Fitch Rates MRPS Issued by Two Kayne Anderson Managed Closed-End Funds
Kayne Anderson MLP Investment Company (KYN)
--$50,000,000 of 3.36% Series J MRPS, due Nov. 9, 2021.
Kayne Anderson Energy Total Return Fund, Inc. (KYE)
--$20,000,000 of 3.36% Series C MRPS, due Sept. 7, 2021.
KEY RATING DRIVERS
The ratings primarily reflect:
--Sufficient asset coverage provided to the preferred shares as calculated per the funds' overcollateralization (OC) tests;
--The structural protections afforded by mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the funds' operations;
--The capabilities of KA Fund Advisors, LLC as investment advisor.
FUND PROFILES
KYN is a non-diversified, closed-end fund, which commenced its operations on Sept. 28, 2004. KYN invests principally in equity securities of energy-related master limited partnerships (MLPs). KYN's objective is to obtain high after tax total returns for its shareholders. MLPs are publicly traded limited partnerships. Energy-related MLPs own domestic infrastructure assets that are used in the gathering, processing, transportation, storage, refining and distribution of energy-related commodities.
KYE is a non-diversified, closed-end fund, which commenced its operations on June 28, 2005. The fund's investment objective is to obtain a high level of total return with an emphasis on current income. The fund seeks to achieve that investment objective by investing principally in equity and debt securities of companies in the energy industry, such as energy related MLPs, U. S. and Canadian income trusts, marine transportation companies, midstream companies and coal companies.
LEVERAGE
As of July 31, 2016, KYN's total assets were approximately $3.9 billion with senior securities totalling $767 million of notes, no balance on the fund's revolving credit facility and $404 million of MRPS. The notes and credit facility are both unsecured and rank pari passu in the fund's capital structure - both senior to the fund's MRPS.
As of July 31, 2016, KYE's total assets were approximately $615 million with senior securities totalling $115 million of notes, no balance on the fund's revolving credit facility and $70 million of MRPS. The notes and credit facility are both unsecured and rank pari passu in the fund's capital structure - both senior to the fund's MRPS.
ASSET COVERAGE
As of July 31, 2016, the funds' pro forma asset coverage ratios, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'A' rating guidelines for the MRPS, outlined in Fitch's closed-end fund criteria, were in excess of 100%. These are the minimum asset coverage guideline required by the fund's governing documents.
The Fitch OC tests calculate standardized asset coverage by applying haircuts to portfolio holdings based on riskiness and diversification of the assets and measuring their ability to cover both on - and off-balance-sheet liabilities at the stress level that corresponds to the assigned rating.
As of July 31, 2016, the fund's pro forma asset coverage ratio for total leverage, including the MRPS, as calculated in accordance with the 1940 Act, was in excess of 225%. These are the minimum asset coverage ratios required by the legal documents of the MRPS.
STRUCTURAL PROTECTIONS
Should the MRPS Asset Coverage Test and Fitch OC test decline below their minimum threshold amounts (as tested weekly for Fitch OC tests and monthly for 1940 Act tests) the fund is required to deliver notice to the MRPS purchasers promptly when becoming aware of such fact.
The fund manager is required to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC tests breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC tests and Asset Coverage Test breaches) within a pre-specified time period consistent with Fitch's 40 to 60 business day criteria.
THE ADVISOR
KA Fund Advisors, LLC is the funds' investment adviser, responsible for implementing and administering the fund's investment strategy and is a subsidiary of Kayne Anderson Capital Advisors, L. P. (Kayne Anderson) a Securities and Exchange Commission-registered investment adviser. As of July 31, 2016, Kayne Anderson and its affiliates managed assets over $23 billion, including over $17 billion in the energy sector. Kayne Anderson has invested in MLPs and other midstream energy companies since 1998.
RATING SENSITIVITIES
The rating is based on the terms of the MRPS stipulating mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines. Should the funds fail to cure an asset coverage breach this may lengthen exposure to market value risk and cause the ratings to be lowered by Fitch.
The ratings may also be sensitive to material changes in the credit quality or market risk profile of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause the ratings to be lowered by Fitch.
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