KKR Financial in need of $750m cash injection

Crisis-stricken financial companies are engaged in a frantic search for alternative sources of funding, because of the same turmoil in the debt markets that brought Solent Capital low yesterday.

KKR Financial, an offshoot of the mighty private equity house Kohlberg Kravis Roberts, promised to shore up its finances with $750m in equity fundraising from new and existing shareholders, while mortgage companies were selling assets and tapping emergency loans from banks to raise cash.

Kohlberg Kravis Roberts itself - which created KKR Financial in June 2005 - said it would put up to $100m of its own money into the company if existing shareholders balked at the bailout. The hedge fund Farallon and the giant bank Morgan Stanley are among the new investors putting in $500m.

Last week KKR Financial revealed big losses on a portfolio of US residential mortgages, which it had bought using short-term financing from the commercial paper market. The company had asked to delay repayment of loans because it could not raise replacement financing and was facing losses of up to $290m if it dumped its mortgage portfolio on the market.

Many companies rely on the commercial paper market for short-term financing, and until very recently there has been strong interest from investors. Commercial paper is meant to be very low risk, being both short-term and backed by measurable assets.

But the collapse of the sub-prime mortgage market has raised questions about the value of the underlying assets and led to a crisis of confidence in all sorts of debt instruments. As a result the ability to sell new commercial paper has all but dried up.

The Federal Reserve, the US central bank, became so concerned about the inability of some companies to raise funds that it cut the interest rate that it charges banks last Friday. It hopes that by cutting the cost of money for banks, and by promising to take commercial paper as collateral for loans, the Fed will be able to kick-start activity in the commercial paper market.

One mortgage company boss was downbeat about whether the Fed's actions will improve the situation. Larry Goldstone, chief operating officer of Thornburg Mortgage, said his company had been forced to sell 35 per cent of its mortgage book to raise funds.

"Nobody can issue asset-backed securities, the commercial paper market is not functioning all that well, and I suspect that the reverse repurchase agreement market which is the only other place to fund mortgages outside the depository system, is still struggling as well."

Countrywide Financial, the largest US mortgage lender, tapped its banks for $11.5m of emergency funding last week, after finding the financial markets were demanding a punishing interest rate for its debt. Yesterday the company began laying off staff, saying it would offer considerable fewer mortgages to customers from now.

Capital One Financial said it will eliminate 1,900 jobs and shut down a wholesale mortgage unit it acquired less than a year ago. The closure of GreenPoint Mortgage will result in an $860m charge, or $2.15 per share. Capital One slashed its 2007 earnings forecast.