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Exhibit 10.16    
    

 
 

THIRD AMENDMENT TO
  SECOND AMENDED AND RESTATED CREDIT AGREEMENT    
    

        This THIRD AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") dated as of
December 14, 2007, to the Second Amended and Restated Credit Agreement dated as of May 4, 2007 (as amended, the "Credit Agreement;"
capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement) is entered into by and among (i) KKR FINANCIAL
HOLDINGS LLC, a Delaware limited liability company ("KKR Financial"), KKR FINANCIAL CORP., a Maryland corporation ("KKR
Financial Corp."), KKR TRS HOLDINGS, INC., a Delaware corporation ("KKR TRS"), KKR TRS HOLDINGS, LTD., a Cayman
Islands company ("KKR TRS LTD"), KKR FINANCIAL HOLDINGS II, LLC, a Delaware limited liability company ("KKR
Holdings II), KKR FINANCIAL HOLDINGS III, LLC, a Delaware limited liability company ("KKR Holdings III"), KKR FINANCIAL
HOLDINGS, INC., a Delaware corporation ("KKR Holdings"), AND KKR FINANCIAL HOLDINGS, LTD., a Cayman Islands company
("KKR Holdings LTD", and collectively with KKR Financial, KKR Financial Corp., KKR TRS, KKR TRS LTD, KKR Holdings II, KKR Holdings III and
KKR Holdings, the "Borrowers" and each, individually, a "Borrower"), (ii) each lender party
hereto (collectively, the "Lenders" and individually, a "Lender") and (iii) BANK OF AMERICA,
N.A., as Administrative Agent ("Administrative Agent") and Swingline Lender. 

        WHEREAS,
the Borrowers have requested that the Required Lenders agree to amend certain provisions of the Credit Agreement in the manner set forth herein; 

        WHEREAS,
the Lenders signatory to this Agreement are agreeable to such amendments on the terms and subject to the conditions set forth herein; and 

        WHEREAS,
pursuant to Section 10.01 of the Credit Agreement, the consent of the Required Lenders is required to effect the amendments set forth herein. 

        NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto agree as follows: 

        Section 1.    Amendments to Credit Agreement.    As of the Effective Date (as defined below), on the basis of
the representations and warranties contained in this Agreement, and subject to the terms and conditions of this Agreement (including satisfaction of the conditions set forth in  Section 2) the
Required Lenders hereby amend the Credit Agreement as follows: 

        1.1   Section 1.01
of the Credit Agreement shall be hereby amended such that the following definitions shall be added to such Section: 

"Adjusted Net Income from Continuing Operations" means, as of any date of determination, Net Income from Continuing Operations plus any net income (or
loss) related to the Retained MBS Portfolio that is included in Net Income from Discontinued Operations. 

"Adjusted Consolidated Tangible Net Worth" means, as of any date of determination, actual Consolidated Tangible Net Worth  less Net Worth of VIE Interest Adjustments,
less any net worth adjustments attributable to KKR Atlantic
and KKR Pacific after September 30, 2007. 

"Adjusted Total Liabilities" means, as of any date of determination, Consolidated Total Liabilities less: (i) Non-Company VIE
Liabilities, (ii) Atlantic and Pacific Adjustments and (iii) Trust Preferred Indebtedness (as of such date of determination, but in no event greater than $440,000,000). For the avoidance
of doubt, any Indebtedness secured by the Retained MBS Portfolio shall be included in the definition of Adjusted Total Liabilities. 

 

"Atlantic and Pacific Adjustments" means, as of any date of determination, the liabilities of KKR Financial Corp. and its subsidiaries attributable to
KKR Atlantic and KKR Pacific. 

"Eligible MBS Portfolio" means, as of any date of determination, the securities within the Retained MBS Portfolio, that are also listed on
Schedule II hereto (as Schedule II may be modified or deemed modified as described in the rest of this definition). The Borrowers may from time to time request the Administrative Agent
to approve the addition to the Eligible MBS Portfolio of one or more securities then within the Retained MBS Portfolio. To the extent the Administrative Agent in its sole discretion approves such
request in writing, following such approval Schedule II shall be deemed modified to include such additional approved securities from the Retained MBS Portfolio as part of the Eligible MBS
Portfolio. 

"First Lien Bank Loan" means Bank Loans secured by a first priority security interest in and lien on substantially all of the material obligors' assets. 

"KKR Atlantic" means KKR Atlantic Funding Trust. 

"KKR Pacific" means KKR Pacific Funding Trust. 

"Net Income from Continuing Operations" means for any period, for KKR Financial and its Subsidiaries on a consolidated basis, the Consolidated Net
Income less Net Income from Discontinued Operations. 

"Net Income from Discontinued Operations" means for any period, for KKR Financial and its Subsidiaries on a consolidated basis, the net income from
discontinued operations (classified as "Discontinued" in the report on Form 10-Q filed with the Securities and Exchange Commission on November 7, 2007 for the quarterly
period ending September 30, 2007) of KKR Financial and its Subsidiaries for that period in accordance with GAAP. 

"Net Worth of VIE Interest Adjustments" means, as of any date of determination from and after June 30, 2007, the variable interest entity other
comprehensive income adjustments required by the application of FAS 115 that are attributable to the other owners of a variable interest entity other than the Borrowers and their consolidated
Subsidiaries. 

"Non-Company VIE Liabilities" means, as of any date of determination after September 30, 2007, the sum of (i) the liabilities
arising out of the Disposition by KKR Financial Corp. of all of its residential real estate assets as contemplated by Section 7.05(b) that are nonrecourse to the Borrowers and are recorded by
KKR Financial based on the required application of FAS 140 and FIN-46(R), and (ii) the liabilities of the Borrowers to the other owners of a variable interest entity arising
out of the required application of FAS 140 or FIN-46(R) and the percentage of the nonrecourse liabilities attributable to the other owners of such variable interest entity. 

"Retained MBS Portfolio" means, as of any date of determination, the securities owned by the Borrowers and their Subsidiaries and listed on
Schedule I hereto (as Schedule I may be modified or deemed modified as described in the rest of this definition). If a security is acquired by a Borrower from KKR Atlantic or KKR Pacific
with the consent of the Administrative Agent in accordance with Section 7.15 of this Agreement, upon such acquisition Schedule I shall be deemed modified to include such acquired
security as part of the Retained MBS Portfolio. 

"Second Lien Bank Loan" means Bank Loans secured by a second priority security interest in and lien on substantially all of the material obligors'
assets. 

2

 

"SLN Repurchase Agreements" means each of (i) the Amended & Restated Master Repurchase Agreement, including the Amended & Restated
Annex I attached thereto, each dated as of October 15, 2007, between KKR Atlantic, as buyer, and KKR Atlantic Funding Depositor Corporation, as seller, (ii) the Amended &
Restated Master Repurchase Agreement, including the Amended & Restated Annex I attached thereto, each dated as of October 15, 2007, between KKR Atlantic, as buyer, and KKR
Financial Corp., as seller, (iii) the Amended & Restated Master Repurchase Agreement, including the Amended & Restated Annex I attached thereto, each dated as of
October 15, 2007, between KKR Pacific, as buyer, and KKR Pacific Funding Depositor Corporation, as seller, and (iv) the Amended & Restated Master Repurchase Agreement, including
the Amended & Restated Annex I attached thereto, each dated as of October 15, 2007, between KKR Pacific, as buyer, and KKR Financial Corp., as seller. 

        1.2    Facility Size.    The definition of "Aggregate Commitment Amount" set forth in Section 1.01 of the
Credit Agreement shall be hereby amended by deleting such definition in its entirety and replacing it with the following: 

"Aggregate Commitment Amount" means the aggregate principal amount of the Aggregate Commitments from time to time. On the date hereof, the Aggregate
Commitment Amount equals $500,000,000. 

        1.3    Applicable Rate.    The definition of "Applicable Rate" set forth in Section 1.01 of the Credit
Agreement shall be hereby amended by deleting such definition in its entirety and replacing it with the following: 

"Applicable Rate" means a per annum rate equal to: 

        (a)   with
respect to Tranche A Loans, 0.825% 

        (b)   with
respect to Tranche B Loans, 1.075%; and 

        (c)   with
respect to the Facility Fee, 0.175%. 

        1.4    Applicable Sublimit.    The definition of "Applicable Sublimit" set forth in Section 1.01 of the Credit
Agreement shall be hereby amended by deleting such definition in its entirety and replacing it with the following: 

"Applicable Sublimit" means the exclusion from the Tranche B Borrowing Base of any amount (without duplication) attributable to any Eligible
Specified Financial Asset to the extent that the Net Value Amount included in the Tranche B Borrowing Base would exceed the amount shown in the chart below for the applicable Eligible Specified
Financial Asset: 

	Eligible Specified Financial Asset
 
	 	Sublimits

	Rule 144A private placed Debt Securities with registration rights only	 	 
	a.	 	NAIC 1 / AAA thru A-	 	Unlimited(1)
	b.	 	NAIC 2 / BBB+ thru BBB-	 	Unlimited(1)
	c.	 	NAIC 3 / BB+ thru BB and NAIC 4 / BB- thru B-	 	$100 million
	

Second Lien Bank Loans, Bridge Loans and Mezzanine Loans	
 	

$125 million
	

MBS in the Eligible MBS Portfolio (not constituting Mortgage-backed Debt Securities Interest Only Strips) with a weighted average life of less than five years rated A- through BB-	
 	

$75 million
	

CLO Tranches rated BB+/Ba1 or lower (including non-rated) on transactions managed by KKR Financial LLC or an Affiliate thereof	
 	

$100 million

3

 

	

144A Private Placed Debt Securities with registration rights only rated BB+ to B- plus MBS in the Eligible MBS Portfolio (not constituting Mortgage-backed Debt Securities Interest Only Strips) with a
weighted average life of less than five years rated A- to BB- plus CLO Tranches rated BB+ / Ba1 or lower (including non rated) on transactions managed by KKR Financial LLC or an Affiliate
thereof	
 	

$175 million
	

Investments Denominated in Foreign Currency (Euros, Pounds, or Yen)	
 	

$60 million
	

CLO Tranches(2)	
 	

 
	a.	 	AAA thru AA-	 	$125 million
	b.	 	A+ thru BBB	 	$65 million
	c.	 	BBB-	 	$15 million
	

Mortgage-backed Debt Securities Interest Only Strips in the Eligible MBS Portfolio	
 	

$30 million
	a.	 	Federal National Mortgage Association Fannie Mae ("FNMA") Interest Only Strips	 	 
	b.	 	Non Agency Interest Only Strips	 	 
	

CCC+ thru CCC- rated Eligible Specified Financial Assets	
 	

 
	a.	 	Rule 144A private placed Debt Securities with registration rights only NAIC 5 / CCC+ thru CCC-	 	$60 million; however when combined with other CCC-rated Eligible Specified Financial Assets not to exceed $100 million in aggregate.
	b.	 	Other Debt Securities, excl. MBS, rated CCC+/Caa1 thru CCC-/Caa3	 	$60 million; however when combined with other CCC-rated Eligible Specified Financial Assets not to exceed $100 million in aggregate.

4

 

	c.	 	Senior Unsecured Bank Loans CCC+ thru CCC-	 	$60 million; however when combined with other CCC-rated Eligible Specified Financial Assets not to exceed $100 million in aggregate.

	(*)
	References
to credit ratings are to the Debt Rating.

	(1)
	Subject
to there not being any restrictions on Bank of America's ability as Administrative Agent to sell any securities financed in the Senior Credit Facility. A sublimit of 15% of
the Aggregate Commitment Amount will apply to 144A privately placed debt transactions that are less than $100 million in size and in which the Borrowers, in the aggregate, own more than 33% of
the total issuance.

	(2)
	Amounts
attributable to CLO Tranches rated BBB or better shall be excluded from the Tranche B Borrowing Base to the extent that any such Eligible Specified Financial Assets
have been included in such Borrowing Base for more than 180 consecutive days, provided, that if the Borrowers remove such Eligible Specified Financial Assets as collateral prior to the elapsing of
such 180 consecutive days, such assets may not thereafter be included as part of such Borrowing Base. 

        1.5    CLO/CBO/CDO Tranches.    The definition of "CLO/CBO/CDO Tranches" set forth in Section 1.01 of the
Credit Agreement shall be hereby amended by deleting such definition in its entirety and replacing it with the following: 

"CLO Tranches" means collateralized loan obligation tranches of collateralized loan obligation transactions managed by KKR Financial LLC or an
Affiliate thereof. 

        1.6    References to CLO/CBO/CDO Tranches.    Each reference in the Credit Agreement to the term "CLO/CBO/CDO
Tranches" shall be deleted and replaced with the term "CLO Tranches." 

        1.7    Concentration Limit.    The definition of "Concentration Limit" set forth in Section 1.01 of the Credit
Agreement shall be hereby amended by deleting such definition in its entirety and replacing it with the following: 

"Concentration Limit" means, (i) with respect to any single Eligible Specified Financial Asset (other than CLO Tranches rated BB+/Ba1 or lower
(including non-rated CLO Tranches)), the exclusion from the Tranche B Borrowing Base of an amount attributable to such Eligible Specified Financial Asset, to the extent that
(a) the amount included in such Borrowing Base would exceed the applicable maximum Net Value Amount for each category as specified in the chart below and (b) the number of investments in
any single Eligible Specified Financial Asset exceeds the maximum number of investments for each category as specified in the chart below, (ii) with respect to any Single Obligor of one or more
Eligible Specified Financial Assets (other than CLO Tranches rated BB+/Ba1 or lower (including non-rated CLO Tranches)), the exclusion from the Tranche B Borrowing Base of an amount
attributable to such Single Obligor, to the extent that (a) the amount included in the Borrowing Base would exceed the applicable maximum Net Value Amount for each category as specified in the
chart below and (b) the number of 

5

 

investments
attributable to any Single Obligor exceeds the maximum number of investments for each category as specified in the chart below, (iii) with respect to any First Lien Bank Loans,
Second Lien Bank Loans, Mezzanine Obligations, Bridge Loans and Mortgage-backed Debt Securities Interest Only Strips in the Eligible MBS Portfolio, to the extent there is no Debt Rating (each, an
"Unrated Asset"), considered individually, the exclusion from the Tranche B Borrowing Base of an amount attributable to such Eligible Specified
Financial Asset, to the extent that (a) the amount included in the Borrowing Base would exceed the applicable maximum Net Value Amount for each category as specified in the chart below and
(b) the number of investments attributable to any unrated Eligible Specified Financial Asset exceeds the maximum number of investments for each category as specified in the chart below. 

	Limits on Single Obligor/Single Asset/Unrated Asset Investments

	Category of Investments

based on Net Value

Amount ($Millions)*
 
	 	Maximum Number

of Investments

Allowed*
	 	Maximum Net Value Amount per

Single Obligor/Asset ($Millions)

	> $50 but up to $75	 	1	 	75
	> $25 but up to $50	 	3	 	50
	< or = $25	 	Up to Aggregate Commitment Amount	 	N/A

	*
	If
there are no Single Obligor, single Eligible Specified Financial Asset or Unrated Asset investments in any particular category specified in the left hand column of the chart (the
"Unutilized Category of Investments"), then the Tranche B Borrowing Base may include an increased number of Single Obligor, single Eligible
Specified Financial Asset or Unrated Asset investments in a category specifying lower Net Value Amounts so long as the aggregate Net Value of such investments does not exceed the Maximum Net Value
Amount per Single Obligor, single Eligible Specified Financial Asset or Unrated Asset investment specified in the right hand column of the chart for such Unutilized Category of Investments;  provided,
however, that the Tranche B Borrowing Base shall not, at any time, include amounts
attributable to more than four (4) Single Obligor, single Eligible Specified Financial Asset or Unrated Asset investments the Net Value Amount of which, individually, exceeds
$25.0 million. 

        1.8    Participation Interest.    The definition of "Participation Interest" set forth in Section 1.01 of the
Credit Agreement shall be hereby amended by deleting such definition in its entirety and replacing it with the following: 

"Participation Interest" means any participating interest in any Specified Financial Asset which is a collateralized loan obligation, First Lien Bank
Loan, Second Lien Bank Loan, Mezzanine Obligation or Bridge Loan where the record holder of such interest is a Financing SPE or a financial institution which has a Debt Rating equal to A+ by S&P, or
its equivalent from another rating agency, or higher. 

6

 

        1.9    Specified Percentage.    The definition of "Specified Percentage" set forth in Section 1.01 of the
Credit Agreement shall be hereby amended by deleting such definition in its entirety and replacing it with the following: 

"Specified Percentage" means, in relation to any Eligible Specified Financial Assets, the percentage set forth in the table below opposite such Eligible
Specified Financial Asset: 

	TRANCHE A
	 
	Eligible Specified Financial Asset(*)
 
	 	Specified Percentage
	 
	Cash	 	100	%
	Certificates of deposit	 	95	%
	Commercial paper (Limited to A1/P1 or higher)	 	95	%
	United States obligations consisting of interest rate strips or zero coupon obligations	 	90	%
	Other United States obligations maturing in 10 or more and up to 30 years	 	95	%
	Other United States obligations maturing in 2 or more but less than 10	 	97	%
	Other United States obligations maturing in less than 2 years	 	98	%
	MBS in the Eligible MBS Portfolio rated AAA and with a weighted average life of less than five years	 	85	%
	MBS in the Eligible MBS Portfolio rated AA+ to AA and with a weighted average life of less than five years	 	80	%
	MBS in the Eligible MBS Portfolio rated AA- to A and with a weighted average life of less than five years	 	75	%

	 

	TRANCHE B
	 
	Eligible Specified Financial Asset(*)
 
	 	Specified Percentage
	 
	Publicly traded investment grade Debt Securities	 	 	 
	a.	 	BBB+ or higher	 	90	%
	b.	 	BBB thru BBB-	 	80	%
	

Rule 144A private placed Debt Securities with registration rights only	
 	

 	
 
	a.	 	NAIC 1 / AAA thru A-	 	85	%
	b.	 	NAIC 2 / BBB+ thru BBB-	 	80	%
	c.	 	NAIC 3 / BB+ thru BB	 	70	%
	d.	 	NAIC 4 / BB- thru B-	 	55	%
	e.	 	NAIC 5 / CCC+ thru CCC-	 	40	%
	

Other Debt Securities, excluding MBS in the Eligible MBS Portfolio, rated BB+/Ba1 through BB-/Ba3	
 	

70	
%
	

Other Debt Securities, excluding MBS in the Eligible MBS Portfolio, rated B+/B1 through B-/B3	
 	

60	
%
	

Other Debt Securities, excluding MBS in the Eligible MBS Portfolio, rated CCC+/Caa1 through CCC-/Caa3	
 	

40	
%
	

First Lien Bank Loans	
 	

75	
%
	

Second Lien Bank Loans	
 	

65	
%
	

Real estate related Mezzanine Obligations	
 	

60	
%
	

Mezzanine Obligations (other than real estate related Mezzanine Obligations)	
 	

50	
%
	

Bridge Loans	
 	

50	
%

7

 

	

MBS in the Eligible MBS Portfolio (not constituting Mortgage-backed Debt Securities Interest Only Strips) rated A- to BBB—and with a weighted average life of less than five years	
 	

50	
%
	

MBS in the Eligible MBS Portfolio (not constituting Mortgage-backed Debt Securities Interest Only Strips) rated BB+ to BB- and with a weighted average life of less than five years	
 	

40	
%
	

CLO Tranches rated BB+/Ba1 or lower (including non-rated)	
 	

35	
%
	

Investments Denominated in Foreign Currency (Euros, Pounds, or Yen)	
 	

Mimic rates on US currency denominated assets if micro hedged for FX risk and, if not, an additional decrease of 5%(1)	
 
	

CLO Tranches	
 	

 	
 
	a.	 	AAA through AA-	 	75	%
	b.	 	A+ through BBB	 	60	%
	c.	 	BBB-	 	50	%
	

Mortgage-backed Debt Securities Interest Only Strips in the Eligible MBS Portfolio	
 	

 	
 
	a.	 	FNMA Interest Only Strips	 	50	%
	b.	 	Non-Agency Interest Only Strips	 	40	%
	

Senior Unsecured Bank Loans	
 	

 	
 
	a.	 	BBB- or higher	 	70	%
	b.	 	BB+ thru BB-	 	65	%
	c.	 	B+ thru B-	 	60	%
	d.	 	CCC+ thru CCC-	 	40	%

	*
	References
to credit ratings are to the Debt Rating.

	(1)
	Subject
to confirmation of Administrative Agent's first lien on foreign exchange hedges. 

        1.10    Swingline Sublimit.    The definition of "Swingline Sublimit" set forth in Section 1.01 of the Credit
Agreement shall be hereby amended by deleting such definition in its entirety and replacing it with the following: 

"Swingline Sublimit" means, at any time, an amount equal to the lesser of (a) $46,875,000 and (b) the Aggregate Commitment Amount. The
Swingline Sublimit is part of, and not in addition to, the Aggregate Commitment Amount. 

        1.11    Tranche A Specified Financial Asset.    Subsection (b) of the definition of "Tranche A
Specified Financial Asset" set forth in Section 1.01 of the Credit Agreement shall be hereby amended by deleting such subsection in its entirety and replacing it with the following: 

	(b)
	commercial
paper maturing in less than 90 days from the date of acquisition and rated A1/P1 or higher. 

8

 

  
        1.12    Tranche B Specified Financial Asset.    Subsections (c) through (e) of the definition of
"Tranche B Specified Financial Asset" set forth in Section 1.01 of the Credit Agreement shall be hereby amended by deleting such subsections in their entirety and replacing them with the
following: 

	(c)
	other
Debt Securities (including, in the case of CLO Tranches, non-rated securities, whether or not related as debt for tax purposes), excluding mortgage-backed securities
having the Debt Ratings indicated in the table for Specified Percentages;

	(d)
	First
Lien Bank Loans;

	(e)
	Second
Lien Bank Loans; 

        1.13    Increase Effective Date.    The definition of "Increase Effective Date" set forth in Section 1.01 of
the Credit Agreement shall be hereby deleted in its entirety. 

        1.14    Increase in Commitments.    Section 2.13 of the Credit Agreement shall be hereby amended by deleting
such Section in its entirety and replacing it with the following: 

"2.13    [RESERVED]"

        1.15    Financial Statements.    Section 6.01 of the Credit Agreement shall be hereby amended by
(i) deleting "and" at the end of Subsection (a); (ii) replacing "." with "; and" at the end of Subsection (b) and (iii) adding the following after
Subsection (b): 

        "(c)     as
soon as available, but in any event within 90 days after the fiscal year of KKR Financial or within 45 days after the end of each of the
first three fiscal quarters of each fiscal year of KKR Financial, an agreed upon procedures report completed by KKR Financial's auditor, in the form to be agreed upon by the Borrower and the
Administrative Agent, with respect to the calculation of certain terms and covenants of the Agreement initially defined in that certain Third Amendment to the Second Amended and Restated Credit
Agreement." 

        1.16    Consolidated Tangible Net Worth.    Section 7.09(a) of the Credit Agreement shall be hereby amended by
deleting such Section in its entirety and replacing it with the following: 

	"(a)
	Consolidated Tangible Net Worth.    Permit Adjusted Consolidated Tangible Net Worth, at any time, to be less than the sum of
(i) the greater of (x) $1,437,000,000, or (y) an amount equal to 85% of the Adjusted Consolidated Tangible Net Worth as of September 30, 2007, plus (ii) 85% of the
net proceeds received from the issuance and sale, at any time after September 30, 2007, of Equity Interests of KKR Financial or any Subsidiary (other than issuances to any Borrower or a
wholly-owned Subsidiary), including upon any conversion of Debt Securities of KKR Financial into such Equity Interests." 

        1.17    Leverage Ratio.    Section 7.09(b) of the Credit Agreement shall be hereby amended by deleting such
Section in its entirety and replacing it with the following: 

	"(b)
	Leverage Ratio.    Permit the ratio of Adjusted Total Liabilities to the sum of: (i) Adjusted Consolidated Tangible
Net Worth and (ii) the Trust Preferred Indebtedness (as of the date of such calculation, but in no event greater than $440,000,000), to exceed 4.75 to 1.00." 

        1.18    Positive Net Income.    Section 7.09(c) of the Credit Agreement shall be hereby amended by deleting
such Section in its entirety and replacing it with the following: 

	"(c)
	Positive Net Income.    Permit KKR Financial's Adjusted Net Income from Continuing Operations to be less than $1.00 for any
fiscal quarter." 

9

 

        1.19    Valuation Policies.    Section 7.14 shall be added to the Credit Agreement and shall state the
following: 

"7.14    Valuation Policies.    Materially alter the policies contained in the KKR Financial LLC and Subsidiaries Valuation
Policies and Procedures as in effect on the Effective Date, a copy of which were provided to the Administrative Agent on the Effective Date, without obtaining the prior written consent of the
Administrative Agent if such alterations affect any of the Collateral or Eligible Specified Financial Assets, which, shall not be unreasonably withheld or delayed; provided that if the Administrative
Agent has not responded within 10 Business Days after written request for a consent by the Borrowers, it shall be deemed to have consented." 

        1.20    KKR Atlantic and KKR Pacific.    Section 7.15 shall be added to the Credit Agreement and shall state
the following: 

"7.15    KKR Atlantic and KKR Pacific.    (i) Purchase an Equity Interest in, (ii) pay any Indebtedness of,
(iii) transfer any assets (including without limitation, in connection with the acquisition of a mortgage-backed security, unless such acquisition has been consented to in writing by the
Administrative Agent) to or (iv) provide any other financial support to, in each case, either KKR Atlantic or KKR Pacific, other than with respect to assets pledged to KKR Atlantic or KKR
Pacific as of September 30, 2007 (it being understood, for the avoidance of doubt, that the repayment of Indebtedness of KKR Atlantic or KKR Pacific from the proceeds of their own assets is not
restricted by this provision). Upon any such acquisition of a mortgage-backed security with the consent of the Administrative Agent, in accordance with the foregoing, the acquired security shall
become a part of the Retained MBS Portfolio (as contemplated in the definition of that term)." 

        1.21    Cross-Default.    Section 8.01(e) of the Credit Agreement shall be hereby amended by deleting such
Section in its entirety and replacing it with the following: 

"(e)    Cross-Default.    (i) Any Borrower fails to make any payment (whether of principal or interest and regardless of
amount) in respect of any Material Indebtedness (other than with respect to KKR Atlantic or KKR Pacific or with respect to any SLN Repurchase Agreement), when and as the same shall become due and
payable (with all applicable grace periods having expired), or (ii) any event or condition occurs that results in any Material Indebtedness (other than with respect to KKR Atlantic or KKR
Pacific or with respect to any SLN Repurchase Agreement) becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both, but
after all applicable grace periods have expired) the holder or holders of any Material Indebtedness (other than with respect to KKR Atlantic or KKR Pacific or with respect to any SLN Repurchase
Agreement) or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its
scheduled maturity; provided that this Section 8.01(e)(ii) shall not apply to secured
Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; or" 

        1.22    Commitments and Applicable Percentages.    Schedule 2.01 to the Credit Agreement shall be hereby
amended by deleting such Schedule in its entirety and replacing it with Schedule 2.01 attached hereto. 

        1.23     The
Credit Agreement shall be hereby amended to add Schedules I and II attached hereto as Schedules I and II, respectively, to the Credit
Agreement. 

        1.24     Exhibit D
to the Credit Agreement (the form of Borrowing Base Report) shall be hereby amended by deleting such Exhibit in its entirety and
replacing it with Exhibit D attached hereto. 

10

 

        1.25     Exhibit E
to the Credit Agreement (the form of Compliance Certificate) shall be hereby amended by deleting such Exhibit in its entirety and
replacing it with Exhibit E attached hereto. 

        Section 2.    Conditions Precedent.    This Agreement shall become effective on the date (the
"Effective Date") upon which the following conditions have been satisfied in full or waived by the Administrative Agent in writing: 

        2.1   The
Administrative Agent shall have received counterparts of this Agreement duly executed by each Borrower, the Required Lenders and the Administrative Agent. 

        2.2   All
representations and warranties contained in this Agreement or otherwise made in writing to the Administrative Agent in connection herewith shall be true and correct. 

        2.3   Other
than the fees and other amounts due and owing in accordance with Section 4 hereof, the Borrowers shall have
paid all outstanding interest and fees due and payable under the Credit Agreement and the other Loan Documents. 

        2.4   The
Borrowers shall have paid the amendment fee specified in Section 4 hereof, and shall have paid the expenses described in Section 4 hereof to the extent
invoiced or otherwise specified in writing to the Borrowers at or prior to the time of the fee payment referred to above (but with any failure to so invoice or specify in writing not having any effect
on the Borrowers' obligation to pay such expenses under Section 4 or the Credit Agreement, as applicable). 

        2.5   The
Administrative Agent shall have received from the Borrowers (i) a Borrowing Base Report, substantially in the form attached hereto as Exhibit D, dated
as of the Effective Date and (ii) a Compliance Certificate, substantially in the form attached hereto as Exhibit E, demonstrating compliance, dated as of September 30, 2007. 

        Section 3.    Effect of Amendment.    

        3.1   Each
Borrower agrees that after giving effect to this Agreement there is no Default nor Event of Default in existence, nor would a Default nor an Event of Default be
caused by this Agreement or the implementation of the matters reflected herein. 

        3.2   Except
as specifically modified by this Agreement, the terms and provisions of the Credit Agreement are ratified and confirmed by the parties hereto and remain in full
force and effect. 

        3.3   The
parties hereto acknowledge that for the purposes of the Credit Agreement, this Agreement is a Loan Document and, upon effectiveness of this Agreement, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit
Agreement", "thereunder", "thereof", "therein" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Agreement. 

        Section 4.    Fees; Expenses.    The Borrowers agree to pay to the Administrative Agent for the ratable benefit
of each of the Lenders executing and delivering this Agreement a non-refundable one time amendment fee of 0.235% of the Commitment of each such Lender and such other fees as may be
mutually agreed upon. The Borrowers shall reimburse the Administrative Agent upon demand for all reasonable out-of-pocket costs and expenses incurred by the Administrative
Agent and its Affiliates (including the reasonable fees, charges and disbursements of counsel for the Administrative Agent) in connection with the preparation, negotiation, execution, delivery and
administration of this Agreement and any other agreements and documents executed and delivered in connection herewith. 

        Section 5.    Acknowledgments.    

	5.1
	(a)    Each
Borrower agrees that the outstanding obligations of such Borrower to the Administrative Agent and each of the Lenders as evidenced by or otherwise arising under
the 

11

 

Credit
Agreement and the other Loan Documents, except as otherwise expressly modified in this Agreement, are, by such Borrower's execution of this Agreement, ratified and confirmed in all respects.
Each Security Document to which such Borrower is a party and all security interests and Liens granted thereunder shall continue in full force and effect and is and shall continue to be applicable to
all of the Obligations and to this Agreement. 

	(b)
	Each
Borrower acknowledges and agrees that, as of the date hereof: (i) the Borrower has no claim or cause of action against any of the Lenders or the Administrative Agent (or
any of their directors, officers, employees, attorneys or agents) arising out of or in connection with the Credit Agreement or any instrument, document or agreement entered into in connection
therewith; (ii) the Borrower has no offset rights, counterclaims or defenses of any kind against any of their obligations, indebtedness or liabilities to any of the Lenders or the Agent arising
out of or in connection with the Credit Agreement or any instrument, document or agreement entered into in connection therewith; and (iii) each Lender and the Administrative Agent have
heretofore properly performed and satisfied in a timely manner all of their obligations to the Borrowers arising out of or in connection with the Credit Agreement or any instrument, document or
agreement entered into in connection therewith. 

        5.2   Each
Borrower ratifies and confirms the grant of the security interest in and the Lien on the Collateral contained in the Loan Documents to which each is a party which
were executed in connection with the Credit Agreement. 

        5.3   For
the avoidance of doubt, each party hereto hereby confirms, as of the date hereof, that (i) the $20,000,000 obligation pledged in connection with the IPS
Corporation 11.25% Senior Subordinated Unsecured Notes program qualifies as a Specified Financial Asset that may be treated as a Rule 144A private placed Debt Security (regardless of whether it
has registration rights), and (ii) any obligation within the Eligible MBS Portfolio may constitute a Specified Financial Asset (with the determination of whether it is a Tranche A
Specified Financial Asset or Tranche B Specified Financial Asset to be made in accordance with the definitions of those terms, as amended hereby). 

        Section 6.    Representations of the Borrower.    

        After
giving effect to this Agreement, each Borrower reaffirms and restates the representations and warranties set forth in Article V of the Credit Agreement (except to the extent
such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date)
and all such representations and warranties shall be true and correct on the date hereof with the same force and effect as if made on
such date. Each Borrower represents and warrants (which representations and warranties shall survive the execution and delivery hereof) to the Administrative Agent that: 

        6.1   It
has the corporate power and authority to execute, deliver and carry out the terms and provisions of this Agreement and the transactions contemplated hereby and has
taken or caused to be taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby; 

        6.2   No
consent of any Person (including, without limitation, shareholders or creditors of the Borrowers), and no action of, or filing with any governmental or public body or
authority is required to authorize, or is otherwise required in connection with the execution, delivery and performance of this Agreement; 

        6.3   This
Agreement has been duly executed and delivered on behalf of each Borrower by a duly authorized officer, and constitutes a legal, valid and binding obligation of the
Borrowers enforceable in accordance with its terms, subject to bankruptcy, reorganization, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally and
the exercise of judicial discretion in accordance with general principles of equity; and 

12

 

        6.4   The
execution, delivery and performance of this Agreement will not violate any law, statute or regulation, or any order or decree of any court or governmental
instrumentality, or conflict with, or result in the breach of, or constitute a default under any contractual obligation of the Borrowers. 

        6.5   Since
September 30, 2007, there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a
Material Adverse Effect. 

        Section 7.    Successors and Assigns.    The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns. 

        Section 8.    Governing Law.    THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW
OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS THEREOF OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. 

        Section 9.    Effect.    Except as expressly stated herein, the terms and conditions of the Credit Agreement
and the other Loan Documents remain in full force and effect. The amendments contained herein shall be deemed to have prospective application only, unless otherwise specifically stated herein. 

        Section 10.    Counterparts; Integration.    This Agreement may be executed in counterparts (and by different
parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a
signature page by telecopier shall be effective as delivery of a manually executed counterpart. 

[The
remainder of this page left blank intentionally] 

13

  
        IN WITNESS WHEREOF, the parties hereto have caused this Amendment to Second Amended and Restated Credit Agreement to be duly executed as of the date first above written. 

	 	 	KKR FINANCIAL HOLDINGS LLC
	

 	
 	

By:	
 	

/s/ Jeffery L. Power
 Name: Jeffery L. Power

Title: Authorized Signatory
	

 	
 	
KKR FINANCIAL HOLDINGS II, LLC
	

 	
 	

By:	
 	

/s/ Jeffery L. Power
 Name: Jeffery L. Power

Title: Authorized Signatory
	

 	
 	
KKR FINANCIAL HOLDINGS III, LLC
	

 	
 	

By:	
 	

/s/ Jeffery L. Power
 Name: Jeffery L. Power

Title: Authorized Signatory
	

 	
 	
KKR FINANCIAL HOLDINGS, INC.
	

 	
 	

By:	
 	

/s/ Jeffery L. Power
 Name: Jeffery L. Power

Title: Authorized Signatory

	 	 	KKR FINANCIAL HOLDINGS, LTD.
	

 	
 	

By:	
 	

/s/ Andrew J. Sossen
 Name: Andrew J. Sossen

Title: Authorized Signatory
	

 	
 	
KKR FINANCIAL CORP.
	

 	
 	

By:	
 	

/s/ Andrew J. Sossen
 Name: Andrew J. Sossen

Title: Authorized Signatory
	

 	
 	
KKR TRS HOLDINGS, INC.
	

 	
 	

By:	
 	

/s/ Andrew J. Sossen
 Name: Andrew J. Sossen

Title: Authorized Signatory
	

 	
 	
KKR TRS HOLDINGS, LTD.
	

 	
 	

By:	
 	

/s/ Andrew J. Sossen
 Name: Andrew J. Sossen

Title: Authorized Signatory

	 	 	BANK OF AMERICA, N.A., as

Administrative Agent
	

 	
 	

By:	
 	

/s/ Paula Laesch
 Name: Paula Laesch

Title: Vice President

	 	 	BANK OF AMERICA, N.A., as a Lender,

and Swingline Lender
	

 	
 	

By:	
 	

/s/ Paula Laesch
 Name: Paula Laesch

Title: Vice President

	 	 	CITICORP NORTH AMERICA, INC., as

a Lender
	

 	
 	

By:	
 	

/s/ Robert B. Goldstein
 Name: Robert B. Goldstein

Title: Managing Director/Senior Credit Officer
	

 	
 	
CITICORP NORTH AMERICA, INC., as

Syndication Agent
	

 	
 	

By:	
 	

/s/ Robert B. Goldstein
 Name: Robert B. Goldstein

Title: Managing Director/Senior Credit Officer

	 	 	JPMORGAN CHASE BANK, N.A., as a

Syndication Agent and a Lender
	

 	
 	

By:	
 	

/s/ Richard J. Poworoznek
 Name: Richard J. Poworoznek

Title: Executive Direct

	 	 	THE BANK OF NOVA SCOTIA, as a

Lender
	

 	
 	

By:	
 	

/s/ David Mahmood
 Name: David Mahmood

Title: Director

	 	 	CREDIT SUISSE, CAYMAN ISLANDS

BRANCH, as a Lender
	

 	
 	

By:	
 	

/s/ Ian Nalitt
 Name: Ian Nalitt

Title: Vice President
	

 	
 	

By:	
 	

/s/ James Neira
 Name: James Neira

Title: Associate

	 	 	GOLDMAN SACHS & CO., INC., as a

Lender
	

 	
 	

By:	
 	

/s/ David J. Rosenblum
 Name: David J. Rosenblum

Title: Managing Director

	 	 	ROYAL BANK OF CANADA, as a

Lender
	

 	
 	

By:	
 	

/s/ Howard Lee
 Name: Howard Lee

Title: Authorized Signatory

	 	 	FORTIS CAPITAL CORP., as a Lender
	

 	
 	

By:	
 	

/s/ Shane Klein
 Name: Shane Klein

Title: Senior Vice President
	

 	
 	

By:	
 	

/s/ Alan Krouk
 Name: Alan Krouk

Title: Managing Director

	 	 	MIZUHO CORPORATE BANK, LTD.,

as a Lender
	

 	
 	

By:	
 	

/s/ James R. Fayen
 Name: James R. Fayen

Title: Deputy General Manager

	 	 	MORGAN STANLEY BANK, as a Lender
	

 	
 	

By:	
 	

/s/ Daniel Twenge
 Name: Daniel Twenge

Title: Authorized Signatory

	 	 	SUMITOMO MITSUI BANKING, as a

Lender
	

 	
 	

By:	
 	

/s/ Leo E. Pagarigan
 Name: Leo E. Pagarigan

Title: General Manager

	 	 	CHANG HWA COMMERCIAL

BANK LTD., as a Lender
	

 	
 	

By:	
 	

Jim C.Y. Chen
 Name: Jim C.Y. Chen

Title: VP & General Manager

QuickLinks

Exhibit 10.16

THIRD AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENTExhibit 10.9

 

AON
CORPORATION

OUTSIDE DIRECTOR DEFERRED COMPENSATION PLAN

 

(a subplan of the Aon Stock Incentive Plan)

 

1.            Purpose:

 

The name of this plan is the
Aon Corporation Outside Director Deferred Compensation Plan (the “Plan”). Its
purpose is to provide directors of Aon Corporation (the “Company”) who are not
employees of the Company or any of its subsidiaries (“Outside Directors”) with
the opportunity to defer cash fees earned as an Outside Director. The Plan
shall be effective as of January 1, 2003.

 

2.            Administration:

 

The Plan shall be
administered by the Organization and Compensation Committee (the “Committee”)
of the Board of Directors of the Company (the “Board”). The Committee shall
have the authority to adopt rules and regulations for carrying out the
Plan, to delegate its administrative responsibilities, as it shall, from time
to time, deem advisable, and to interpret, construe, and implement the
provisions thereof. Any decision or interpretation of any provision of the Plan
adopted by the Committee shall be final and conclusive. Furthermore, the
Committee may obtain such advice or assistance, as it deems appropriate from
persons not serving on the Committee.

 

3.            Eligibility:

 

Any Outside Director shall
be eligible to participate in the Plan. An Outside Director shall become a
participant after making an election to participate (the “Participant”) on such
forms as required by the Committee and in accordance with Section 4.

 

4.            Elections:

 

On or before the meeting of the Board next following the annual meeting
of the Company’s stockholders for a year (the “Annual Meeting of the Board”),
each Outside Director shall be entitled to make an election to defer receipt of
all or 50% of the fees to which the Outside Director may become entitled to
receive for serving as an Outside Director of the Company, including fees to
which the Outside Director may become entitled for serving as a member of any
committee of the Board (collectively, “Director’s Fees”), during the period
beginning on such Annual Meeting of the Board and ending on the next Annual
Meeting of the Board.

 

Elections made pursuant to
this Section 4 shall remain in effect until such time as they are amended
by the Participant. Any amendment will take place effective with the next
Annual Meeting of the Board or earlier if permitted by the Committee.

 

2

 

5.            Deemed Investment of
Deferred Amounts:

 

(a)           Stock Accounts. Unless a Participant otherwise
elects pursuant to paragraph (b) of this Section 5, each Participant shall
have established for his or her benefit an account (“Stock Account”) to which
all deferred Director’s Fees shall be credited as stock units representing shares
of the Company’s common stock, $1.00 par value (“Common Stock”). The number of stock
units so credited to a Participant’s Stock Account will be determined by
dividing the deferred amount by the Market Value (defined below) of a share of
Common Stock on the day the deferred amount would have been payable to the
Participant had it not been deferred. The “Market Value” of a share of Common
Stock on any day is the arithmetic mean of the high and low selling prices of
the Common Stock on the New York Stock Exchange on such date (or, if the New
York Stock Exchange was not open for trading or the Common Stock was not traded
on that day, the immediately preceding day that the New York Stock Exchange was
open for trading and the Common Stock was traded).

 

As of each dividend payment
date, each Participant’s Stock Account shall be credited with the dividends
that would be paid with respect to the shares of Common Stock represented by
the stock units credited to the Participant’s Stock Account on the dividend
record date as if the Participant owned such shares as of the record date.
Dividends will be credited as if reinvested in whole or fractional shares of
Common Stock at the Market Value on the dividend payment date.

 

In the event of a
recapitalization, stock split, stock dividend, combination or exchange of
shares, merger, consolidation, rights offering, separation, reorganization or
liquidation, or any other change in the corporate structure or shares of the
Company, the Committee may make such equitable adjustments, to prevent dilution
or enlargement of rights, as it may deem appropriate in the number and class of
shares represented by the stock units credited to a Participant’s Stock
Account.

 

(b)           Cash Accounts. A Participant may elect, at the same
time that a deferral election is made, to have all or 50% of the deferred
amount credited to an account established for his or her benefit (“Cash Account”).
Each Participant’s Cash Account shall be credited with interest, compounded
semiannually, at the annual rate determined as of January 1 and July 1
of each year by averaging the six-month Treasury Bill yield as published
monthly by Board of Governors of the Federal Reserve System on a bank discount
basis through the secondary market for the last six months immediately prior
thereto.

 

(c)           As of the last business day of the quarter in which the
Annual Meeting of the Board occurs, amounts may be transferred between a
Participant’s Stock Account and Cash Account.

 

6.            Method of
Distribution:

 

(a)           Number
of Payments. At the time a Participant elects to defer Director’s Fees
pursuant to Section 4, the Participant may also make an election to have
his or her Accounts distributed in a specified number of annual installments,
not in excess of 10. The most recently filed election in effect at the time
distributions commence pursuant to paragraph (b) of this

 

3

 

Section 6 shall govern. If no such election is
made by a Participant, the Participant’s Accounts shall be distributed in a
single lump sum.

 

(b)          Time of Payment. Distributions shall commence in the
month of January next following the date on which a Participant retires,
becomes unable to fulfill his duties as a director due to death or disability
or otherwise ceases to serve as a director.

 

(c)           Withdrawals for Immediate Financial Needs. Amounts
deferred under the Plan may be distributed at the discretion of the Committee
based on immediate financial need of the Participant or the Participant’s
beneficiary. Such distributions shall occur only if the Participant or the
Participant’s beneficiary suffers an extreme financial hardship occasioned by
an unforeseeable event. Extreme financial hardship means an immediate
catastrophic financial need occasioned by (1) an event such as death,
total disability, serious injury or illness of the Participant, or the Participant’s
beneficiary, a spouse, or dependent, or (2) extreme financial reversal.
Adequate proof of extreme financial hardship must be provided to the Committee.
Distributions for extreme financial hardship may not exceed the amount required
to meet the hardship and may be made only if the Committee finds that extreme
financial hardship may not be met from other resources reasonably available to
the Participant or the Participant’s beneficiary including liquidation of
investment assets, liquidation of luxury assets, loans from financial
institutions or other sources.

 

(d)          Form of Payment. Distributions from a
Participant’s Cash Account will be made in cash. Distributions from a
Participant’s Stock Account will be made in shares of Common Stock with fractional
shares payable in cash; provided, however, that a Participant may elect prior
to the receipt of any amount from his or her Stock Account to have all
distributions from his or her Stock Account paid in cash. Cash payments from a
Participant’s Stock Account will be based on the Market Value of a share of
Common Stock on the last day of the month preceding the payment date.

 

(e)           Beneficiary. If a Participant dies before receiving
all amounts credited to such Participant’s Accounts, the undistributed amounts
shall be distributed to the Participant’s beneficiary or beneficiaries in
accordance with the last effective beneficiary designation form filed by the
Participant with the Company. Such undistributed amounts will be distributed in
the same manner and at the same time as had been elected by the Participant
prior to such Participant’s death. If a Participant has failed to designate a
beneficiary, the Participant’s Accounts shall be distributed to the Participant’s
estate.

 

7.           Participant’s Rights:

 

Nothing in the Plan shall
confer on a Participant any right to continue as a director of the Company.

 

All amounts deferred or otherwise held for the
account of a Participant under the Plan shall remain the sole property of the
Company. With respect to such amounts, the Participant is merely a general
creditor, and any obligation of the Company hereunder is purely contractual and
shall not be funded or secured in any way.

 

4

 

8.           Nonalienability:

 

No amounts, whether deferred
or distributable, shall be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, charge, garnishment,
execution, or levy of any kind, whether voluntary or involuntary, including any
liability which is for alimony or other payments for the support of a spouse or
former spouse.

 

9.           Amendment and Termination:

 

The Board reserves the right
to amend, modify or terminate the Plan at any time, subject to any applicable rule or
regulation.

 

10.         Governing Law:

 

Except to the extent
superseded by federal law, the laws of Illinois shall be controlling in all
matters relating to the Plan.

 

5

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