOs pursuant to which it is entitled to receive fees for the services it performs as collateral manager for all of these CLOs, except for CLO 2011-1. The collateral manager has the option to waive the fees it earns for providing management services for the CLO.

Fees Charged and Fee Credits

The Company recorded management fees expense for the majority of its CLOs during both the three and six months ended June 30, 2017 and 2016. The Manager credited the Company for a portion of the CLO management fees received by an affiliate of the Manager from CLOs including CLO 2007-1, CLO 2012-1, CLO 9, CLO 10, CLO 11, CLO 13, CLO 2016-1 and CLO 15 via an offset to the base management fees payable to the Manager. As the Company owns less than 100% of the subordinated notes of these CLOs (with the remaining subordinated notes held by affiliated and unaffiliated third parties), the Company received a Fee Credit equal only to the Company’s pro rata share of the aggregate CLO management fees paid by these CLOs. Specifically, the amount of the reimbursement for each of these CLOs was calculated by taking the product of (x) the total CLO management fees received by an affiliate of the Manager during the period for such CLO multiplied by (y) the percentage of the subordinated notes of such CLO held by the Company. The remaining portion of the CLO management fees paid by each of these CLOs was not credited to the Company, but instead resulted in a dollar-for-dollar reduction in the interest expense paid by the Company to the third party holder of the CLO’s subordinated notes. Similarly, the Manager credited the Company the CLO management fees from CLOs including CLO 2013-1 and CLO 2013-2 based on the Company’s 100% ownership of the subordinated notes in the CLO.

The table below summarizes the aggregate CLO management fees, including the Fee Credits (amounts in thousands):

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	Three months ended June 30, 2017		Three months ended June 30, 2016		Six months ended June 30, 2017		Six months ended June 30, 2016
Charged and retained CLO management fees(1)	$	2,202	$	1,765	$	3,938	$	3,258
CLO management fees credit	1,304		4,443		2,682		9,197
Total CLO management fees	$	3,506	$	6,208	$	6,620	$	12,455


(1)	Represents management fees incurred by the senior and subordinated note holders of a CLO, excluding the Fee Credits received by the Company based on its ownership percentage in the CLO.

Subordinated note holders in CLOs have the first risk of loss and conversely, the residual value upside of the transactions. When CLO management fees are paid by a CLO, the residual economic interests in the CLO transaction are reduced by an amount commensurate with the CLO management fees paid. The Company records any residual proceeds due to subordinated note holders as interest expense on the condensed consolidated statements of operations. Accordingly, the increase in CLO management fees is directly offset by a decrease in interest expense.

Incentive Fees

The Manager receives quarterly incentive compensation from the Company based on its achievement of specified levels of net income pursuant to the Management Agreement. The Manager earned zero incentive fees for the three months ended June 30, 2017 and agreed to waive incentive fees of $16.2 million for the six months ended June 30, 2017. The Manager earned zero incentive fees for both the three and six months ended June 30, 2016.

Reimbursable General and Administrative Expenses

Certain general and administrative expenses are incurred by the Company’s Manager on its behalf that are reimbursable to the Manager pursuant to the Management Agreement. The Company incurred reimbursable general and administrative expenses to its Manager totaling $1.0 million and $2.0 million for the three and six months ended June 30, 2017, respectively. The Company incurred reimbursable general and administrative expenses to its Manager totaling $0.9 million and $1.9 million for the three and six months ended June 30, 2016 , respectively. Expenses incurred by the Manager and reimbursed by the Company are reflected in general, administrative and directors expenses on the condensed consolidated statements of operations.

Contributions and Distributions

The Company made certain cash distributions on its common shares, which are held by its Parent, totaling $53.4 million for both the three and six months ended June 30, 2017, and $24.6 million and $62.9 million during the three and six months ended June 30, 2016, respectively. Separately, the Company made certain asset distributions in kind on its common shares as described further below.

During 2017 and 2016, certain assets were contributed from and distributed to the Parent, including a $166.3 million contribution representing membership interests in a holding company of a real estate investment trust and a $250.8 million contribution representing equity interests in a holding company of an amusement theme park. The table below summarizes the estimated fair value of contributions and distributions at the time of transfer (amounts in thousands):

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	Three months ended June 30, 2017		Three months ended June 30, 2016		Six months ended June 30, 2017		Six months ended June 30, 2016
Contributions:
Equity investments, at estimated fair value	$	250,805	$	—	$	250,805	$	—
Interests in joint ventures and partnerships	166,258		—		183,879		—
Total contributions from Parent	$	417,063	$	—	$	434,684	$	—

Distributions:
Cash	$	417,063	$	—	$	433,715	$	—
Loans	—		45,225		—		45,225
Equity investments, at estimated fair value	—		26,098		—		26,098
CLO subordinated notes	—		60,640		—		60,640
Total distributions to Parent	$	417,063	$	131,963	$	433,715	$	131,963

Affiliated Investments

The Company has invested in corporate loans, debt securities and other investments of entities that are affiliates of the Manager. As of June 30, 2017, the aggregate par amount of these affiliated investments totaled $259.2 million, or approximately 6% of the total investment portfolio, and consisted of 2 issuers. The total affiliated investments was comprised of $259.2 million of equity investments. Comparatively, as of December 31, 2016, the aggregate par amount of these affiliated investments totaled $20.4 million, or less than 1% of the total investment portfolio, and consisted of 2 issuers. The total affiliated investments was comprised of $20.1 million of equity investments and $0.3 million of corporate debt securities.

In addition, the Company has invested in certain joint ventures and partnerships alongside affiliates of the Manager. As of June 30, 2017 and December 31, 2016, the estimated fair value of these interests in joint ventures and partnerships totaled $901.4 million and $680.5 million, respectively.

NOTE 11. SEGMENT REPORTING

Operating segments are defined as components of a company that engage in business activities that may earn revenues and incur expenses for which separate financial information is available and reviewed by the chief operating decision maker or group in determining how to allocate resources and assessing performance. The Company operates its business through the following reportable segments: credit (“Credit”), natural resources (“Natural Resources”) and other ("Other").

The Company’s reportable segments are differentiated primarily by their investment focuses. The Credit segment consists primarily of below investment grade corporate debt comprised of senior secured and unsecured loans, mezzanine loans, high yield bonds, private and public equity investments, and distressed and stressed debt securities. The Natural Resources segment consists of overriding royalty interests in oil and natural gas properties, as well as interests in joint ventures and partnerships focused on the oil and gas sector. The Other segment includes all other portfolio holdings, consisting solely of commercial real estate. The segments currently reported are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by the Company.

The Company evaluates the performance of its reportable segments based on several net income (loss) components. Net income (loss) includes (i) revenues, (ii) related investment costs and expenses, (iii) other income (loss), which is comprised primarily of unrealized and realized gains and losses on investments, debt and derivatives, and (iv) other expenses, including related party management compensation and general and administrative expenses. Certain corporate assets and expenses that are not directly related to the individual segments, including interest expense and related costs on borrowings, base management fees and professional services are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end. Certain other corporate assets and expenses, including incentive fees, insurance expenses and directors’ expenses, if any, are not allocated to individual segments in the Company’s assessment of segment performance. Collectively, these items are included as reconciling items between reported segment amounts and consolidated totals.

The following table presents the net income (loss) components of our reportable segments reconciled to amounts reflected in the condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016 (amounts in thousands):

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	Credit					Natural Resources					Other					Reconciling Items(1)				Total Consolidated
	Three months ended June 30, 2017		Three months ended June 30, 2016			Three months ended June 30, 2017			Three months ended June 30, 2016		Three months ended June 30, 2017		Three months ended June 30, 2016			Three months ended June 30, 2017		Three months ended June 30, 2016		Three months ended June 30, 2017			Three months ended June 30, 2016
Total revenues	$	49,406	$	65,905		$	4,256		$	3,257	$	3,960	$	—		$	—	$	—	$	57,622		$	69,162
Total investment costs and expenses	40,735		55,665			2,278			1,894		609		494			—		—		43,622			58,053
Total other income (loss)	29,578		18,756			(7,844		)	8,634		11,190		(2,444		)	—		—		32,924			24,946
Total other expenses	13,532		8,986			484			127		447		79			—		—		14,463			9,192
Income tax expense (benefit)	—		(27		)	—			—		144		(160		)	—		—		144			(187		)
Net income (loss)	$	24,717	$	20,037		$	(6,350	)	$	9,870	$	13,950	$	(2,857	)	$	—	$	—	$	32,317		$	27,050
Net income (loss) attributable to noncontrolling interests	1,841		(1,948		)	(2,100		)	667		—		—			—		—		(259		)	(1,281		)
Net income (loss) attributable to KKR Financial Holdings LLC and Subsidiaries	$	22,876	$	21,985		$	(4,250	)	$	9,203	$	13,950	$	(2,857	)	$	—	$	—	$	32,576		$	28,331


(1)	Consists of incentive fees, insurance expenses and directors’ expenses, if any, which are not allocated to individual segments.



	Credit					Natural Resources						Other					Reconciling Items(1)					Total Consolidated
	Six months ended June 30, 2017		Six months ended June 30, 2016			Six months ended June 30, 2017			Six months ended June 30, 2016			Six months ended June 30, 2017		Six months ended June 30, 2016			Six months ended June 30, 2017			Six months ended June 30, 2016		Six months ended June 30, 2017		Six months ended June 30, 2016
Total revenues	$	92,828	$	143,300		$	7,966		$	5,898		$	3,961	$	9,269		$	—		$	—	$	104,755	$	158,467
Total investment costs and expenses	76,888		106,649			4,203			3,508			810		894			—			—		81,901		111,051
Total other income (loss)	181,965		(155,190		)	(23,427		)	(18,608		)	15,887		(11,138		)	—			—		174,425		(184,936		)
Total other expenses	23,401		32,850			740			257			689		149			20			—		24,850		33,256
Income tax expense (benefit)	6		(4		)	—			—			591		(123		)	—			—		597		(127		)
Net income (loss)	$	174,498	$	(151,385	)	$	(20,404	)	$	(16,475	)	$	17,758	$	(2,789	)	$	(20	)	$	—	$	171,832	$	(170,649	)
Net income (loss) attributable to noncontrolling interests	5,616		(11,659		)	(3,900		)	(5,157		)	—		—			—			—		1,716		(16,816		)
Net income (loss) attributable to KKR Financial Holdings LLC and Subsidiaries	$	168,882	$	(139,726	)	$	(16,504	)	$	(11,318	)	$	17,758	$	(2,789	)	$	(20	)	$	—	$	170,116	$	(153,833	)


(1)	Consists of incentive fees, insurance expenses and directors’ expenses, if any, which are not allocated to individual segments.

The following table shows total assets of our reportable segments reconciled to amounts reflected in the condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016 (amounts in thousands):



	Credit				Natural Resources				Other				Reconciling Items				Total Consolidated(1)
As of	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Total assets	$	5,694,159	$	5,422,560	$	187,841	$	219,516	$	394,361	$	208,981	$	—	$	—	$	6,276,361	$	5,851,057

(1)

Total consolidated assets as of June 30, 2017 included $70.7 million of noncontrolling interests, of which $48.2 million was related to the Credit segment and $22.5 million was related to the Natural Resources segment. Total consolidated assets as of December 31, 2016 included $71.6 million of noncontrolling interests, of which $43.4 million was related to the Credit segment and $28.2 million was related to the Natural Resources segment.

NOTE 12. SUBSEQUENT EVENTS

On June 22, 2017, the Company announced a cash distribution on its Series A LLC Preferred Shares totaling $6.9 million, or $0.460938 per share. The distribution was paid on July 17, 2017 to preferred shareholders of record as of the close of business on July 10, 2017.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except where otherwise expressly stated or the context suggests otherwise, the terms “we,” “us” and “our” refer to KKR Financial Holdings LLC and its subsidiaries.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Certain information contained in this Quarterly Report on Form 10-Q constitutes “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our current expectations, estimates and projections. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. The words “believe,” “anticipate,” “intend,” “aim,” “expect,” “strive,” “plan,” “estimate,” and “project,” and similar words identify forward-looking statements. Such statements are not guarantees of future performance, events or results and involve potential risks and uncertainties. Accordingly, actual results and the timing of certain events could differ materially from those addressed in forward-looking statements due to a number of factors including, but not limited to, changes in interest rates and market values, financing and capital availability, changes in prepayment rates, general economic and political conditions and events, changes in market conditions, particularly in the global fixed income, credit and equity markets, the impact of current, pending and future legislation, regulation and legal actions, and other factors not presently identified. Other factors that may impact our actual results are discussed under “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K filed with the Securities Exchange Commission, or the SEC, on March 29, 2017 and our subsequent quarterly reports. We do not undertake, and specifically disclaim, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except for as required by federal securities laws.

EXECUTIVE OVERVIEW

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 KKR Financial Advisors LLC (our “Manager”) with the objective of generating current income. Our holdings primarily consist of below investment grade syndicated corporate loans, also known as leveraged loans, high yield debt securities and interests in joint ventures and partnerships. The corporate loans that we hold are typically purchased via assignment or participation in the primary or secondary market.

The majority of our holdings consist of corporate loans and high yield debt securities held in collateralized loan obligation (“CLO”) transactions that are structured as on balance sheet securitizations and are used as long term financing for our investments in corporate debt. The senior secured debt issued by the CLO transactions is primarily owned by unaffiliated third party investors and we own the majority of the subordinated notes in the CLO transactions. As of June 30, 2017, our CLO transactions consisted of KKR Financial CLO 2012-1, Ltd. (“CLO 2012-1"), KKR Financial CLO 2013-1, Ltd. (“CLO 2013-1"), KKR Financial CLO 2013-2, Ltd. (“CLO 2013-2"), KKR CLO 9, Ltd. (“CLO 9”), KKR CLO 10, Ltd. (“CLO 10”), KKR CLO 15, Ltd. ("CLO 15") and KKR CLO 16, Ltd. ("CLO 16") (collectively the “Cash Flow CLOs”). During 2016, we called KKR 2016-1, Ltd. ("CLO 2016-1"), KKR Financial CLO 2007-1 (“CLO 2007-1") and KKR Financial CLO 2011-1 (“CLO 2011-1") and during 2015, we called KKR Financial CLO 2005-2, Ltd. (“CLO 2005-2"), KKR Financial CLO 2005-1, Ltd. ("CLO 2005-1") and KKR Financial CLO 2006-1, Ltd ("CLO 2006-1"), whereby we repaid all senior and mezzanine notes outstanding. We execute our core business strategy through our subsidiaries, including CLOs.

We are a Delaware limited liability company and were organized on January 17, 2007. We are the successor to KKR Financial Corp., a Maryland corporation. We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation.

We are a subsidiary of KKR & Co. L.P. ("KKR & Co." and, together with its subsidiaries, "KKR"). KKR Fund Holdings L.P., a subsidiary of KKR & Co., is the sole holder of all of our outstanding common shares and is our parent ("Parent"). We are externally managed and advised by our Manager pursuant to an amended and restated management agreement (as amended the “Management Agreement”). The Manager is a subsidiary of KKR & Co.

Our 7.375% Series A LLC Preferred Shares (“Series A LLC Preferred Shares”) trade on the New York Stock Exchange (“NYSE”).

Consolidated Summary of Results

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Our net income available to common shares for the three and six months ended June 30, 2017 totaled $25.7 million and $156.3 million, respectively. Comparatively, we had net income available to common shares for the three months ended June 30. 2016 totaling $21.4 million and net loss available to common shares for the six months ended June 30, 2016 totaling $167.6 million. Additional discussion around our results, as well as the components of net income for our reportable segments, are detailed further below under “Results of Operations.”

Consolidation

Our Cash Flow CLOs are all variable interest entities (‘‘VIEs’’) that we consolidate as we have determined we have the power to direct the activities that most significantly impact these entities’ economic performance and we have both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities.

We also consolidate non-VIEs in which we hold a greater than 50 percent voting interest. The ownership interests held by third parties of our consolidated non-VIE entities are reflected as noncontrolling interests in our condensed consolidated financial statements. We began consolidating a majority of these non-VIE entities as a result of the asset contributions from our Parent during the second half of 2014. For certain of these entities, we previously held a percentage ownership, but following the incremental contributions from our Parent, we were presumed to have control.

As our condensed consolidated financial statements in this Quarterly Report on Form 10-Q are presented to reflect the consolidation of the CLOs and above non-VIE entities we hold investments in, the information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations also reflects these entities on a consolidated basis, which is consistent with the disclosures in our condensed consolidated financial statements.

Non-Cash “Phantom” Taxable Income

We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. Holders of our Series A LLC Preferred Shares are subject to United States federal income taxation and generally other taxes, such as state, local and foreign income taxes, on their allocable share of our gross ordinary income, regardless of whether or when they receive cash distributions. We generally allocate our gross ordinary income using a monthly convention, which means that we determine our gross ordinary income for the taxable year to be allocated to our Series A LLC Preferred Shares and then prorate that amount on a monthly basis. Our Series A LLC Preferred Shares will receive an allocation of our gross ordinary income. If the amount of cash distributed to our Series A LLC Preferred Shares in any year exceeds our gross ordinary income for such year, additional gross ordinary income will be allocated to the Series A LLC Preferred Shares in future years until such excess is eliminated. Consequently, in some taxable years, holders of our Series A LLC Preferred Shares may recognize taxable income in excess of our cash distributions. Furthermore, even if we did not pay cash distributions with respect to a taxable year, holders of our Series A LLC Preferred Shares may still have a tax liability attributable to their allocation of our gross ordinary income from us during such year in the event that cash distributed in a prior year exceeded our gross ordinary income in such year.

CRITICAL ACCOUNTING POLICIES

Our condensed consolidated financial statements are prepared by management in conformity with GAAP. Our significant accounting policies are fundamental to understanding our financial condition and results of operations because some of these policies require that we make significant estimates and assumptions that may affect the value of our assets or liabilities and financial results. We believe that certain of our policies are critical because they require us to make difficult, subjective, and complex judgments about matters that are inherently uncertain. In addition to the below, refer to “Part I-Item 1. Financial Statements-Note 2. Summary of Significant Accounting Policies” and our Annual Report on Form 10-K filed with the SEC on March 29, 2017 for further discussion.

Recent Accounting Pronouncements

Accounting Changes and Error Corrections and Investments - Equity Method and Joint Ventures

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registrant’s new accounting policies, if determined, to current accounting policies, a description of the status of the registrant’s process to implement the new standard and a description of the significant implementation matters yet to be addressed by the registrant. Other than enhancements to the qualitative disclosures regarding future adoption of new ASUs, adoption of the provisions of this standard is not expected to have any material impact on our condensed consolidated financial statements.

Consolidation

Financial Instruments

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Liabilities (“ASU 2016-01”). The amended guidance (i) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at fair value; (iii) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments and (iv) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amended guidance related to equity securities without readily determinable fair values (including the disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We are currently evaluating the impact on our financial statements.

Cash Flow Classification

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amended guidance adds or clarifies guidance on eight cash flow matters: (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The guidance must be applied retrospectively to all periods presented but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. We are currently evaluating the impact on our financial statements.

RESULTS OF OPERATIONS

Consolidated Results

The following tables show data of our reportable segments reconciled to amounts reflected in the condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016 (amounts in thousands):

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	Credit					Natural Resources					Other					Reconciling Items(1)				Total Consolidated
	Three months ended June 30, 2017		Three months ended June 30, 2016			Three months ended June 30, 2017			Three months ended June 30, 2016		Three months ended June 30, 2017		Three months ended June 30, 2016			Three months ended June 30, 2017		Three months ended June 30, 2016		Three months ended June 30, 2017			Three months ended June 30, 2016
Total revenues	$	49,406	$	65,905		$	4,256		$	3,257	$	3,960	$	—		$	—	$	—	$	57,622		$	69,162
Total investment costs and expenses	40,735		55,665			2,278			1,894		609		494			—		—		43,622			58,053
Total other income (loss)	29,578		18,756			(7,844		)	8,634		11,190		(2,444		)	—		—		32,924			24,946
Total other expenses	13,532		8,986			484			127		447		79			—		—		14,463			9,192
Income tax expense (benefit)	—		(27		)	—			—		144		(160		)	—		—		144			(187		)
Net income (loss)	$	24,717	$	20,037		$	(6,350	)	$	9,870	$	13,950	$	(2,857	)	$	—	$	—	$	32,317		$	27,050
Net income (loss) attributable to noncontrolling interests	1,841		(1,948		)	(2,100		)	667		—		—			—		—		(259		)	(1,281		)
Net income (loss) attributable to KKR Financial Holdings LLC and Subsidiaries	$	22,876	$	21,985		$	(4,250	)	$	9,203	$	13,950	$	(2,857	)	$	—	$	—	$	32,576		$	28,331

(1) Consists of incentive fees, insurance expenses and directors’ expenses, if any, which are not allocated to individual segments.



	Credit					Natural Resources						Other					Reconciling Items(1)					Total Consolidated
	Six months ended June 30, 2017		Six months ended June 30, 2016			Six months ended June 30, 2017			Six months ended June 30, 2016			Six months ended June 30, 2017		Six months ended June 30, 2016			Six months ended June 30, 2017			Six months ended June 30, 2016		Six months ended June 30, 2017		Six months ended June 30, 2016
Total revenues	$	92,828	$	143,300		$	7,966		$	5,898		$	3,961	$	9,269		$	—		$	—	$	104,755	$	158,467
Total investment costs and expenses	76,888		106,649			4,203			3,508			810		894			—			—		81,901		111,051
Total other income (loss)	181,965		(155,190		)	(23,427		)	(18,608		)	15,887		(11,138		)	—			—		174,425		(184,936		)
Total other expenses	23,401		32,850			740			257			689		149			20			—		24,850		33,256
Income tax expense (benefit)	6		(4		)	—			—			591		(123		)	—			—		597		(127		)
Net income (loss)	$	174,498	$	(151,385	)	$	(20,404	)	$	(16,475	)	$	17,758	$	(2,789	)	$	(20	)	$	—	$	171,832	$	(170,649	)
Net income (loss) attributable to noncontrolling interests	5,616		(11,659		)	(3,900		)	(5,157		)	—		—			—			—		1,716		(16,816		)
Net income (loss) attributable to KKR Financial Holdings LLC and Subsidiaries	$	168,882	$	(139,726	)	$	(16,504	)	$	(11,318	)	$	17,758	$	(2,789	)	$	(20	)	$	—	$	170,116	$	(153,833	)

(1) Consists of incentive fees, insurance expenses and directors’ expenses, if any, which are not allocated to individual segments.

Revenues

Revenues consist primarily of interest income and discount accretion from our investment portfolio, and to a lesser extent dividend income primarily from our equity investments and interests in joint ventures and partnerships. In addition, revenues include oil and gas revenue from our overriding royalty interest properties.

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Revenues decreased $11.5 million in the second quarter of 2017 compared to the second quarter of 2016. This was primarily due to a $20.0 million decline in interest income earned from our corporate debt portfolio partially offset by a $7.5 million increase in other income.

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to 2012, were larger in total transaction size relative to those issued subsequently. During the second half of 2016, we repaid approximately $1.1 billion of notes from the sale proceeds of assets held within the legacy CLOs. Separately, during 2016, we de-consolidated CLO 11 and CLO 13 which resulted in a reduction in the aggregate par value of our loan portfolio by approximately $898.8 million. Refer to "Segment Results-Credit Segment-Revenues" for further discussion.

Other income within revenues increased $7.5 million in the second quarter of 2017 compared to the second quarter of 2016. Other income is comprised primarily of dividend income from our interests in joint ventures and partnerships and equity investments. The increase in the second quarter of 2017 was largely from certain of our commercial real estate assets, in the Other segment, in which we received $4.0 million of dividend payments compared to zero in the second quarter of 2016. Unlike our corporate debt portfolio, which have stated coupon rates and frequencies, dividends are not necessarily contractual in their amounts or timing and may vary depending on investment performance.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Revenues decreased $53.7 million in the first half of 2017 compared to the first half of 2016 primarily due to a $50.2 million decline in interest income earned from our corporate debt portfolio.

The decline in interest income was largely due to a smaller portfolio generating recurring income. Specifically, as of June 30, 2017 and 2016, the aggregate par value of our corporate debt portfolio totaled $4.0 billion and $4.4 billion, respectively. This decline was primarily due to the calling of our legacy CLOs during 2015 and 2016, the largest of which was CLO 2007-1, and the sale of assets held within these CLOs to repay the CLO notes outstanding. These legacy CLOs, which were issued prior to 2012, were larger in total transaction size relative to those issued subsequently. During the latter half of 2016, we repaid approximately $1.1 billion of notes from the sale proceeds of assets held within the legacy CLOs. Separately, during 2016, we de-consolidated CLO 11 and CLO 13 which resulted in a reduction in the aggregate par value of our loan portfolio by approximately $898.8 million. Refer to "Segment Results-Credit Segment-Revenues" for further discussion.

Investment Costs and Expenses

Investment costs and expenses is comprised of interest expense, oil and gas production costs, depreciation, depletion and amortization expense (“DD&A”) related to our oil and gas properties and other investment expenses.

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Total investment costs and expenses decreased $14.4 million in the second quarter of 2017 compared to the second quarter of 2016 largely driven by a decrease in interest expense partially offset by an increase in interest expense to affiliates. Interest expense, which includes interest expense on our CLO secured notes, decreased $14.5 million during the second quarter of 2017 compared to the same prior year period primarily due to the calling of CLO 2007-1 in August 2016 and the de-consolidation of CLO 11 and CLO 13 during 2016. These three CLOs recorded $24.8 million of interest expense during the second quarter of 2016 compared to zero during the second quarter of 2017.

Partially offsetting the above decrease in interest expense, was an increase in interest expense on our junior secured CLO notes to affiliates of $4.5 million in the second quarter of 2017 compared to the second quarter of 2016. During May and December 2016, we distributed in kind on our common shares $203.0 million par amount of certain subordinated notes to our Parent and as such incurred interest expense on these CLO junior secured notes held by affiliates of our Manager. These notes were previously owned by us and eliminated in consolidation.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Total investment costs and expenses decreased $29.2 million in the first half of 2017 compared to the first half of 2016 largely driven by a decrease in interest expense, specifically on our CLO secured notes and senior notes, partially offset by an increase in interest expense to affiliates. Interest expense, which includes interest expense on our CLO secured notes, decreased $26.3 million during the first half of 2017 compared to the same prior year period primarily due to the calling of CLO 2007-1 in August 2016 and the de-consolidation of CLO 11 and CLO 13 during 2016. These three CLOs recorded $44.7 million of interest expense during the first half of 2016 compared to zero during the first half of 2017. Additionally, interest expense on our senior notes decreased $6.4 million during the first half of 2017 compared to the first half of 2016 primarily due to the redemption of our 8.375% Senior Notes due 2041 (the "Notes due 2041") and our 7.500% Senior Notes due 2042 (the "Notes due 2042") in November 2016 and April 2017, respectively.

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Partially offsetting the above decrease in interest expense, was an increase in interest expense on our junior secured CLO notes to affiliates of $9.1 million in the first half of 2017 compared to the first half of 2016. During May and December 2016, we distributed in kind on our common shares $203.0 million par amount of certain subordinated notes to our Parent and as such incurred interest expense on these CLO junior secured notes held by affiliates of our Manager. These notes were previously owned by us and eliminated in consolidation.

Other Income (Loss)

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Other income favorably changed $8.0 million in the second quarter of 2017 compared to the second quarter of 2016 largely due to a $22.9 million favorable change in net realized and unrealized gain (loss) on debt and debt to affiliates, a $19.9 million favorable change in net realized and unrealized gain (loss) on derivatives and foreign exchange and a $7.9 million gain on extinguishment of debt. The above gains however were partially offset by $44.2 million of unfavorable changes in net realized and unrealized gain (loss) on investments.

Net realized and unrealized gain (loss) on debt and debt to affiliates favorably changed $22.9 million in the second quarter of 2017 compared to the second quarter of 2016. Beginning January 1, 2015, we measured the financial liabilities of our consolidated CLOs using the fair value of the financial assets of our consolidated CLOs, which was determined to be more observable. Accordingly, these financial assets were measured at fair value and these financial liabilities were measured as: (i) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets that are incidental to the operations of the CLOs, less (ii) the sum of the fair value of any beneficial interests retained by us.

Net realized and unrealized gain (loss) on derivatives and foreign exchange favorably changed $19.9 million during the second quarter of 2017 compared to the same prior year period. A majority of the change was related to net realized and unrealized gains on foreign exchange which favorably changed $17.5 million, largely driven by fluctuations in the foreign currency exchange rates related to a Euro-denominated investment which was contributed from our Parent during the second quarter of 2017.

Net gain on extinguishment of debt increased $7.9 million during the second quarter of 2017 compared to the same prior year period. During April, we redeemed all of our outstanding 7.500% Senior Notes due 2042 and recognized a gain upon redemption.

Net realized and unrealized gain (loss) on investments unfavorably changed $44.2 million from a net realized and unrealized gain of $30.5 million in the second quarter of 2016 to a net realized and unrealized loss of $13.7 million in the second quarter of 2017. A majority of this unfavorable change was related to our corporate loans and corporate debt securities as a result of a general downturn in general market conditions. For example, the S&P/LSTA Loan Index returned 0.76% for the three months ended June 30, 2017 compared to 2.92% for the three months ended June 30, 2016. Refer to "Segment Results-Credit Segment-Investment Costs and Expenses" for further discussion.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Other income (loss) favorably changed $359.4 million in the first half of 2017 compared to the first half of 2016 primarily due to a $210.8 million favorable change in net realized and unrealized gain (loss) on investments, a $98.6 million favorable change in net realized and unrealized loss on debt and debt to affiliates and a $35.9 million favorable change in net realized and unrealized gain (loss) on derivatives and foreign exchange.

Net realized and unrealized gain (loss) on investments favorably changed $210.8 million from a net realized and unrealized loss of $107.5 million in the first half of 2016 to a net realized and unrealized gain of $103.2 million in the first half of 2017. A majority of this favorable change was related to our corporate debt securities, interests in joint ventures and partnerships and equity investments spanning the oil and gas, marine, alternative credit, diversified financial services and education sectors, as well as our commercial real estate assets. Refer to "Segment Results-Credit Segment-Investment Costs and Expenses" and "Segment Results-Other Segment-Investment Costs and Expenses" for further discussion.

Net realized and unrealized loss on debt and debt to affiliates favorably changed $98.6 million in the first half of 2017 compared to the first half of 2016. Beginning January 1, 2015, we measured the financial liabilities of our consolidated CLOs using the fair value of the financial assets of our consolidated CLOs, which was determined to be more observable. Accordingly, these financial assets were measured at fair value and these financial liabilities were measured as: (i) the sum of the fair value of

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the financial assets and the carrying value of any nonfinancial assets that are incidental to the operations of the CLOs, less (ii) the sum of the fair value of any beneficial interests retained by us.

Net realized and unrealized gain (loss) on derivatives and foreign exchange favorably changed $35.9 million during the first half of 2017 compared to the same prior year period largely driven by two factors. First, realized and unrealized gains on foreign exchange favorably changed $20.4 million, largely driven by fluctuations in the foreign currency exchange rates related to a Euro-denominated investment which was contributed from our Parent during the first half of 2017. Second, realized and unrealized gain (loss) on interest rate swaps favorably changed $16.6 million, driven by comparatively smaller period over period decreases in the 30-year swap rate. We use pay-fixed, receive variable interest rate swaps to hedge the interest rate risk associated with a portion of our borrowings which are indexed to the 30-year swap rate; as such, movements in the 30-year swap rate are expected to impact total realized and unrealized gain (loss) on derivatives and foreign exchange. Refer to "Segment Results-Credit Segment-Investment Costs and Expenses" for further discussion.

Other Expenses

Other expenses include related party management compensation, general, administrative and directors’ expenses and professional services. Related party management compensation consists of base management fees payable to our Manager pursuant to the Management Agreement, collateral management fees and incentive fees, if any.

Base Management Fees

We pay our Manager a base management fee quarterly in arrears. During 2017 and 2016, certain related party fees received by affiliates of our Manager were credited to us via an offset to the base management fee (“Fee Credits”). Specifically, as described in further detail under “CLO Management Fees” below, a portion of the CLO management fees received by an affiliate of our Manager for certain of our CLOs were credited to us via an offset to the base management fee.

The table below summarizes the aggregate base management fees (amounts in thousands):



	Three months ended June 30, 2017			Three months ended June 30, 2016			Six months ended June 30, 2017			Six months ended June 30, 2016
Base management fees, gross	$	6,504		$	5,002		$	12,326		$	10,785
CLO management fees credit(1)	(1,304		)	(4,443		)	(2,682		)	(9,197		)
Total base management fees, net	$	5,200		$	559		$	9,644		$	1,588


(1)	See “CLO Management Fees” for further discussion.

CLO Management Fees

An affiliate of our Manager entered into separate management agreements with the respective investment vehicles for all of our Cash Flow CLOs pursuant to which it is entitled to receive fees for the services it performs as collateral manager for all of these CLOs, except for CLO 2011-1. The collateral manager has the option to waive the fees it earns for providing management services for the CLO.

Our Manager credited us for a portion of the CLO management fees received by an affiliate of our Manager from CLOs including CLO 2007-1, CLO 2012-1, CLO 9, CLO 10, CLO 11, CLO 13, CLO 2016-1 and CLO 15 via an offset to the base management fees payable to our Manager. As we own less than 100% of the subordinated notes of these CLOs (with the remaining subordinated notes held by affiliated and unaffiliated third parties), we received a Fee Credit equal only to our pro rata share of the aggregate CLO management fees paid by these CLOs. Specifically, the amount of the reimbursement for each of these CLOs was calculated by taking the product of (x) the total CLO management fees received by an affiliate of our Manager during the period for such CLO multiplied by (y) the percentage of the subordinated notes of such CLO held by us. The remaining portion of the CLO management fees paid by each of these CLOs was not credited to us, but instead resulted in a dollar‑for‑dollar reduction in the interest expense paid by us to the third party holder of the CLO’s subordinated notes. Similarly, our Manager credited to us the CLO management fees from CLO 2013-1 and CLO 2013-2 based on our 100% ownership of the subordinated notes in the CLO.

The table below summarizes the aggregate CLO management fees, including the Fee Credits (amounts in thousands):

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	Three months ended June 30, 2017		Three months ended June 30, 2016		Six months ended June 30, 2017		Six months ended June 30, 2016
Charged and retained CLO management fees(1)	$	2,202	$	1,765	$	3,938	$	3,258
CLO management fees credit	1,304		4,443		2,682		9,197
Total CLO management fees	$	3,506	$	6,208	$	6,620	$	12,455


(1)	Represents management fees incurred by the senior and subordinated note holders of a CLO, excluding the Fee Credits received by us based on our ownership percentage in the CLO.

Subordinated note holders in CLOs have the first risk of loss and conversely, the residual value upside of the transactions. When CLO management fees are paid by a CLO, the residual economic interests in the CLO transaction are reduced by an amount commensurate with the CLO management fees paid. We record any residual proceeds due to subordinated note holders as interest expense on the consolidated statements of operations. Accordingly, the increase in CLO management fees is directly offset by a decrease in interest expense.

Incentive Fees

Our Manager receives quarterly incentive compensation from us based on our achievement of specified levels of net income pursuant to the Management Agreement. Our Manager earned zero incentive fees for the three months ended June 30, 2017 and agreed to waive incentive fees of $16.2 million for the six months ended June 30, 2017. Our Manager earned zero incentive fees for both the three and six months ended June 30, 2016.

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Other expenses increased $5.3 million in the second quarter of 2017 compared to the second quarter of 2016. This was largely due to a $3.3 million increase in general, administrative and directors' expenses related to debt issuance costs totaling $3.0 million for the refinancing of CLO 2013-1 in the second quarter of 2017, coupled with a $1.9 million increase in related party management compensation. Related party management compensation includes net base management fees and CLO management fees. Net base management fees increased $4.6 million in the second quarter of 2017 compared to the prior year period primarily due to a decrease in CLO management fee credits, which directly offset gross base management fees, as a result of the overall reduced percentage of subordinated CLO notes held by us. However, the increase in net base management fees was partially offset by a $2.7 million decrease in CLO management fees due to the calling of our legacy CLOs and de-consolidation of certain CLOs.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Other expenses decreased $8.4 million in the first half of 2017 compared to the first half of 2016. This was primarily due to a $10.8 million decrease in general, administrative and directors' expenses as a result of the write-off of costs associated with our CLOs during the first half of 2016, partially offset by a $2.2 million increase in related party management compensation. Related party management compensation includes net base management fees and CLO management fees. Net base management fees increased $8.1 million in the first half of 2017 compared to the prior year period primarily due to a decrease in CLO management fee credits, which directly offset gross base management fees, as a result of the calling of legacy CLOs and overall reduced percentage of subordinated CLO notes held by us. However, the increase in net base management fees was partially offset by a $5.8 million decrease in CLO management fees due to the calling of our legacy CLOs and de-consolidation of certain CLOs.

Segment Results

We operate our business through multiple reportable segments, which are differentiated primarily by their investment focuses.

Credit (“Credit”): The Credit segment includes primarily below investment grade corporate debt comprised of senior secured and unsecured loans, mezzanine loans, high yield bonds, private and public equity investments, and distressed and stressed debt securities.

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Natural resources (“Natural Resources”): The Natural Resources segment consists of non-operated overriding royalty interests in oil and natural gas properties, as well as interests in joint ventures and partnerships focused on the oil and gas sector.

Other (“Other”): The Other segment includes all other portfolio holdings, consisting solely of commercial real estate.

The segments currently reported are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by our chief operating decision maker.

We evaluate the performance of our reportable segments based on several net income (loss) components. Net income (loss) includes: (i) revenues; (ii) related investment costs and expenses; (iii) other income (loss), which is comprised primarily of unrealized and realized gains and losses on investments, debt and derivatives and (iv) other expenses, including related party management compensation and general and administrative expenses. Certain corporate assets and expenses that are not directly related to the individual segments, including interest expense and related costs on borrowings, base management fees and professional services are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period‑end. Certain other corporate assets and expenses, including incentive fees, insurance expenses and directors’ expenses, if any, are not allocated to individual segments in our assessment of segment performance. Collectively, these items are included as reconciling items between reported segment amounts and consolidated totals. For further financial information related to our segments, refer to “Part I-Item 1. Financial Statements-Note 11. Segment Reporting.”

The following discussion and analysis regarding our results of operations is based on our reportable segments.

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Credit Segment

The following table presents the net income (loss) components of our Credit segment (amounts in thousands):



	Three months ended June 30, 2017			Three months ended June 30, 2016			Six months ended June 30, 2017			Six months ended June 30, 2016
Revenues
Corporate loans and securities interest income	$	42,039		$	62,396		$	83,917		$	133,283
Residential mortgage-backed securities interest income	650			924			1,304			1,606
Net discount accretion	1,709			1,097			936			1,500
Dividend income	3,781			1,123			4,362			6,308
Other	1,227			365			2,309			603
Total revenues	49,406			65,905			92,828			143,300
Investment costs and expenses
Interest expense:
Collateralized loan obligation secured notes	25,985			40,511			50,625			76,939
Collateralized loan obligation junior secured notes to affiliates	5,460			1,009			10,113			1,009
Credit facilities	—			—			721			—
Senior notes	5,225			6,614			7,194			13,345
Junior subordinated notes	2,558			3,667			4,992			7,723
Interest rate swaps	840			2,706			1,712			5,679
Total interest expense	40,068			54,507			75,357			104,695
Other	667			1,158			1,531			1,954
Total investment costs and expenses	40,735			55,665			76,888			106,649
Other income (loss)
Realized and unrealized gain (loss) on derivatives and foreign exchange:
Interest rate swap	(2,802		)	(5,934		)	(1,087		)	(17,665		)
Common stock warrants	96			(165		)	267			(23		)
Foreign exchange(1)	19,634			2,140			22,892			2,413
Options	124			1,614			586			2,017
Total realized and unrealized gain (loss) on derivatives and foreign exchange	17,052			(2,345		)	22,658			(13,258		)
Net realized and unrealized gain (loss) on investments	(17,310		)	23,486			110,643			(77,913		)
Net realized and unrealized gain (loss) on debt	15,258			(802		)	30,474			(63,975		)
Net realized and unrealized gain (loss) on debt to affiliates	3,805			(2,984		)	1,192			(2,984		)
Net gain on extinguishment of debt	7,868			—			10,283			—
Other income	2,905			1,401			6,715			2,940
Total other income (loss)	29,578			18,756			181,965			(155,190		)
Other expenses
Related party management compensation:
Base management fees	4,677			514			8,768			1,478
CLO management fees	3,506			6,208			6,620			12,455
Total related party management compensation	8,183			6,722			15,388			13,933
Professional services	946			930			2,016			1,878
Other general and administrative	4,403			1,334			5,997			17,039
Total other expenses	13,532			8,986			23,401			32,850
Income (loss) before income taxes	24,717			20,010			174,504			(151,389		)
Income tax expense (benefit)	—			(27		)	6			(4		)
Net income (loss)	$	24,717		$	20,037		$	174,498		$	(151,385	)


(1)	Includes foreign exchange contracts and foreign exchange remeasurement gain or loss.

Revenues

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For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Revenues decreased $16.5 million in the second quarter of 2017 compared to the second quarter of 2016. The decrease was primarily attributable to a $20.4 million decrease in corporate loans and securities interest income in the second quarter of 2017 compared to the same prior year period, partially offset by a $2.7 million increase in dividend income.

A large driver of the decrease in corporate loan and security interest income was a decline in the aggregate par value of our corporate loan and debt security portfolios as of June 30, 2017 compared to June 30, 2016. The decline in the aggregate par value of our corporate debt portfolio was largely attributable to the calling of our legacy CLOs during 2015 and 2016, the largest of which was CLO 2007-1, and the sale of assets held within these CLOs to repay the CLO notes outstanding. These legacy CLOs, which were issued prior to 2012, were larger in total transaction size relative to those issued subsequently. During the latter half of 2016, we repaid approximately $1.1 billion of notes from the sale proceeds of assets held within the legacy CLOs. Separately, during 2016, we de-consolidated CLO 11 and CLO 13 which resulted in a reduction in the aggregate par value of our loan portfolio by approximately $898.8 million. We also closed CLO 15 and CLO 16 during the latter half of 2016; however, total new assets only partially offset the decline in portfolio from the amortization of legacy CLOs.

Partially offsetting the above decrease in corporate loan and security interest income was a $2.7 million increase in dividend income from $1.1 million in the second quarter of 2016 to $3.8 million in the second quarter of 2017. A majority of the dividend income in the second quarter of 2016 was related to two issuers in the specialty finance industry and aerospace and defense industry.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Revenues decreased $50.5 million in the first half of 2017 compared to the first half of 2016. The decrease was primarily attributable to a $49.4 million decrease in corporate loans and securities interest income in the first half of 2017 compared to the same prior year period.

A large driver of the decrease in corporate loan and security interest income was a decline in the aggregate par value of our corporate loan and debt security portfolios as of June 30, 2017 compared to June 30, 2016. The decline in the aggregate par value of our corporate debt portfolio was largely attributable to the calling of our legacy CLOs during 2015 and 2016, the largest of which was CLO 2007-1, and the sale of assets held within these CLOs to repay the CLO notes outstanding. These legacy CLOs, which were issued prior to 2012, were larger in total transaction size relative to those issued subsequently. During the latter half of 2016, we repaid approximately $1.1 billion of notes from the sale proceeds of assets held within the legacy CLOs. Separately, during 2016, we de-consolidated CLO 11 and CLO 13 which resulted in a reduction in the aggregate par value of our loan portfolio by approximately $898.8 million. We also closed CLO 15 and CLO 16 during the second half of 2016; however, total new assets only partially offset the decline in portfolio from the amortization of legacy CLOs.

Investment Costs and Expenses

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Total investment costs and expenses decreased $14.9 million in the second quarter of 2017 compared to the second quarter of 2016 primarily as a result of a $14.4 million decline in total interest expense. The decline in total interest expense was largely attributable to a $14.5 million decrease in interest expense related to our collateralized loan obligation secured notes coupled with a $1.9 million decrease in interest expense on our interest rate swaps, partially offset by a $4.5 million increase in interest expense related to our CLO junior secured notes to affiliates.

Interest expense on our CLO secured notes decreased $14.5 million during the second quarter of 2017 compared to the second quarter of 2016 primarily due to the calling of CLO 2007-1 in August 2016 and the de-consolidation of CLO 11 and CLO 13 during 2016. These three CLOs recorded $24.8 million of interest expense during the second quarter of 2016 compared to zero during the second quarter of 2017. This decline however, was partially offset by the closing of CLO 15 and CLO 16 during the latter half of 2016 whereby the two CLOs recorded a total of $8.2 million of interest expense during the second quarter of 2017.

In addition, interest expense on our interest rate swaps decreased during the second quarter of 2017 compared to the same prior year period in conjunction with the calling of CLO 2007-1 in August 2016. We terminated the related interest rate swaps and ceased incurring the associated interest expense. For further information, refer to "Part I-Item 1. Financial Statements-Note 6. Borrowings."

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Partially offsetting the above decreases within total interest expense was a $4.5 million increase in interest expense on our junior secured CLO notes to affiliates during the second quarter of 2017 compared to the same prior year period. During May and December 2016, we distributed in kind on our common shares $203.0 million par amount of certain subordinated notes to our Parent and as such incurred interest expense on these CLO junior secured notes held by affiliates of our Manager. These notes were previously owned by us and eliminated in consolidation. For further information, refer to "Part I-Item 1. Financial Statements-Note 6. Borrowings."

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Total investment costs and expenses decreased $29.8 million in the first half of 2017 compared to the first half of 2016 primarily as a result of a $29.3 million decline in total interest expense. The decline in total interest expense was largely attributable to a $26.3 million decrease in interest expense related to our collateralized loan obligation secured notes coupled with a $6.2 million decrease in interest expense on our senior notes. These declines were partially offset by a $9.1 million increase in interest expense related to our CLO junior secured notes to affiliates.

Interest expense on our CLO secured notes decreased $26.3 million during the first half of 2017 compared to the first half of 2016 primarily due to the calling of CLO 2007-1 in August 2016 and the de-consolidation of CLO 11 and CLO 13 during 2016. These three CLOs recorded $44.7 million of interest expense during the first half of 2016 compared to zero during the first half of 2017. This decline however, was partially offset by the closing of CLO 15 and CLO 16 during the latter half of 2016 whereby the two CLOs recorded a total of $16.2 million of interest expense during the first half of 2017.

In addition, interest expense on our senior notes decreased $6.2 million during the first half of 2017 compared to the first half of 2016 primarily due to the redemption of our Notes due 2041 and our Notes due 2042 in November 2016 and April 2017, respectively.

Partially offsetting the above decreases within total interest expense was a $9.1 million increase in interest expense on our junior secured CLO notes to affiliates during the first half of 2017 compared to the same prior year period. During May and December 2016, we distributed in kind on our common shares $203.0 million par amount of certain subordinated notes to our Parent and as such, incurred interest expense on these CLO junior secured notes held by affiliates of our Manager. These notes were previously owned by us and eliminated in consolidation. For further information, refer to "Part I-Item 1. Financial Statements-Note 6. Borrowings."

Other Income (Loss)

Other income (loss) consists of gains and losses that can be highly variable, primarily driven by episodic sales, mark-to-market and foreign currency exchange rates as of each period-end.

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Total other income favorably changed $10.8 million in the second quarter of 2017 compared to the second quarter of 2016 largely attributable to the following four factors.

First, net realized and unrealized gain (loss) on debt and debt to affiliates, representing the change in estimated fair value of our financial liabilities, favorably changed $22.9 million in the second quarter of 2017 compared to the second quarter of 2016. As discussed above, beginning January 1, 2015, we measured the financial liabilities of our consolidated CLOs using the fair value of the financial assets of our consolidated CLOs, which was determined to be more observable. Accordingly, these financial assets were measured at fair value and these financial liabilities were measured as: (i) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets that are incidental to the operations of the CLOs, less (ii) the sum of the fair value of any beneficial interests retained by us.

Second, total realized and unrealized gain (loss) on derivatives and foreign exchange favorably changed $19.4 million during the second quarter of 2017 compared to the same prior year period. A majority of the change was related to realized and unrealized gains on foreign exchange which favorably changed $17.5 million, largely driven by fluctuations in the foreign currency exchange rates related to a Euro-denominated investment which was contributed from our Parent during the second quarter of 2017 and had unrealized gains on foreign exchange of $16.3 million.

Third, net gain on extinguishment of debt increased $7.9 million during the second quarter of 2017 compared to the same prior year period. During April 2017, we redeemed all of our outstanding Notes due 2042 and recognized a gain upon redemption.

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Fourth, net realized and unrealized gain (loss) on investments unfavorably changed $40.8 million from a net realized and unrealized gain of $23.5 million in the second quarter of 2016 to a net realized and unrealized loss of $17.3 million in the second quarter of 2017. The most significant changes were in our corporate loans and corporate debt securities.

The table below details the components of net realized and unrealized gain (loss) on investments, which is included in other income (loss), separated by financial instrument for the three months ended June 30, 2017 and 2016 (amounts in thousands):



	For the three months ended June 30, 2017									For the three months ended June 30, 2016
	Unrealized gains (losses)			Realized gains (losses)			Total			Unrealized gains (losses)			Realized gains (losses)			Total
Corporate loans	$	17,877		$	(30,490	)	$	(12,613	)	$	190,503		$	(180,238	)	$	10,265
Corporate debt securities	4,201			—			4,201			14,978			5,384			20,362
RMBS	(1,829		)	3,402			1,573			52			395			447
Equity investments, at estimated fair value	(2,800		)	(4,094		)	(6,894		)	(457		)	(4,496		)	(4,953		)
Interests in joint ventures and partnerships, at estimated fair value and other	(583		)	(2,994		)	(3,577		)	(12,371		)	9,736			(2,635		)
Total	$	16,866		$	(34,176	)	$	(17,310	)	$	192,705		$	(169,219	)	$	23,486

Net realized and unrealized gains (losses) on our corporate loans negatively changed by $22.9 million during the second quarter of 2017 compared to the same prior year period. Net realized and unrealized gains totaled $10.3 million compared to net realized and unrealized losses of $12.6 million in the second quarter of 2016 and 2017, respectively. A majority of the change was driven by a downturn in general market conditions rather than any specific issuers. For example, the S&P/LSTA Loan Index returned 0.76% for the three months ended June 30, 2017 compared to 2.92% for the three months ended June 30, 2016.

Net realized and unrealized gains on our corporate debt securities negatively changed by $16.2 million for the second quarter of 2017 compared to the same prior year period, from $20.4 million during the second quarter of 2016 to $4.2 million in the second quarter of 2017. A majority of the change was related to one issuer in the specialty finance sector which, when restructured, resulted in the realization of $20.6 million of unrealized gains during the second quarter of 2016.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Total other income (loss) favorably changed $337.2 million in the first half of 2017 compared to the first half of 2016 largely attributable to the following four factors.

First, net realized and unrealized gain (loss) on investments positively changed $188.6 million from a net realized and unrealized loss of $77.9 million in the first half of 2016 to a net realized and unrealized gain of $110.6 million in the first half of 2017. The most significant gains were in our corporate debt securities and interests in joint ventures and partnerships.

The table below details the components of net realized and unrealized gain (loss) on investments, which is included in other income (loss), separated by financial instrument for the six months ended June 30, 2017 and 2016 (amounts in thousands):



	For the six months ended June 30, 2017									For the six months ended June 30, 2016
	Unrealized gains (losses)			Realized gains (losses)			Total			Unrealized gains (losses)			Realized gains (losses)			Total
Corporate loans	$	15,991		$	(34,376	)	$	(18,385	)	$	235,426		$	(210,952	)	$	24,474
Corporate debt securities	88,806			1,364			90,170			(35,167		)	3,257			(31,910		)
RMBS	(1,439		)	3,894			2,455			71			929			1,000
Equity investments, at estimated fair value	2,792			(4,094		)	(1,302		)	(16,449		)	(3,771		)	(20,220		)
Interests in joint ventures and partnerships, at estimated fair value and other	74,824			(37,119		)	37,705			(60,823		)	9,566			(51,257		)
Total	$	180,974		$	(70,331	)	$	110,643		$	123,058		$	(200,971	)	$	(77,913	)

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Net realized and unrealized gains (losses) on our corporate debt securities positively changed by $122.1 million for the first half of 2017 compared to the same prior year period, from net realized and unrealized losses of $31.9 million during the first half of 2016 to net realized and unrealized gains of $90.2 million in the first half of 2017. A majority of the positive change was driven by one issuer in the oil and gas sector due to recovering commodity prices. Specifically, this issuer recorded unrealized losses totaling $43.8 million during first half of 2016 compared to unrealized gains of $86.8 million during the first half of 2017.

Net realized and unrealized gains (losses) on interests in joint ventures and partnerships positively changed by $89.0 million during the first half of 2017 compared to the same prior year period, from net realized and unrealized losses of $51.3 million in the first half of 2016 to net realized and unrealized gains of $37.7 million in the first half of 2017. A majority of the positive change was driven by one investment in the marine sector which positively changed $43.1 million from net unrealized losses of $30.8 million in the first half of 2016 compared to unrealized gains of $9.5 million in the first quarter of 2017. The second quarter of 2017 also included an alternative credit investment which was acquired in the second half of 2016 and had unrealized gains of $21.8 million during the first half of 2017, compared to zero in the same prior year period.

Net realized and unrealized losses on equity investments positively changed by $18.9 million during the first half of 2017 compared to the same prior year period, from $20.2 million during the first half of 2016 to $1.3 million in the first half of 2017. A majority of the positive change was driven by two issuers in the diversified financial services and education sectors which had unrealized losses totaling $16.4 million during the first half of 2016 and were subsequently restructured or paid down in 2016.

Partially offsetting the above positive changes in the components of net realized and unrealized gain (loss) on investments was a negative change in net realized and unrealized gains (losses) on our corporate loans, which negatively changed $42.9 million during the first half of 2017 compared to the same prior year period. Net realized and unrealized gains totaled $24.5 million compared to net realized and unrealized losses of $18.4 million in the first half of 2016 and 2017, respectively. A majority of the change was driven by a downturn in general market conditions rather than any specific issuers. For example, the S&P/LSTA Loan Index returned 1.93% for the six months ended June 30, 2017 compared to 4.51% for the six months ended June 30, 2016.

Second, net realized and unrealized gain (loss) on debt and debt to affiliates, representing the change in estimated fair value of our financial liabilities, favorably changed $98.6 million in the first half of 2017 compared to the first half of 2016. As discussed above, beginning January 1, 2015, we measured the financial liabilities of our consolidated CLOs using the fair value of the financial assets of our consolidated CLOs, which was determined to be more observable. Accordingly, these financial assets were measured at fair value and these financial liabilities were measured as: (i) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets that are incidental to the operations of the CLOs, less (ii) the sum of the fair value of any beneficial interests retained by us.

Third, total realized and unrealized gain (loss) on derivatives and foreign exchange favorably changed $35.9 million during the first half of 2017 compared to the same prior year period largely driven by two factors. First, realized and unrealized gains on foreign exchange favorably changed $17.5 million, largely driven by fluctuations in the foreign currency exchange rates related to a Euro-denominated investment which was contributed from our Parent during the first half of 2017 and had unrealized gains on foreign exchange of $16.3 million. Second, realized and unrealized gain (loss) on interest rate swaps favorably changed $16.6 million, driven by comparatively smaller period over period decreases in the 30-year swap rate. We use pay-fixed, receive variable interest rate swaps to hedge the interest rate risk associated with a portion of our borrowings which are indexed to the 30-year swap rate; as such, movements in the 30-year swap rate are expected to impact total realized and unrealized gain (loss) on derivatives and foreign exchange. For example, the 30-year swap rate declined 79 bps from 2.61% to 1.82% as of December 31, 2015 and June 30, 2016, respectively, compared to a 5 bps decrease from 2.59% to 2.54% as of December 31, 2016 to June 30, 2017, respectively.

Other Expenses

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Total other expenses, which is comprised primarily of general and administrative expenses and related party management compensation, increased $4.5 million in the second quarter of 2017 compared to the second quarter of 2016 primarily due to a $3.1 million increase in other general and administrative expenses. A majority of the increase in other general and administrative expenses was related to debt issuance costs related to CLO 2013-1, which we refinanced during the second quarter of 2017.

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Related party management compensation, which includes net base management fees and CLO management fees, also increased $1.5 million in the second quarter of 2017 compared to the second quarter of 2016. Net base management fees increased $4.2 million in the second quarter of 2017 compared to the prior year period primarily due to a decrease in CLO management fee credits as a result of the calling of our legacy CLOs and overall reduced percentage of subordinated CLO notes held by us. CLO management fees decreased $2.7 million attributable to the calling of our legacy CLOs and de-consolidation of certain CLOs. See “Consolidated Results-Other Expenses” above for further discussion around the base management fees and Fee Credits.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Total other expenses decreased $9.4 million in the first half of 2017 compared to the first half of 2016 primarily due to an $11.0 million decrease in other general and administrative expenses. A majority of the decrease in other general and administrative expenses was related to the write-off of costs associated with our CLOs during the first half of 2016.

The above decrease in other general and administrative expenses was slightly offset by a $1.5 million increase in related party management compensation, which includes net base management fees and CLO management fees, in the first half of 2017 compared to the first half of 2016. Net base management fees increased $7.3 million in the first half of 2017 compared to the prior year period primarily due to a decrease in CLO management fee credits as a result of the calling of our legacy CLOs and overall reduced percentage of subordinated CLO notes held by us. CLO management fees decreased $5.8 million attributable to the calling of our legacy CLOs and de-consolidation of certain CLOs. See “Consolidated Results-Other Expenses” above for further discussion around the base management fees and Fee Credits.

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Natural Resources Segment

The following table presents the net income (loss) components of our Natural Resources segment (amounts in thousands):



	For the three months ended June 30, 2017			For the three months ended June 30, 2016		For the six months ended June 30, 2017			For the six months ended June 30, 2016
Revenues
Oil and gas revenue:
Natural gas sales	$	404		$	253	$	779		$	623
Oil sales	3,355			2,761		6,309			5,058
Natural gas liquids sales	497			243		878			217
Total revenues	4,256			3,257		7,966			5,898
Investment costs and expenses
Oil and gas production costs:
Severance and ad valorem taxes	284			240		531			455
Total oil and gas production costs	284			240		531			455
Oil and gas depreciation, depletion and amortization	1,734			1,258		3,232			2,324
Interest expense:
Senior notes	175			254		255			462
Junior subordinated notes	85			142		185			267
Total interest expense	260			396		440			729
Total investment costs and expenses	2,278			1,894		4,203			3,508
Other income (loss)
Net realized and unrealized gain (loss) on investments	(7,844		)	8,634		(23,427		)	(18,608		)
Total other income (loss)	(7,844		)	8,634		(23,427		)	(18,608		)
Other expenses
Related party management compensation:
Base management fees	157			20		324			50
Total related party management compensation	157			20		324			50
Professional services	32			36		76			65
Other general and administrative	295			71		340			142
Total other expenses	484			127		740			257
Income (loss) before income taxes	(6,350		)	9,870		(20,404		)	(16,475		)
Income tax expense (benefit)	—			—		—			—
Net income (loss)	$	(6,350	)	$	9,870	$	(20,404	)	$	(16,475	)

Our natural resources assets are accounted for and presented on our condensed consolidated balance sheets in one of two ways: (i) at cost net of depreciation, depletion and amortization presented within oil and gas properties, net or (ii) estimated fair value within interests in joint ventures and partnerships, at estimated fair value with net realized and unrealized gains or losses on these holdings recorded in other income (loss) on our condensed consolidated statements of operation.

Revenues

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Revenues increased $1.0 million from $3.3 million in the second quarter of 2016 compared to $4.3 million in the second quarter of 2017 and represented sales from oil and gas production on our overriding royalty interest properties. The increase in revenue was primarily attributable to higher average commodity prices, which was partially offset by a decrease in production volumes as a result of normal field decline. As of June 30, 2017 and 2016, our oil and natural gas properties had carrying amounts of $107.7 million and $112.5 million, respectively.

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For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Revenues increased $2.1 million from $5.9 million in the first half of 2016 compared to $8.0 million in the first half of 2017 and represented sales from oil and gas production on our overriding royalty interest properties. The increase in revenue was primarily attributable to higher average commodity prices, which was partially offset by a decrease in production volumes as a result of normal field decline. As of June 30, 2017 and 2016, our oil and natural gas properties had carrying amounts of $107.7 million and $112.5 million, respectively.

Investment Costs and Expenses

Investment costs and expenses primarily consist of production costs, DD&A and allocated corporate expenses such as interest expense and related costs on borrowings. DD&A represents recurring charges related to the exhaustion of mineral reserves for our oil and natural gas properties.

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Total investment costs and expenses increased $0.4 million in the second quarter of 2017 compared to the second quarter of 2016. The increase was primarily driven by an increase in DD&A on our oil and natural gas properties of $0.5 million during the second quarter of 2017 compared to the same prior year period. This was, however, slightly offset by a decrease in total allocated interest expense in the second quarter of 2017 compared to the second quarter of 2016.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Total investment costs and expenses increased $0.7 million in the first half of 2017 compared to the first half of 2016. The increase was primarily driven by an increase in DD&A on our oil and natural gas properties of $0.9 million during the first half of 2017 compared to the same prior year period. This was, however, partially offset by a $0.3 million decrease in total allocated interest expense largely due to the redemption of our Notes due 2041 and our Notes due 2042 in November 2016 and April 2017, respectively.

Other Income (Loss)

Our oil and gas results and estimated fair values depend substantially on natural gas, oil and natural gas liquids ("NGL") prices and production levels, as well as drilling and operating costs.

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Total other income (loss), comprised primarily of net realized and unrealized income (loss) on investments, unfavorably changed $16.5 million in the second quarter of 2017 compared to the second quarter of 2016. Net realized and unrealized loss totaled $7.8 million during the second quarter of 2017 compared to a net realized and unrealized gain of $8.6 million for the same prior year period. The value of our natural resources assets are heavily influenced by the price of natural gas and oil. During the quarter ended June 30, 2017, the long-term price of WTI crude oil decreased approximately 4%, while the long-term price of natural gas was relatively stable. The long-term price of WTI crude oil declined from approximately $51 per barrel to approximately $49 per barrel, and the long-term price of natural gas increased from approximately $2.84 per mcf to $2.85 per mcf as of March 31, 2017 and June 30, 2017, respectively.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Total other loss, comprised primarily of net realized and unrealized loss on investments, increased $4.8 million in the first half of 2017 compared to the first half of 2016. Net realized and unrealized loss totaled $23.4 million during the first half of 2017 compared to $18.6 million for the same prior year period. The value of our investments is heavily influenced by the price of natural gas and oil. During the six months ended June 30, 2017, the long-term price of WTI crude oil decreased approximately 12%, while the long-term price of natural gas decreased approximately 1%. The long-term price of WTI crude oil declined from approximately $56 per barrel to approximately $49 per barrel, and the long-term price of natural gas decreased from $2.87 per mcf to $2.85 per mcf as of December 31, 2016 and June 30, 2017, respectively.

Other Expenses

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

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Total other expenses, which is comprised primarily of general and administrative expenses and related party management compensation, increased $0.4 million in the second quarter of 2017 compared to the second quarter of 2016. The increase was largely due to a $0.2 million increase in other general and administrative expenses primarily due to a slight increase in costs associated with managing the assets coupled with a $0.1 million increase in total allocable net base management fees expense in the second quarter of 2017 compared to the same prior year period. Other expenses are comprised primarily of certain corporate expenses that are not directly related to an individual segment, including base management fees and professional services, and are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Total other expenses increased $0.5 million in the first half of 2017 compared to the first half of 2016. The increase was largely due to a $0.3 million increase in total allocable net base management fees expense in the second half of 2017 compared to the same prior year period. Other expenses are comprised primarily of certain corporate expenses that are not directly related to an individual segment, including base management fees and professional services, and are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end.

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Other Segment

The following table presents the net income (loss) components of our Other segment (amounts in thousands):



	For the three months ended June 30, 2017			For the three months ended June 30, 2016			For the six months ended June 30, 2017			For the six months ended June 30, 2016
Revenues
Dividend income	$	3,958		$	—		$	3,958		$	9,269
Other income	2			—			3			—
Total revenues	3,960			—			3,961			9,269
Investment costs and expenses
Interest expense:
Senior notes	409			318			499			566
Junior subordinated notes	200			176			311			325
Total interest expense	609			494			810			891
Other	—			—			—			3
Total investment costs and expenses	609			494			810			894
Other income (loss)
Net realized and unrealized gain (loss) on derivatives and foreign exchange:
Foreign exchange(1)	(303		)	(835		)	(198		)	(138		)
Total realized and unrealized gain (loss) on derivatives and foreign exchange	(303		)	(835		)	(198		)	(138		)
Net realized and unrealized gain (loss) on investments	11,493			(1,609		)	16,029			(11,000		)
Other income	—			—			56			—
Total other income (loss)	11,190			(2,444		)	15,887			(11,138		)
Other expenses
Related party management compensation:
Base management fees	366			25			552			60
Total related party management compensation	366			25			552			60
Professional services	73			44			121			79
Other general and administrative	8			10			16			10
Total other expenses	447			79			689			149
Income before income taxes	14,094			(3,017		)	18,349			(2,912		)
Income tax expense (benefit)	144			(160		)	591			(123		)
Net income (loss)	$	13,950		$	(2,857	)	$	17,758		$	(2,789	)


(1)	Includes foreign exchange contracts and foreign exchange remeasurement gain or loss.

Our commercial real estate assets are carried at estimated fair value and are included within interests in joint ventures and partnerships, at estimated fair value on our condensed consolidated balance sheets. Net realized and unrealized gains or losses on these holdings are recorded in other income (loss) on our condensed consolidated statements of operation.

Revenues

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Revenues, comprised primarily of dividend income, increased $4.0 million in the second quarter of 2017 compared to the second quarter of 2016 and represented dividend income from certain of our commercial real estate assets, the majority of which was from certain investments acquired during 2012 and 2013. In contrast to our corporate debt portfolio, which typically

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earns interest at stated coupon rates and frequencies, revenues generated from our commercial real estate assets are often delayed from the date of acquisition and are episodic in their frequency and amount.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Revenues, comprised primarily of dividend income, decreased $5.3 million from $9.3 million during the first half of 2016 compared to $4.0 million during the first half of 2017. The first half of 2016 included an $8.1 million dividend payment related to a real estate investment we acquired in the first quarter of 2013 whereas the first half of 2017 included dividend payments from various commercial real estate assets acquired during 2012 and 2014. In contrast to our corporate debt portfolio, which typically earns interest at stated coupon rates and frequencies, revenues generated from our commercial real estate assets are often delayed from the date of acquisition and are episodic in their frequency and amount.

Investment Costs and Expenses

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Investment costs and expenses increased $0.1 million from $0.5 million in the second quarter of 2016 compared to $0.6 million in the second quarter of 2017 as a result of an equivalent increase in allocated interest expense. Certain corporate assets and expenses that are not directly related to an individual segment, including interest expense and related costs on borrowings, are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end. The increase in allocated interest expense in the second quarter of 2017 compared to the second quarter of 2016 was directly related to the increase in our commercial real estate assets. As of June 30, 2017 and 2016, our commercial real estate assets had carrying values of $379.1 million and $227.5 million, respectively, and represented approximately 7.0% and 4.4%, respectively, of our total investment portfolio balance.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Investment costs and expenses decreased $0.1 million from $0.9 million in the first half of 2016 compared to $0.8 million in the first half of 2017 primarily as a result of a $0.1 million decline in allocated interest expense. Total allocable interest expense decreased period over period largely due to the redemption of our Notes due 2041 and our Notes due 2042 in November 2016 and April 2017, respectively. Certain corporate assets and expenses that are not directly related to an individual segment, including interest expense and related costs on borrowings, are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end. Despite the increase in our commercial real estate portfolio, as mentioned above, the overall reduction in interest expense as a result of our senior note redemptions had a greater impact on total allocated interest expense.

Other Income (Loss)

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Other income (loss), comprised primarily of net realized and unrealized gain (loss) on investments, favorably changed $13.6 million in the second quarter of 2017 compared to the second quarter of 2016 from other loss of $2.4 million in the second quarter of 2016 to other income of $11.2 million in the second quarter of 2017. The change was largely attributable to one commercial real estate investment, which was contributed from our Parent during the second quarter of 2017 and represented membership interests in a controlling company of a real estate investment trust, and had unrealized gains of $8.1 million during the second quarter of 2017. Our commercial real estate assets are carried at estimated fair value and are included within interests in joint ventures and partnerships, at estimated fair value on our condensed consolidated balance sheets. Net realized and unrealized gains or losses on these holdings are recorded in other income (loss) on our condensed consolidated statements of operation.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Other income (loss), comprised primarily of net realized and unrealized gain (loss) on investments, favorably changed $27.0 million in the first half of 2017 compared to the first half of 2016 from other loss of $11.1 million in the first half of 2016 to other income of $15.9 million in the first half of 2017. The change was largely attributable to: (i) the first half of 2017 included one commercial real estate investment, which was contributed from our Parent during the second quarter of 2017 and represented membership interests in a holding company of a real estate investment trust, and had unrealized gains of $8.1 million and (ii) the first half of 2016 included one commercial real estate investment, which was acquired in the first quarter of 2013, and had unrealized losses of $8.3 million primarily as a result of the investment distributing an $8.1 million dividend payment

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during the same period. Generally, as our investment's equity decreases through losses and dividend payments, so does the value of our investment. Factors that impact the carrying value of our commercial real estate assets may include overall market conditions, as well as the pace of development, vacancies and ability to rent, and amount of cash distributions made from the individual investments. Our commercial real estate assets are carried at estimated fair value and are included within interests in joint ventures and partnerships, at estimated fair value on our condensed consolidated balance sheets. Net realized and unrealized gains or losses on these holdings are recorded in other income (loss) on our condensed consolidated statements of operation.

Other Expenses

For the three months ended June 30, 2017 compared to the three months ended June 30, 2016

Other expenses increased $0.4 million in the second quarter of 2017 compared to the second quarter of 2016 primarily due to an increase in total allocable net base management fees expense. Other expenses are comprised of certain corporate expenses that are not directly related to an individual segment, including base management fees and professional services, and are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end. As of June 30, 2017 and 2016, our commercial real estate assets had carrying values of $379.1 million and $227.5 million, respectively, and represented approximately 7.0% and 4.4%, respectively, of our total investment portfolio balance.

For the six months ended June 30, 2017 compared to the six months ended June 30, 2016

Other expenses increased $0.5 million in the first half of 2017 compared to the first half of 2016 primarily due to an increase in total allocable net base management fees expense. Other expenses are comprised of certain corporate expenses that are not directly related to an individual segment, including base management fees and professional services, and are allocated to individual segments based on the investment portfolio balance in each respective segment as of the most recent period-end. As of June 30, 2017 and 2016, our commercial real estate assets had carrying values of $379.1 million and $227.5 million, respectively, and represented approximately 7.0% and 4.4%, respectively, of our total investment portfolio balance.

Income Tax Provision

We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Therefore, we generally are not subject to United States federal income tax at the entity level, but are subject to limited state and foreign taxes. Holders of our Series A LLC Preferred Shares will be allocated a share of our gross ordinary income for our taxable year ending within or with their taxable year. Holders of our Series A LLC Preferred Shares will not be allocated any gains or losses from the sale of our assets.

We hold equity interests in certain subsidiaries that have elected or intend to elect to be taxed as real estate investment trusts (“REIT subsidiaries”) under the Internal Revenue Code of 1986, as amended (the “Code”). A REIT is not subject to United States federal income tax to the extent that it currently distributes its income and satisfies certain asset, income and ownership tests, and recordkeeping requirements, but it may be subject to some amount of federal, state, local and foreign taxes based on its taxable income.

We have wholly‑owned domestic and foreign subsidiaries that are taxable as corporations for United States federal income tax purposes and thus are not consolidated by us for United States federal income tax purposes. For financial reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by us with respect to our interest in the domestic taxable corporate subsidiaries, because each is taxed as a regular corporation under the Code. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP consolidated financial statements and the United States federal income tax basis of assets and liabilities as of each consolidated balance sheet date. The foreign corporate subsidiaries were formed to make certain foreign and domestic investments from time to time. The foreign corporate subsidiaries are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are anticipated to be exempt from United States federal and state income tax at the corporate entity level because they restrict their activities in the United States to trading in stock and securities for their own account. They generally will not be subject to corporate income tax in our financial statements on their earnings, and no provision for income taxes for the three and six months ended June 30, 2017 was recorded; however, we will be required to include their current taxable income in our calculation of our gross ordinary income allocable to holders of our Series A LLC Preferred Shares.

CLO 2005‑1, CLO 2005‑2, CLO 2006‑1, CLO 2007‑1, CLO 2007‑A, CLO 2009‑1 and CLO 2011‑1 are our foreign subsidiaries that elected to be treated as disregarded entities or partnerships for United States federal income tax purposes. These subsidiaries were established to facilitate securitization transactions, structured as secured financing transactions.

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Our REIT subsidiaries are not expected to incur a federal tax expense, but are subject to limited state and foreign income tax expense related to the 2017 tax year.

For the three and six months ended June 30, 2017, we recorded total income tax expense of $0.1 million and $0.6 million, respectively. Cumulative tax assets and liabilities are included in other assets and accounts payable, accrued expenses and other liabilities, respectively, on our condensed consolidated balance sheets.

Investment Portfolio

Our investment portfolio primarily consists of corporate debt holdings, consisting of corporate loans and corporate debt securities. The details of our corporate debt portfolio are discussed below under “Corporate Debt Portfolio.” Also included in our investment portfolio are our other holdings, including royalty interests in oil and gas properties, equity investments, and interests in joint ventures and partnerships, which are all discussed below under “Other Holdings.”

Corporate Debt Portfolio

Our corporate debt investment portfolio primarily consists of investments in corporate loans and corporate debt securities. Our corporate loans primarily consist of senior secured, second lien and subordinated loans. The corporate loans we invest in are generally below investment grade and are primarily floating rate indexed to three‑month LIBOR. Our investments in corporate debt securities primarily consist of fixed rate investments in below investment grade corporate bonds that are senior secured, senior unsecured and subordinated. We evaluate and monitor the asset quality of our investment portfolio by performing detailed credit reviews and by monitoring key credit statistics and trends. The key credit statistics and trends we monitor to evaluate the quality of our investments include credit ratings of both our investments and the issuer, financial performance of the issuer including earnings trends, free cash flows of the issuer, debt service coverage ratios of the issuer, financial leverage of the issuer, and industry trends that have or may impact the issuer’s current or future financial performance and debt service ability.

We do not require specific collateral or security to support our corporate loans and debt securities; however, these loans and debt securities are either secured through a first or second lien on the assets of the issuer or are unsecured. We do not have access to any collateral of the issuer of the corporate loans and debt securities, rather the seniority in the capital structure of the loans and debt securities determines the seniority of our investment with respect to prioritization of claims in the event that the issuer defaults on the outstanding debt obligation.

Corporate Loans

Our corporate loan portfolio had an aggregate par value of $3.8 billion and $3.4 billion as of June 30, 2017 and December 31, 2016, respectively. Our corporate loan portfolio consists of debt obligations of corporations, partnerships and other entities in the form of senior secured loans, second lien loans and subordinated loans. The following table summarizes our corporate loans portfolio stratified by type:

Corporate Loans

(Amounts in thousands)



	June 30, 2017						December 31, 2016
	Par		Amortized Cost		Estimated Fair Value		Par		Amortized Cost		Estimated Fair Value
Senior secured	$	3,578,342	$	3,569,484	$	3,511,347	$	3,286,630	$	3,271,336	$	3,194,328
Second lien	78,189		73,243		65,463		67,865		68,359		58,584
Subordinated	97,311		81,755		58,779		78,564		79,788		52,352
Total	$	3,753,842	$	3,724,482	$	3,635,589	$	3,433,059	$	3,419,483	$	3,305,264

As of June 30, 2017, $3.7 billion par amount, or 97.4%, of our corporate loan portfolio was floating rate and $97.6 million par amount, or 2.6%, was fixed rate. In addition, as of June 30, 2017, $120.3 million par amount, or 3.2%, of our corporate loan portfolio was denominated in foreign currencies, of which 62.3% was denominated in Euros. As of December 31, 2016, $3.3 billion par amount, or 96.5%, of our corporate loan portfolio was floating rate and $119.0 million par amount, or 3.5%, was fixed rate. In addition, as of December 31, 2016, $109.0 million par amount, or 3.2%, of our corporate loan portfolio was denominated in foreign currencies, of which 61.6% was denominated in Euros.

As of June 30, 2017, our fixed rate corporate loans, which included pay-in-kind interest, had a weighted average coupon of 13.1% and a weighted average years to maturity of 3.6 years, as compared to 13.5% and 2.9 years, respectively, as of December 31, 2016. All of our floating rate corporate loans have index reset frequencies of less than twelve months with the

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majority resetting at least quarterly. The weighted average coupon on our floating rate corporate loans was 4.7% as of June 30, 2017 and 4.8% as of December 31, 2016, and the weighted average coupon spread to LIBOR of our floating rate corporate loan portfolio was 3.6% as of June 30, 2017 and 4.0% as of December 31, 2016. The weighted average years to maturity of our floating rate corporate loans was 5.1 years as of June 30, 2017 and 4.8 years as of December 31, 2016.

Non‑Accrual Loans

Loans are placed on non‑accrual when there is uncertainty regarding whether future income amounts on the loan will be earned and collected. While on non‑accrual status, interest income is recognized using the cost‑recovery method, cash‑basis method or some combination of the two methods. A loan is placed back on accrual status when the ultimate collectability of the principal and interest is no longer in doubt. When placed on non‑accrual status, previously recognized accrued interest is reversed and charged against current income.

As of June 30, 2017, we held a total par value and estimated fair value of non-accrual loans of $93.8 million and $26.4 million, respectively, and $114.1 million and $26.0 million, respectively, as of December 31, 2016.

Defaulted Loans

Defaulted loans consist of corporate loans that have defaulted under the contractual terms of their loan agreements. As of June 30, 2017 and December 31, 2016, no corporate loans in our portfolio were in default.

Concentration Risk

Our corporate loan portfolio has certain credit risk concentrated in a limited number of issuers. As of both June 30, 2017 and December 31, 2016, approximately 21% of the total estimated fair value of the our corporate loan portfolio was concentrated in twenty issuers, with no single issuer individually greater than 2% of the aggregate estimated fair value of our corporate loans.

Corporate Debt Securities

Our corporate debt securities portfolio had an aggregate par value of $287.9 million and $311.2 million as of June 30, 2017 and December 31, 2016, respectively. Our corporate debt securities portfolio consists of debt obligations of corporations, partnerships and other entities in the form of senior secured, senior unsecured and subordinated bonds. Our corporate debt securities are included in securities on our condensed consolidated balance sheets. The following table summarizes our corporate debt securities portfolio stratified by type:

Corporate Debt Securities

(Amounts in thousands)



	June 30, 2017						December 31, 2016
	Par		Amortized Cost		Estimated Fair Value		Par		Amortized Cost		Estimated Fair Value
Senior secured	$	149,445	$	107,640	$	131,416	$	156,546	$	125,515	$	61,687
Senior unsecured	280		3,839		4,581		25,280		28,842		29,133
Subordinated	138,154		111,498		100,946		129,331		111,544		97,723
Total	$	287,879	$	222,977	$	236,943	$	311,157	$	265,901	$	188,543

As of June 30, 2017, $115.6 million par amount, or 44.3%, of our corporate debt securities portfolio was fixed rate and $145.6 million par amount, or 55.7%, was floating rate. In addition, we had $26.7 million par amount of other securities that do not have fixed or floating coupons, such as subordinated notes in third‑party‑controlled CLOs. As of December 31, 2016, $151.0 million par amount, or 52.7%, of our corporate debt securities portfolio was fixed rate and $135.3 million par amount, or 47.3%, was floating rate. In addition, we had $24.8 million par amount of other securities that do not have fixed or floating coupons, such as subordinated notes in CLOs.

As of June 30, 2017, $26.8 million par amount, or 9.3%, of our corporate debt securities portfolio, was denominated in foreign currencies, of which 89.7% was denominated in Euros. As of December 31, 2016, $24.8 million par amount, or 8.0%, of our corporate debt securities portfolio, was denominated in foreign currencies, of which 89.2% was denominated in Euros.

As of June 30, 2017, our fixed rate corporate debt securities had a weighted average coupon of 9.1% and a weighted average years to maturity of 3.4 years, as compared to 10.0% and 3.3 years, respectively, as of December 31, 2016. All of our

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floating rate corporate debt securities have index reset frequencies of less than twelve months. The weighted average coupon on our floating rate corporate debt securities was 14.8% and 14.7% as of June 30, 2017 and December 31, 2016, respectively, both of which included a single PIK security earning 15% and excluded other securities such as subordinated notes in third‑party‑ controlled CLOs that do not earn a stated rate. The weighted average coupon spread to LIBOR of our floating rate corporate debt securities was 1.0% as of both June 30, 2017 and December 31, 2016. The weighted average years to maturity of our floating rate corporate debt securities was 4.3 years and 4.8 years as of June 30, 2017 and December 31, 2016, respectively.

Defaulted Securities

As of both June 30, 2017 and December 31, 2016, no corporate debt securities in our portfolio were in default.

Concentration Risk

Our corporate debt securities portfolio has certain credit risk concentrated in a limited number of issuers. As of June 30, 2017, our corporate debt securities portfolio was concentrated in three issuers: Preferred Proppants LLC, LCI Helicopters Limited and Avoca Capital CLO XII Limited, which combined represented $219.0 million, approximately 92% of the estimated fair value of our corporate debt securities. As of December 31, 2016, approximately 97% of the estimated fair value of our corporate debt securities portfolio was concentrated in ten issuers, with the three largest concentrations of debt securities in securities issued by LCI Helicopters Limited, Preferred Proppants LLC and Mizuho Bank Ltd., which combined represented $134.7 million, or approximately 71% of the estimated fair value of our corporate debt securities.

Other Holdings

Our other holdings primarily consisted of royalty interests in oil and gas properties, equity investments, as well as interests in joint ventures and partnerships.

Natural Resources Holdings

Our natural resources holdings consisted of the following as of June 30, 2017 and December 31, 2016 (amounts in thousands):



	As of June 30, 2017		As of December 31, 2016
Oil and gas properties, net	$	107,702	$	110,934
Interests in joint ventures and partnerships(1)	78,028		107,348
Total	$	185,730	$	218,282

_____________________


(1)	Includes $22.5 million and $28.2 million of noncontrolling interests as of June 30, 2017 and December 31, 2016, respectively. Refer to “Interests in Joint Ventures and Partnerships Holdings” below for further discussion around the aggregate balance of our interests in joint ventures and partnerships.

As of June 30, 2017 and December 31, 2016, our oil and gas properties, net totaled $107.7 million and $110.9 million, respectively, and consisted solely of overriding royalty interests in acreage located in Texas. The overriding royalty interests include producing oil and natural gas properties operated by unaffiliated third parties. We had approximately 1,093 and 1,014 gross productive wells as of June 30, 2017 and December 31, 2016, respectively, in which we own an overriding royalty interest, and the acreage is still under development.

Our oil and gas properties are materially affected by commodity prices, and in particular long term crude oil and natural gas prices, which may be volatile. If commodity prices decline and such decline is not offset by other factors, we would generally expect the value of our natural resources assets to be adversely impacted. Conversely, if commodity prices increase, we would generally expect the value of our natural resources assets to be favorably impacted.

Equity Holdings

As of June 30, 2017 and December 31, 2016, our equity investments carried at estimated fair value totaled $444.4 million and $168.7 million, respectively. The following table summarizes the changes in our equity investments, at estimated fair value (amounts in thousands):

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	For the three months ended June 30, 2017			For the three months ended June 30, 2016			For the six months ended June 30, 2017			For the six months ended June 30, 2016
Beginning balance	$	174,693		$	244,462		$	168,658		$	262,946
Additions	272,359			4,160			272,680			10,039
Dispositions and paydowns	(17,328		)	(29,670		)	(17,328		)	(38,727		)
Unrealized gains (losses)	(2,800		)	(457		)	2,792			(16,449		)
Other(1)	17,448			(189		)	17,570			497
Ending balance	$	444,373		$	218,306		$	444,373		$	218,306

_____________________

(1) Includes foreign exchange translation.

Interests in Joint Ventures and Partnerships Holdings

As of June 30, 2017 and December 31, 2016, our interests in joint ventures and partnerships, which primarily hold assets related to commercial real estate, natural resources, specialty lending and alternative credit had an aggregate estimated fair value of $1.0 billion, which included noncontrolling interests of $70.7 million, and $794.0 million, which included noncontrolling interests of $71.6 million, respectively. We currently consolidate majority owned entities for which we are presumed to have control. Specifically, we consolidate three entities, all of which are classified as interests in joint ventures and partnerships. Noncontrolling interests represent the ownership interests that certain third parties hold in these entities that are consolidated in our financial results.

Equity

Our total equity at June 30, 2017 totaled $2.0 billion, which included $70.7 million of noncontrolling interests related to entities we consolidate. Comparatively, our total equity at December 31, 2016 totaled $1.9 billion, which included $71.6 million of noncontrolling interests related to entities we consolidate. Noncontrolling interests represent the equity component held by third parties.

Contributions and Distributions

We received contributions of certain assets, including cash, from our Parent and we made distributions of assets, including cash, as distributions on our common shares, which are all held by our Parent in order to facilitate the management and administration of such assets by us and for other general corporate purposes.

During the second quarter of 2017, our board of directors approved a $166.3 million contribution from our Parent representing membership interests in a holding company of a real estate investment trust and a $250.8 million contribution from our Parent representing equity interests in a holding company of an amusement theme park. In addition, during the second quarter of 2017, our board of directors approved cash distributions to our Parent, as the holder of all our common shares, totaling $417.1 million.

During the first quarter of 2017, our board of directors approved a $16.7 million distribution to our Parent, as the holder of all our common shares, and a $17.6 million capital contribution representing additional capital account credits for the general partner interests in an alternative credit fund discussed below.

During the fourth quarter of 2016, our board of directors approved the receipt of a contribution from our Parent for the general partner interest in an alternative credit fund and the distribution of certain of our loans, equity investments and CLO subordinated notes owned by us to our Parent, as the holder of all our common shares. The net estimated fair value of the contribution and distributions was approximately $135.0 million at the time of transfer.

During the second quarter of 2016, our board of directors approved the distribution of certain of our loans, equity investments and CLO subordinated notes owned by us to our Parent, as the holder of all our common shares. The estimated fair value of these distributions totaled approximately $132.0 million.

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Preferred Shareholders

The following table shows the distributions declared on our 14.95 million Series A LLC Preferred Shares outstanding:



Declaration Date		Record Date	Payment Date	Cash Distribution Declared per Preferred Share
Year ended December 31, 2017
	March 23, 2017	April 10, 2017	April 17, 2017	$0.460938
	June 22, 2017	July 10, 2017	July 17, 2017	$0.460938
Year ended December 31, 2016
	March 24, 2016	April 8, 2016	April 15, 2016	$0.460938
	June 23, 2016	July 8, 2016	July 15, 2016	$0.460938
	September 22, 2016	October 10, 2016	October 17, 2016	$0.460938
	December 22, 2016	January 10, 2017	January 17, 2017	$0.460938

Common Shareholders

Our Parent owns 100 common shares, constituting all of our outstanding common shares. The following table shows the distributions declared on our common shares:



		Record and Declaration Date	Payment Date	Cash Distribution Declared per Common Share
Year ended December 31, 2017 (1)
	First Quarter ended March 31, 2017	(2)	(2)	(2)
	Second Quarter ended June 30, 2017	(2)	(2)	(2)
Year ended December 31, 2016 (1)
	First Quarter ended March 31, 2016	May 9, 2016	May 10, 2016	$245,741
	Second Quarter ended June 30, 2016	July 21, 2016	July 22, 2016	$179,230
	Third Quarter ended September 30, 2016	(2)	(2)	(2)
	Fourth Quarter ended December 31, 2016	February 9, 2017	February 10, 2017	$534,323

___________________

(1) We distributed certain other assets and/or cash to our Parent as discussed above under "Contributions and Distributions."

(2) There were no distributions declared or paid for the period.

Distribution amounts and the decision whether or not to declare and pay a distribution to the holders of common shares and Series A LLC Preferred Shares are determined by our board of directors and in certain cases by the executive committee of the board of directors. Distributions are determined based upon a review of various factors including current market conditions, our liquidity needs, legal and contractual restrictions on the payment of distributions, including those under the terms of our preferred shares, the amount of ordinary taxable income or loss earned by us, gains or losses recognized by us on the disposition of assets and our liquidity needs. For this purpose, we generally determined gains or losses based upon the price we paid for those assets.

Holders of Series A LLC Preferred Shares will not be allocated any gains or losses from any distribution of our assets. Shareholders may have taxable income or tax liability attributable to our shares for a taxable year in an amount greater than our cash distributions for such taxable year. Refer to “Non‑Cash ‘Phantom’ Taxable Income” below for further discussion about taxable income allocable to holders of our shares. We may not declare or pay distributions on our common shares unless all accrued distributions have been declared and paid, or set aside for payment, on our Series A LLC Preferred Shares.

LIQUIDITY AND CAPITAL RESOURCES

We actively manage our liquidity position with the objective of preserving our ability to fund our operations and fulfill our commitments on a timely and cost-effective basis. Although we believe our current sources of liquidity are adequate to

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preserve our ability to fund our operations and fulfill our commitments, we may evaluate opportunities to issue incremental capital. As of June 30, 2017, we had unrestricted cash and cash equivalents totaling $432.7 million.

The majority of our investments are held in Cash Flow CLOs. Accordingly, the majority of our cash flows have historically been received from our investments in the secured and subordinated notes of our Cash Flow CLOs. However, during the period in which a Cash Flow CLO is not in compliance with an over-collateralization test (‘‘OC Test’’), as outlined in its respective indenture, the cash flows we would generally expect to receive from our Cash Flow CLO holdings are paid to the secured note holders of the Cash Flow CLOs. As described in further detail below, as of June 30, 2017, all of our Cash Flow CLOs were in compliance with their respective coverage tests (specifically, their OC Tests and interest coverage (‘‘IC’’) tests) and made cash distributions to secured and/or subordinated note holders, including us.

Since April 30, 2014, the date we became a subsidiary of KKR & Co., the size of our corporate loan and debt securities portfolio has declined largely due to the calling of our CLOs. During 2014 through 2016, all of our legacy CLOs were called for redemption. These legacy CLOs, which were issued prior to 2012, were larger in total transaction size relative to those that were issued subsequently. The size of new CLOs and the frequency of CLO issuances will depend on market conditions. CLO issuances typically increase when the spread between the value of CLO assets and liabilities generates an attractive return to subordinated note holders. In the case where demand for loans leads to tighter spreads or if interest rates for the liabilities increase, the return to subordinated note holders would be less attractive, and the issuance of CLOs would be expected to generally decline. Consequently, since April 30, 2014, the amount of corporate loan and security interest income and interest expense on our CLO notes has declined along with the volatility in our interest income and interest expense. While the levels of associated corporate loan and security interest income and interest expense on our CLO notes have declined compared to prior years, as we have called for redemption all notes issued by all six legacy CLOs, we do not expect any declines in the near term to be as significant as in past quarters. Rather, as we continue to issue new CLOs, if not offset by other factors, we expect corporate debt interest income and interest expense on our CLOs to increase. Based on the above factors combined with alternative investment opportunities, we may selectively redeploy capital to other assets outside of CLOs.

Sources and Uses of Funds

Cash Flow CLO Transactions

In accordance with GAAP, we consolidate each of our CLO subsidiaries, or Cash Flow CLOs, as we have the power to direct the activities of these VIEs, as well as the obligation to absorb losses of the VIEs or the right to receive benefits of the VIEs that could potentially be significant to the VIEs. We utilize CLOs to fund our investments in corporate loans and corporate debt securities.

On April 17, 2017, the senior CLO notes of CLO 2013-1 were refinanced. Senior secured notes totaling $458.5 million were paid down in full and refinanced into $463.0 million of senior secured notes with a weighted-average coupon of three-month LIBOR plus 1.84% maturing on April 15, 2029.

On March 30, 2017, we closed KKR CLO 17 LLC ("CLO 17"), a $608.5 million secured financing transaction maturing on April 15, 2029. We issued $552.0 million par amount of senior secured notes to unaffiliated investors, all of which was floating rate with a weighted-average coupon of three-month LIBOR plus 1.81%. We also issued $22.0 million par amount of subordinated notes to unaffiliated investors and $34.5 million par amount of subordinated notes to affiliated investors. Upon closing CLO 17, it was determined that we no longer met the consolidation criteria and therefore de-consolidated CLO 17, resulting in a reduction of both consolidated assets and liabilities of approximately $760.0 million.

During December 2016, we declared a distribution in kind on our common shares of certain subordinated notes to our Parent as the sole holder of our common shares and distributed an aggregate $106.5 million par amount of CLO 2012-1, CLO 2013-1, CLO 2013-2, CLO 9, CLO 10, CLO 11 and CLO 13 subordinated notes to our Parent. These notes were previously owned by us and eliminated in consolidation. Following the distribution, certain of the subordinated notes were held by an affiliate of our Manager and reflected as collateralized loan obligation junior secured notes to affiliates, at estimated fair value, on our consolidated balance sheets. However, for certain CLOs, specifically CLO 11 and CLO 13, it was determined that we no longer met the consolidation criteria and therefore de-consolidated these two CLOs, resulting in a reduction of consolidated CLO liabilities of approximately $967.3 million.

On December 15, 2016, we closed CLO 16, a $711.3 million secured financing transaction maturing on January 20, 2029. We issued $644.3 million par amount of senior secured notes to unaffiliated investors, $634.8 million of which was floating rate with a weighted-average coupon of three-month LIBOR plus 2.04% and $9.5 million of which was fixed rate with a coupon of 4.80%. The CLO also issued $4.5 million par amount of subordinated notes to unaffiliated investors. The

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investments that are owned by CLO 16 collateralize the CLO 16 debt, and as a result, those investments are not available to us, our creditors or shareholders.

On September 14, 2016, we closed CLO 15, a $410.8 million secured financing transaction maturing on October 18, 2028. We issued $370.5 million par amount of senior secured notes to unaffiliated investors, all of which was floating rate with a weighted-average coupon of three-month LIBOR plus 2.05%. The CLO also issued $12.1 million par amount of subordinated notes to unaffiliated investors. The investments that are owned by CLO 15 collateralize the CLO 15 debt, and as a result, those investments are not available to us, our creditors or shareholders.

During August 2016, we issued $3.6 million par amount of CLO 13 class F notes for proceeds of $3.0 million. During September 2016, we issued $3.4 million par amount of CLO 13 class F notes for proceeds of $2.9 million.

On June 7, 2016, we closed CLO 2016-1, a $426.4 million secured financing transaction maturing on June 7, 2018, which was funded during the third quarter of 2016. We issued $330.9 million par amount of senior secured notes to unaffiliated investors at a rate of three-month LIBOR plus 1.70% and $25.7 million par amount of subordinated notes to unaffiliated investors. The investments that are owned by CLO 2016-1 collateralize the CLO 2016-1 debt, and as a result, those investments are not available to us, our creditors or shareholders.

During May 2016, we declared a distribution in kind on our common shares of certain subordinated notes to our Parent as the sole holder of our common shares and distributed an aggregate $96.5 million par amount of CLO 9, CLO 10, CLO 11 and CLO 13 subordinated notes. These notes were previously owned by us and eliminated in consolidation. Following the distribution, the subordinated notes were held by an affiliate of our Manager and reflected as collateralized loan obligation junior secured notes to affiliates, at estimated fair value, on our consolidated balance sheets.

During April 2016, the remaining $15.1 million par amount of CLO 2007-A subordinated notes owned by third parties were deemed repaid in full, whereby the CLO distributed assets held as collateral in CLO 2007-A to the subordinated note holders.

The indentures governing our Cash Flow CLOs include numerous compliance tests, the majority of which relate to the CLO’s portfolio.

In the case of our Cash Flow CLOs, in the event that a portfolio profile test is not met, the indenture places restrictions on the ability of the CLO’s manager to reinvest available principal proceeds generated by the collateral in the CLOs until the specific test has been cured. In addition to the portfolio profile tests, the indentures for these CLOs include OC Tests which set the ratio of the collateral value of the assets in the CLO to the tranches of debt for which the test is being measured, as well as interest coverage tests. For purposes of the calculation, collateral value is the par value of the assets unless an asset is in default, is a discounted obligation, or is a CCC-rated asset in excess of the percentage of CCC-rated asset limit specified for each CLO.

If an asset is in default, the indenture for each CLO transaction defines the value used to determine the collateral value, which value is the lower of the market value of the asset or the recovery value proscribed for the asset based on its type and rating by Standard & Poor’s or Moody’s.

A discount obligation is an asset with a purchase price of less than a particular percentage of par. The discount obligation amounts are specified in each CLO and are generally set at a purchase price of less than 80% of par for corporate loans and 75% of par for corporate debt securities.

The indenture for each CLO specifies a CCC-threshold for the percentage of total assets in the CLO that can be rated CCC. All assets in excess of the CCC threshold specified for the respective CLO are also included in the OC Tests at market value and not par.

Defaults of assets in CLOs, ratings downgrade of assets in CLOs to CCC, price declines of CCC assets in excess of the proscribed CCC threshold amount, and price declines in assets classified as discount obligations may reduce the over-collateralization ratio such that a CLO is not in compliance. If a CLO is not in compliance with an OC Test, cash flows normally payable to the holders of junior classes of notes will be used by the CLO to amortize the most senior class of notes until such point as the OC Test is brought back into compliance. While being out of compliance with an OC Test would

not impact our investment portfolio or results of operations, it would impact our unrestricted cash flows available for operations, new investments and cash distributions. As of June 30, 2017, all of our CLOs were in compliance with their respective OC Tests.

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An affiliate of our Manager has entered into separate management agreements with our Cash Flow CLOs and is entitled to receive fees for the services performed as collateral manager. The indentures governing the CLO transactions stipulate the reinvestment period during which the collateral manager can generally sell or buy assets at its discretion and can reinvest principal proceeds into new assets. CLO 2013-1, CLO 2013-2, CLO 9, CLO 10, CLO 15 and CLO 16 will end their reinvestment periods during April 2022, January 2018, October 2018, December 2018, October 2020 and January 2021, respectively.

Pursuant to the terms of the indentures governing our CLO transactions, we have the ability to call our CLO transactions after the end of their respective non-call periods. During August 2016, we called CLO 2007-1 and repaid all senior and mezzanine notes totaling $945.6 million par amount. In addition, during October 2016, the remaining $134.5 million par amount of CLO 2007-1 subordinated notes owned by third parties were deemed repaid in full, whereby the CLO distributed assets held as collateral in CLO 2007-1 to the subordinated note holders. In connection with the repayment of the CLO 2007-1 notes, the related pay-fixed, receive-variable interest rate swap used to hedge interest rate risk associated with the CLO, with a contractual notional amount of $142.3 million was terminated.

During the three months ended June 30, 2017, $63.5 million par amount of original CLO 2012-1 secured notes and $2.5 million par amount of original CLO 15 secured notes were repaid. During the six months ended June 30, 2017, $143.9 million par amount of original CLO 2012-1 secured notes and $2.5 million par amount of original CLO 15 secured notes were repaid. During the three and six months ended June 30, 2016, $486.3 million and $598.5 million par amount, respectively, of original CLO 2007-1 senior notes were repaid.

CLO 2011-1 and CLO 2016-1 do not have reinvestment periods and all principal proceeds from holdings in the respective CLOs are used to amortize the transaction. During the year ended December 31, 2016, $348.4 million par amount of original CLO 2016-1 secured and subordinated notes were repaid in full. In addition, during December 2016, the remaining $8.2 million par amount of CLO 2016-1 subordinated notes owned by third parties were deemed repaid in full, whereby the CLO distributed assets held as collateral in CLO 2016-1 to subordinated note holders. During March 2016, we called CLO 2011-1 and repaid all senior debt totaling $249.3 million par amount.

CLO Warehouse Facility

On March 10, 2017, CLO 18 entered into a $470.0 million CLO warehouse facility ("CLO 18 Warehouse"), which matured upon the closing of KKR CLO 18 LLC ("CLO 18"). The CLO 18 Warehouse was used to purchase assets for the CLO transaction in advance of its closing date upon which the proceeds of the CLO closing were used to repay the CLO 18 Warehouse in full. Debt issued under the CLO 18 warehouse was non-recourse to us beyond the assets of CLO 18 and bore interest rates ranging from three-month LIBOR plus 1.10% to 1.75%. Upon the closing of CLO 18 on July 27, 2017, the aggregate amount outstanding under the CLO 18 Warehouse was repaid.

On November 1, 2016, CLO 17 entered into a $200.0 million CLO warehouse facility ("CLO 17 Warehouse"), which matured upon the closing of CLO 17 on March 30, 2017. The CLO 17 Warehouse was used to purchase assets for the CLO transaction in advance of its closing date upon which the proceeds of the CLO closing were used to repay the CLO 17 Warehouse in full. Debt issued under the CLO 17 Warehouse was non-recourse to us beyond the assets of CLO 17 and bore interest at rates ranging from three-month LIBOR plus 1.25% to 2.20%. Upon the closing of CLO 17 on March 30, 2017, the aggregate amount outstanding under the CLO 17 Warehouse was repaid.

Senior Notes

On April 24, 2017, we redeemed $115.0 million aggregate principal amount of our Notes due 2042 in accordance with the optional redemption provisions provided in the documents governing the Notes due 2042. The transaction resulted in recording a gain on extinguishment of debt of $7.9 million. Prior to the redemption, our Notes due 2042 traded on the NYSE.

On March 30, 2017, we issued $375.0 million aggregate principal amount of 5.50% senior unsecured notes due March 30, 2032 ("Notes due 2032") in a private placement, resulting in net proceeds of $368.6 million. Interest on the Notes due 2032 is payable semi-annually on March 30 and September 30 of each year. We may redeem the Notes due 2032 in whole, but not in part, at a redemption price equal to 100% of the outstanding principal amount plus accrued and unpaid interest to, but excluding, the date of redemption on or after March 30, 2022 and annually thereafter, after providing notice to noteholders of such redemption not less than 30 and no more than 60 business days prior to such redemption date. At any time prior to March 30, 2022, we may redeem the Notes due 2032 in whole, but not in part, at a redemption price equal to (i) 100% of the outstanding principal amount, (ii) plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) plus the excess, if any, of (a) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes

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due 2032 (as if the Notes due 2032 matured on March 30, 2022), discounted to the redemption date on a semi-annual basis (assuming a 360-day year of twelve 30-day months) at a rate equal to the sum of the applicable treasury rate plus 50 basis points, minus accrued and unpaid interest, if any, on the Notes due 2032 being redeemed to, but excluding, the redemption date over (b) the principal amount of the Notes due 2032 being redeemed.

On November 15, 2016, we redeemed $258.8 million aggregate principal amount of our Notes due 2041, in accordance with the optional redemption provisions provided in the documents governing the Notes due 2041. The transaction resulted in us recording a gain on extinguishment of debt of $29.8 million. Prior to the redemption, our Notes due 2041 traded on the NYSE.

Replacing the Notes due 2041 (which were redeemed in November 2016) and the Notes due 2042 (which were redeemed in April 2017) with the Notes due 2032 (which were issued in March 2017) represents an annualized interest expense

savings of $9.7 million when calculated in the aggregate.

Junior Subordinated Notes

In January 2017, we repurchased $18.8 million of junior subordinated notes, which resulted in a gain on extinguishment of debt of $2.4 million.

Off-Balance Sheet Arrangements

We participate in certain contingent financing arrangements, whereby we are committed to provide funding of up to a specific predetermined amount at the discretion of the borrower or have entered into an agreement to acquire interests in certain assets. As of June 30, 2017 and December 31, 2016, we had unfunded financing commitments for corporate loans totaling $0.6 million and $3.2 million, respectively.

We participate in joint ventures and partnerships alongside affiliates of our Manager through which we contribute capital for assets, including development projects related to our interests in joint ventures and partnerships that hold commercial real estate, as well as alternative credit and specialty lending focused businesses. As of June 30, 2017, we estimated these future contributions to total approximately $271.4 million, whereby approximately 91% was related to our credit segment and 9% was related to our other segment. As of December 31, 2016, we estimated these future contributions to total approximately $279.4 million, whereby approximately 91% was related to our credit segment and 9% was related to our other segment.

We had investments, held alongside affiliates of our Manager, in real estate entities that were financed with non-recourse debt totaling approximately $1.4 billion as of June 30, 2017 and $1.1 billion as of December 31, 2016. Under non-recourse debt, the lender generally does not have recourse against any other assets owned by the borrower or any related parties of the borrower, except for certain specified exceptions listed in the respective loan documents including customary ‘‘bad boy’’ acts and environmental losses. In connection with certain of these investments, joint and several non-recourse carve-out guarantees and environmental indemnities were provided, pursuant to which KFN guarantees losses or the full amount of the applicable loan in the event of specified bad acts or environmental matters. In addition, completion guarantees were provided for certain properties to complete all or portions of development projects, and partial payment guarantees were provided for certain investments.

PARTNERSHIP TAX MATTERS

Non-Cash “Phantom” Taxable Income

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Shares may still have a tax liability attributable to their allocation of gross ordinary income from us during such year in the event that cash distributed in a prior year exceeded our gross ordinary income in such year.

Qualifying Income Exception

We intend to continue to operate so that we qualify, for United States federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. In general, if a partnership is ‘‘publicly traded’’ (as defined in the Code), it will be treated as a corporation for United States federal income tax purposes. A publicly traded partnership will be taxed as a partnership, however, and not as a corporation, for United States federal income tax purposes so long as it is not required to register under the Investment Company Act and at least 90% of its gross income for each taxable year constitutes ‘‘qualifying income’’ within the meaning of Section 7704(d) of the Code. We refer to this exception as the ‘‘qualifying income exception.’’ Qualifying income generally includes rents, dividends, interest (to the extent such interest is neither derived from the ‘‘conduct of a financial or insurance business’’ nor based, directly or indirectly, upon ‘‘income or profits’’ of any person), income and gains derived from certain activities related to minerals and natural resources, 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.

If we fail to satisfy the ‘‘qualifying income exception’’ described above, our gross ordinary income would not pass through to holders of our Series A LLC Preferred Shares and such holders would be treated for United States federal (and certain state and local) income tax purposes as shareholders in a corporation. In such case, we would be required to pay income tax at regular corporate rates on all of our net income. In addition, we would likely be liable for state and local income and/or franchise taxes on all of our income. Distributions to holders of our Series A LLC Preferred Shares would constitute ordinary dividend income taxable to such holders to the extent of our earnings and profits, and these distributions would not be deductible by us. If we were taxable as a corporation, it could result in a material reduction in cash flow and after-tax return for holders of our Series A LLC Preferred Shares and thus could result in a substantial reduction in the value of our Series A LLC Preferred Shares and any other securities we may issue.

Tax Consequences of Investments in Natural Resources and Real Estate

As referenced above, we have made certain investments in natural resources and real estate. It is likely that the income from natural resources investments will be treated as effectively connected with the conduct of a United States trade or business with respect to holders of our Series A LLC Preferred Shares that are not ‘‘United States persons’’ within the meaning of Section 7701(a)(30) of the Code. Furthermore, any notional principal contracts that we enter into, if any, in connection with investments in natural resources likely would generate income that would be treated as effectively connected with the conduct of a United States trade or business. Further, our investments in real estate through pass-through entities may generate operating income that is treated as effectively connected with the conduct of a United States trade or business.

To the extent our income is treated as effectively connected income, a holder who is a non-United States person generally would be required to (i) file a United States federal income tax return for such year reporting its allocable share, if any, of our gross ordinary income effectively connected with such trade or business and (ii) pay United States federal income tax at regular United States tax rates on any such income. Moreover, if such a holder is a corporation, it might be subject to a United States branch profits tax on its allocable share of our effectively connected income. In addition, distributions to such a holder would be subject to withholding at the highest applicable federal income tax rate to the extent of the holder’s allocable share of our effectively connected income. Any amount so withheld would be creditable against such holder’s United States federal income tax liability, and such holder could claim a refund to the extent that the amount withheld exceeded such holder’s United States federal income tax liability for the taxable year.

If we are engaged in a United States trade or business, a portion of any gain recognized by an investor who is a non-United States person on the sale or exchange of its Series A LLC Preferred Shares may be treated for United States federal income tax purposes as effectively connected income, and hence such holder may be subject to United States federal income tax on the sale or exchange. Moreover, if the fair market value of our investments in United States real property interests, which include our investments in natural resources, real estate and REIT subsidiaries that invest primarily in real estate, represent more than 10% of the total fair market value of our assets, our Series A LLC Preferred Shares could be treated as United States real property interests. In such case, gain recognized by an investor who is a non-United States person on the sale or exchange of its Series A LLC Preferred Shares would be treated for United States federal income tax purposes as effectively connected income (unless our Series A LLC Preferred Shares are regularly traded on a securities market and the non-United States person owned 5% or less of the shares of our Series A LLC Preferred Shares during the applicable compliance period). We believe that the fair market value of our investments in United States real property interests represented more than 10% of the total fair market value of our assets during the second quarter of 2017. As a result, although the Treasury regulations are not entirely

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clear, the Series A LLC Preferred Shares (unless our Series A LLC Preferred Shares are regularly traded on a securities market and the non-United States person owned 5% or less of the shares of our Series A LLC Preferred Shares during the applicable compliance period) could be treated as United States real property interests. Moreover, it is possible that the Internal Revenue Service ("IRS") could take the position that such shares would be treated as United States real property interests for the five years following the last date on which more than 10% of the total fair market value of our assets consisted of United States real property interests. If gain from the sale of our Series A LLC Preferred Shares is treated as effectively connected income, the holder may be subject to United States federal income and/or withholding tax on the sale or exchange.

In addition, all holders of our Series A LLC Preferred Shares will likely have state tax filing obligations in jurisdictions in which we have made investments in natural resources or real estate (other than through a REIT subsidiary). As a result, holders of our Series A LLC Preferred Shares will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, holders may be subject to penalties if they fail to comply with those requirements. Our current investments may cause our holders to have state tax filing obligations in the following states: Florida, Hawaii, Kansas, Louisiana, Maryland, Mississippi, North Dakota, Ohio, Oklahoma, Pennsylvania and West Virginia. We may make investments in other states or non-U.S. jurisdictions in the future.

For holders of our Series A LLC Preferred Shares that are regulated investment companies, to the extent that our income from our investments in natural resources and real estate exceeds 10% of our gross income, then we will likely be treated as a ‘‘qualified publicly traded partnership’’ for purposes of the income and asset diversification tests that apply to regulated investment companies. Although the calculation of our gross income for purposes of this test is not entirely clear, it is likely we will be treated as a ‘‘qualified publicly traded partnership’’ for our 2017 tax year. However, no assurance can be provided that we will or will not be treated as a ‘‘qualified publicly traded partnership’’ in 2017 or any future year.

OUR INVESTMENT COMPANY ACT STATUS

Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is, holds itself out as being, or proposes to be, primarily engaged in the business of investing, reinvesting or trading in securities and Section 3(a)(1)(C) of the Investment Company 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 Investment Company Act) having a value exceeding 40% of the value of the issuer’s total assets (exclusive of United States 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 Investment Company Act (a “fund”).

We are organized as a holding company. We conduct our operations primarily through our majority‑owned subsidiaries. Each of our subsidiaries is either outside of the definition of an investment company in Sections 3(a)(1)(A) and 3(a)(1)(C), described above, or excepted from the definition of an investment company under the Investment Company Act. We believe that we are not, and that we do not propose to be, primarily engaged in the business of investing, reinvesting or trading in securities and we do not believe that we have held ourselves out as such. 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.

We monitor our holdings regularly to confirm our continued compliance with the 40% test. In calculating our position under the 40% test, we are responsible for determining whether any of our subsidiaries is majority‑owned. We treat as majority‑owned subsidiaries for purposes of the 40% test entities, including those that issue CLOs, in which we own at least 50% of the outstanding voting securities or that are otherwise structured consistent with applicable SEC staff guidance. Some of our majority‑owned subsidiaries may rely solely on the exceptions from the definition of “investment company” found in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. In order for us to satisfy the 40% test, our ownership interests in those subsidiaries or any of our subsidiaries that are not majority‑owned for purposes of the Investment Company Act, 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 United States government securities and cash items. However, many of our majority‑owned subsidiaries either fall outside of the general definitions of an investment company or rely on exceptions provided by provisions of, and rules and regulations promulgated under, the Investment Company Act (other than Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act) and, therefore, the securities of those subsidiaries that we own and hold are not investment securities for purposes of the Investment Company Act. In order to conform to these exceptions, these subsidiaries are 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 relating to such a subsidiary, and that of the subsidiary itself, may be limited as a result. For example, our subsidiaries that issue CLOs generally rely on the exception provided by Rule 3a‑7 under the Investment Company Act, while

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our real estate subsidiaries, including those that are taxed as REITs for United States federal income tax purposes, generally rely on the exception provided by Section 3(c)(5)(C) of the Investment Company 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. Similarly, any subsidiaries engaged in the ownership of oil and gas assets may, depending on the nature of the assets, be outside the definition of an investment company or rely on exceptions provided by Section 3(c)(5)(C) or Section 3(c)(9) of the Investment Company Act. While Section 3(c)(9) of the Investment Company Act does not limit the nature of the securities issued, it does impose business engagement requirements that limit the types of assets that may be held.

We do not treat our interests in majority‑owned subsidiaries that are outside of the general definition of an investment company or that rely on Section 3(c)(5)(A), (B), (C) or Section 3(c)(9) of, or Rule 3a‑7 under, the Investment Company Act as investment securities when calculating our 40% test.

We sometimes refer to our subsidiaries that rely on Rule 3a‑7 under the Investment Company Act as “CLO subsidiaries.” Rule 3a‑7 under the Investment Company 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 management investment companies (e.g., 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 Investment Company 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 our subsidiaries that rely on Section 3(c)(5)(C) of the Investment Company Act, as our “real estate subsidiaries.” Section 3(c)(5)(C) of the Investment Company Act is available to companies that are primarily 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 Investment Company Act if, among other things, at least 55% of the company’s assets consist of mortgage loans, other assets that are considered the functional equivalent of mortgage loans and certain other interests in real property (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 subsidiaries 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 real estate subsidiaries classify 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 unilateral 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 real estate subsidiaries consider 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 United States government or by a federally chartered entity, which 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 by our real estate subsidiaries to be a real estate‑related asset.

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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 real estate subsidiaries’ investment in non‑agency mortgage‑backed securities is the “functional equivalent” of owning the underlying mortgage loans, our real estate subsidiaries may treat those securities as qualifying real estate assets. Moreover, investments in mortgage‑ backed securities that do not constitute qualifying real estate assets are classified by our real estate subsidiaries as real estate‑related assets. Therefore, based upon the specific terms and circumstances related to each non‑agency mortgage‑backed security that our real estate subsidiaries own, our real estate subsidiaries 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 real estate subsidiaries acquire 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 unilateral foreclosure rights with respect to those mortgage loans, then our real estate subsidiaries 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 real estate subsidiaries 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 real estate subsidiaries own more than one subordinate class, then, to determine the classification of subordinate classes other than the first loss class, our real estate subsidiaries 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 real estate subsidiaries own), whether our real estate subsidiaries own the entire amount of each such class and whether our real estate subsidiaries 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 real estate subsidiaries would expect not to classify that particular class, or classes senior to that class, as qualifying real estate assets.

We have made or may make oil and gas and other mineral investments that are held through one or more subsidiaries and would refer to those subsidiaries as our “oil and gas subsidiaries”. Depending upon the nature of the oil and gas assets held by an oil and gas subsidiary, such oil and gas subsidiary may rely on Section 3(c)(5)(C) or Section 3(c)(9) of the Investment Company Act or may fall outside of the general definition of an investment company. An oil and gas subsidiary that does not engage primarily, propose to engage primarily or hold itself out as engaging primarily in the business of investing, reinvesting or trading in securities will be outside of the general definition of an investment company provided that it passes the 40% test. This may be the case where an oil and gas subsidiary holds a sufficient amount of oil and gas assets constituting real estate interests together with other assets that are not investment securities such as equipment. Oil and gas subsidiaries that hold oil and gas assets that constitute real property interests, but are unable to pass the 40% test, may rely on Section 3(c)(5)(C), subject to the requirements and restrictions described above. Alternately, an oil and gas subsidiary may rely on Section 3(c)(9) of the Investment Company Act if substantially all of its business consists of owning or holding oil, gas or other mineral royalties or leases, certain fractional interests, or certificates of interest or participations in or investment contracts relating to such royalties, leases or fractional interests. These various restrictions imposed on our oil and gas subsidiaries by the Investment Company Act may have the effect of limiting our freedom of action with respect to oil and gas assets (or other assets) that may be held or acquired by such subsidiary or the manner in which we may deal in such assets.

In addition, we anticipate that one or more of our subsidiaries, will qualify for an exception from registration as an investment company under the 1940 Act pursuant to either Section 3(c)(5)(A) of the 1940 Act, which is available for entities primarily engaged in the business of purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services, and/or Section 3(c)(5)(B) of the 1940 Act, which is available for entities primarily engaged in the business of making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services and, in each case, the entities are not engaged in the business of issuing redeemable securities, face‑amount certificates of the installment type or periodic payment plan certificates. In order to rely on Sections 3(c)(5)(A) and (B) and be deemed “primarily engaged” in the applicable businesses, at least 55% of an issuer’s assets must represent investments in eligible loans and receivables under those sections. We intend to treat as qualifying assets for purposes of these exceptions the purchases of loans and leases representing part or all of the sales price of equipment and loans where the loan proceeds are specifically provided to finance equipment, services and structural improvements to properties and other facilities and maritime and infrastructure projects or improvements. We intend to rely on guidance published by the SEC or its staff in determining which assets are deemed qualifying assets.

As noted above, if the combined values of the securities issued to us by any non‑majority‑owned subsidiaries and our subsidiaries that must rely on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other

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investment securities we may own, exceed 40% of the value of our total assets (exclusive of United States 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 Investment Company 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 Investment Company Act or (ii) to register as an investment company. Either of these would likely have a material adverse effect on us, the type of investments we make, 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 Investment Company 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 Investment Company 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 effective the date immediately prior to our becoming an investment company. Moreover, if we were required to register as an investment company, we would no longer be eligible to be treated as a partnership for United States 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 (“RIC”) under applicable tax rules. Because our eligibility for RIC status would depend on our assets 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 “Partnership Tax Matters-Qualifying Income Exception”.

We have not requested approval or guidance from the SEC or its staff with respect to our Investment Company Act determinations, including, in particular: our treatment of any subsidiary as majority‑owned; the compliance of any subsidiary with Section 3(c)(5)(A), (B), (C) or Section 3(c)(9) of, or Rule 3a‑7 under, the Investment Company Act, including any subsidiary’s determinations with respect to the consistency of its assets or operations with the requirements thereof; or whether our interests 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 majority‑ owned, excepted from the Investment Company Act pursuant to Rule 3a‑7, Section 3(c)(5)(A), (B), (C), Section 3(c)(9) or any other exception, with our determination that one or more of our other holdings do not constitute investment securities for purposes of the 40% test, or with our determinations as to the nature of the business in which we engage or the manner in which we hold ourselves out, we and/or one or more of our subsidiaries would need to adjust our operating strategies or assets in order for us to continue to pass the 40% test or register as an investment company, either of which could have a material adverse effect on us. Moreover, we may be required to adjust our operating strategy and holdings, or to effect sales of our assets in a manner that, or at a time or price at which, we would not otherwise choose, if there are changes in the laws or rules governing our Investment Company Act status or that of our subsidiaries, or if the SEC or its staff provides more specific or different guidance regarding the application of relevant provisions of, and rules under, the Investment Company Act. The SEC published on August 31, 2011 an advance notice of proposed rulemaking to potentially amend the conditions for reliance on Rule 3a‑7 and the treatment of asset‑backed issuers that rely on Rule 3a‑7 under the Investment Company Act (the “3a‑7 Release”).

The SEC, in the 3a‑7 Release, requested public comment on the nature and operation of issuers that rely on Rule 3a‑7 and indicated various steps it may consider taking in connection with Rule 3a‑7, although it did not formally propose any changes to the rule. Among the issues for which the SEC has requested comment in the 3a‑7 Release is whether Rule 3a‑7 should be modified so that parent companies of subsidiaries that rely on Rule 3a‑7 should treat their interests in such subsidiaries as investment securities for purposes of the 40% test. The SEC also published on August 31, 2011 a concept release seeking information about the nature of entities that invest in mortgages and mortgage‑related pools and public comment on how the SEC staff’s interpretive positions in connection with Section 3(c)(5)(C) affect these entities, although it did not propose any new interpretive positions or changes to existing interpretive positions in connection with Section 3(c)(5)(C). Any guidance or action from the SEC or its staff, including changes that the SEC may ultimately propose and adopt to the way Rule 3a‑7 applies to entities or new or modified interpretive positions related to Section 3(c)(5)(C), could further inhibit our ability, or the ability of a subsidiary, to pursue our current or future operating strategies, which could have a material adverse effect on us.

If the SEC or a court of competent jurisdiction were to find that we were required, but failed, to register as an investment company in violation of the Investment Company Act, we may have to cease business activities, we would breach representations and warranties and/or be in default as to certain of our contracts and obligations, civil or criminal actions could be brought against us, our contracts would be unenforceable unless a court were to require enforcement and a court could appoint a receiver to take control of us and liquidate our business, any or all of which would have a material adverse effect on our business.

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OTHER REGULATORY ITEMS

In August 2012, the CFTC adopted a series of rules to establish a new regulatory framework for swaps that may cause certain users of swaps to be deemed commodity pools or to register as commodity pool operators. We believe we and our subsidiaries are not commodity pools. To the extent that any of our subsidiaries may be deemed to be a commodity pool, we believe they should satisfy certain exemptions to these rules available to privately offered entities. However, if the CFTC were to take the position that KKR Financial Holdings LLC is a commodity pool, our directors may be required to register as commodity pool operators, and complying with the CFTC’s requirements may materially and adversely affect our business and results of operations. Among other things, such requirements would add to our operating and compliance costs and could affect the manner in which we use swaps as part of our operating and hedging strategies.

IRAN SANCTIONS RELATED DISCLOSURE

Under the Iran Threat Reduction and Syrian Human Rights Act of 2012, or ITRA, which added Section 13(r) of the Exchange Act, we are required to disclose in our annual or quarterly reports certain dealings or transactions that we or any of our affiliates engaged in during the previous reporting period involving Iran or other individuals and entities targeted by certain Office of Foreign Assets Control sanctions. We have no disclosures to make with respect to us or our subsidiaries under Section 13(r) of the Exchange Act during the quarter ended June 30, 2017.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risks

From time to time, we may make investments that are denominated in a foreign currency through which we may be subject to foreign currency exchange risk. As of June 30, 2017, $98.3 million estimated fair value, or 2.5%, of our corporate debt portfolio was denominated in foreign currencies, of which approximately 70.5% was denominated in Euros. In addition, as of June 30, 2017, $421.8 million estimated fair value, or 30.5%, of our interests in joint ventures and partnerships and equity investments had foreign exposure, including those denominated in foreign currencies, of which approximately 73.2% was denominated in Euros, 10.6% was denominated in the British pound sterling and 9.2% was denominated in Chinese Yuan Renminbi.

Based on these investments, we are exposed to movements in foreign currency exchange rates which may impact earnings if the United States dollar significantly strengthens or weakens against foreign currencies. Accordingly, we may use derivative instruments from time to time, including foreign exchange options and forward contracts, to manage the impact of fluctuations in foreign currency exchange rates. As of June 30, 2017, the net contractual notional balance of our foreign exchange options and forward contract liabilities totaled $407.4 million, the majority of which related to certain of our foreign currency denominated assets. Refer to “Derivative Risk” below for further discussion on our derivatives.

Credit Spread Exposure

Our investments are subject to spread risk. Our investments in floating rate loans and securities are valued based on a market credit spread over LIBOR and for which the value is affected by changes in the market credit spreads over LIBOR. Our investments in fixed rate loans and securities are valued based on a market credit spread over the rate payable on fixed rate United States Treasuries of like maturity. Increased credit spreads, or credit spread widening, will have an adverse impact on the value of our investments while decreased credit spreads, or credit spread tightening, will have a positive impact on the value of our investments. However, tightening credit spreads will increase the likelihood that certain holdings will be refinanced at lower rates that would negatively impact our earnings.

Interest Rate Risk

Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in repricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows and the prepayment rates experienced on our investments that have embedded borrower optionality. The objective of interest rate risk management is to achieve earnings, preserve capital and achieve liquidity by minimizing the negative impacts of changing interest rates, asset and liability mix and prepayment activity.

We are exposed to basis risk between our investments and our borrowings. Interest rates on our floating rate investments and our variable rate borrowings do not reset on the same day or with the same frequency and, as a result, we are exposed to basis risk with respect to index reset frequency. Our floating rate investments may reprice on indices that are

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different than the indices that are used to price our variable rate borrowings and, as a result, we are exposed to basis risk with respect to repricing index. The basis risks noted above, in addition to other forms of basis risk that exist between our investments and borrowings, could have a material adverse impact on our future net interest margins.

Interest rate risk impacts our interest income, interest expense, prepayments, as well as the fair value of our investments, interest rate derivatives and liabilities. We generally fund our variable rate investments with variable rate borrowings with similar interest rate reset frequencies. Based on our variable rate investments and related variable rate borrowings as of June 30, 2017, we estimated that increases in interest rates would impact net income by approximately (amounts in thousands):



Change in interest rates	Annual Impact
Increase of 1.0%	$	8,649
Increase of 2.0%	$	17,299
Increase of 3.0%	$	25,948
Increase of 4.0%	$	34,597
Increase of 5.0%	$	43,247

As of June 30, 2017, approximately 78% of our floating rate corporate debt portfolio had LIBOR floors with a weighted average floor of 0.95%. Increases in short-term interest rates of 1% or more will result in a greater positive impact as yields on interest-earning assets are expected to rise faster than the cost of funding sources. The simulation above assumes that the asset and liability structure of the condensed consolidated balance sheets would not be changed as a result of the simulated changes in interest rates.

We manage our interest rate risk using various techniques ranging from the purchase of floating rate investments to the use of interest rate derivatives. The use of interest rate derivatives is a component of our interest risk management strategy. As of June 30, 2017, we had interest rate swaps with a contractual notional amount of $141.0 million, the majority of which were used to hedge a portion of the interest rate risk associated with our floating rate junior subordinated notes. The objective of the interest rate swaps is to eliminate the variability of cash flows in the interest payments of these notes due to fluctuations in the indexed rate. The estimated fair value of the interest rate swaps is based on the 30-year swap rate and all changes in value are reflected as net unrealized gains and losses on the condensed consolidated statements of operations. Refer to “Derivative Risk” below for further discussion on our derivatives.

Derivative Risk

Derivative transactions including engaging in swaps and foreign currency transactions are subject to certain risks. There is no guarantee that a company can eliminate its exposure under an outstanding swap agreement by entering into an offsetting swap agreement with the same or another party. Also, there is a possibility of default of the other party to the transaction or illiquidity of the derivative instrument. Furthermore, the ability to successfully use derivative transactions depends on the ability to predict market movements which cannot be guaranteed. As such, participation in derivative instruments may result in greater losses as we would have to sell or purchase an investment at inopportune times for prices other than current market prices or may force us to hold an asset we might otherwise have sold. In addition, as certain derivative instruments are unregulated, they are difficult to value and are therefore susceptible to liquidity and credit risks.

Collateral posting requirements are individually negotiated between counterparties and there is currently no regulatory requirement concerning the amount of collateral that a counterparty must post to secure its obligations under certain derivative instruments. Currently, there is no requirement that parties to a contract be informed in advance when a credit default swap is sold. As a result, investors may have difficulty identifying the party responsible for payment of their claims. If a counterparty’s credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that we may not receive adequate collateral. Amounts paid by us as premiums and cash or other assets held in margin accounts with respect to derivative instruments are not available for investment purposes.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments held (amounts in thousands):

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	As of June 30, 2017
	Notional			Estimated Fair Value
Free-Standing Derivatives:
Interest rate swaps	$	141,000		$	(28,270	)
Foreign exchange forward contracts and options	(407,389		)	15,487
Common stock warrants	—			1,795
Options	—			1,587
Total				$	(9,401	)

For our derivatives, our credit exposure is directly with our counterparties and continues until the maturity or termination of such contracts. The following table sets forth the estimated net fair values of our primary derivative investments by remaining contractual maturity as of June 30, 2017 (amounts in thousands):



	Less than 1 year			1 - 3 years		3 - 5 years		More than 5 years			Total
Free-Standing Derivatives:
Interest rate swaps	$	(544	)	$	—	$	—	$	(27,726	)	$	(28,270	)
Foreign exchange forward contracts and options	8,070			7,417		—		—			15,487
Total	$	7,526		$	7,417	$	—	$	(27,726	)	$	(12,783	)

Counterparty Risk

We have credit risks that are generally related to the counterparties with which we do business. If a counterparty becomes bankrupt, or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. These risks of non-performance may differ from risks associated with exchange-traded transactions which are typically backed by guarantees and have daily mark-to-market and settlement positions. Transactions entered into directly between parties do not benefit from such protections and thus, are subject to counterparty default. It may be the case where any cash or collateral we pledged to the counterparty may be unrecoverable and we may be forced to unwind our derivative agreements at a loss. We may obtain only a limited recovery or may obtain no recovery in such circumstances, thereby reducing liquidity and earnings.

Management Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Significant estimates, assumptions and judgments are applied in situations including the valuation of certain investments. We revise our estimates when appropriate. However, actual results could materially differ from management’s estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See discussion of quantitative and qualitative disclosures about market risk in “Quantitative and Qualitative Disclosures About Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that the information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired controls.

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As of the period ended June 30, 2017, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the period ended June 30, 2017, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended June 30, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The section entitled “Contingencies” appearing in Note 9 “Commitments and Contingencies” of our condensed consolidated financial statements included elsewhere in this report is incorporated herein by reference.

ITEM 1A. RISK FACTORS

For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 29, 2017, which are accessible on the SEC’s website at www.sec.gov.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

KKR & Co. periodically issues press releases, hosts calls and webcasts, publishes presentations on its website, and files reports with the Securities and Exchange Commission, including, for example, earnings releases containing financial results for its completed fiscal quarters, related conference calls and quarterly reports on Form 10‑Q or annual reports on Form 10‑K. Such presentations, reports, calls and webcasts may contain information regarding KFN, which is now a subsidiary of KKR & Co.

Additional information regarding such filings and events may be found at the Investor Center for KKR & Co. L.P. under “Events & Presentations,” “Press Releases” and “SEC Filings”, and KKR’s periodic filings with the SEC are accessible on the Securities and Exchange Commission’s website at www.sec.gov. Such presentations, reports, calls and webcasts whether published on KKR & Co.’s website or filed with the Securities and Exchange Commission are not incorporated by reference in this report and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.

ITEM 6. EXHIBITS

Required exhibits are listed in the Index to Exhibits and are incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		KKR Financial Holdings LLC

Signature		Title


/s/ THOMAS N. MURPHY		Chief Financial Officer (Principal Financial and Accounting Officer and Authorized Signatory)
Thomas N. Murphy

Date: August 10, 2017

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INDEX TO EXHIBITS

The following is a list of all exhibits filed or furnished as part of this report:



Exhibit Number		Description

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

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