NEW YORK--(BUSINESS WIRE)--
Fitch Ratings expects to assign a 'AA' rating to the following series of mandatory redeemable preferred stock (MRPS) expected to be issued by Kayne Anderson MLP Investment Company (NYSE Amex: KYN), a non-diversified closed-end fund managed by KA Fund Advisors, LLC:
--Up to $125,000,000 of 3.5% Series F MRPS, consisting of 5,000,000 shares at a price of $25.00 per share, and due April 15, 2020.
The MRPS issuance is expected to close April 3rd, 2013, following which the securities are expected to trade on a public exchange. The above amount assumes full exercise of the over-allotment option by underwriters to sell additional 600,000 shares. The fund intends to use $100 million of the net proceeds to redeem its Series D MRPS and the remaining $25 million to make additional portfolio investments (thereby slightly increasing leverage).
KEY RATING DRIVERS
The expected rating reflects:
--Sufficient pro-forma asset coverage provided to the MRPS as calculated per the fund's asset coverage 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 fund's operations;
--The capabilities of KA Fund Advisors, LLC as investment advisor.
As of Feb. 28, 2013, fund's total assets were $4,889 million and total leverage was $1,285 million, or 26.3% of assets. The leverage consisted of $890 million in outstanding senior notes, $21 million drawn on the fund's credit facility and $374 million in mandatory redeemable preferred stock. On March 27th, 2013 Fitch published a press release expecting to rate senior notes that the fund intends to issue and fund fully by June of 2013. Incorporating the expected note and MRPS issuances onto the current portfolio would increase the fund leverage to approximately 28%.
The funds' pro forma asset coverage ratios for the MRPS, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AA' rating guidelines outlined in Fitch's closed-end fund criteria, were in excess of 100%. This is the minimum asset coverage guideline required by the fund's governing documents and evaluated as such by Fitch.
The funds' pro-forma asset coverage ratios for the MRPS, as calculated in accordance with the Investment Company Act of 1940 (1940 Act), were in excess of 200%, which is the minimum asset coverage required by the 1940 Act and the fund's governing documents.
Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each week), the governing documents require the fund to alter the composition of its portfolio toward assets with lower discount factors (for Fitch OC Tests), or to reduce leverage in a sufficient amount (for both the Fitch OC Tests and the 1940 Act test) to restore compliance within a pre-specified period (a maximum of 47 calendar days for the Fitch OC Tests and a longer period for the 1940 Act test).
The fund invests principally in equity securities of energy-related publicly traded master limited partnerships (MLPs). Energy-related MLPs own domestic infrastructure assets that are used in the gathering, processing, transportation, storage, refining and distribution of energy-related commodities. The fund's objective is to obtain high after tax total returns for its shareholders.
As of Feb. 28, 2013, the fund carried a deferred tax liability in the amount of $810 million as a result of certain unrealized gains for tax purposes typically seen in MLP closed-end funds. However, under a stressed market scenario, the fund may have to liquidate portfolio assets to restore its asset coverage ratios, and as such, much of the currently existing unrealized gains would likely be eliminated or significantly reduced as a result of asset price declines. To account for any residual risk, Fitch's rating criteria reduces discounted portfolio assets by 10% of the deferred tax liability when calculating its Fitch OC Tests for rated notes and preferred shares.
KA Fund Advisors, LLC is the fund's investment adviser, responsible for implementing and administering the fund's investment strategy. It is a subsidiary of Kayne Anderson Capital Advisors, L.P. (Kayne Anderson) a Securities and Exchange Commission-registered investment adviser. As of Dec. 31, 2012 Kayne Anderson and its affiliates managed approximately $18 billion, including over $15 billion in the Midstream/Energy Sector. Kayne Anderson has invested in MLPs and other midstream energy companies since 1998.
The ratings may be sensitive to material changes in the credit quality or market risk profile of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause the ratings to be lowered by Fitch.
For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.
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Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 15, 2012).
Applicable Criteria and Related Research
Rating Closed-End Fund Debt and Preferred Stock
- Security Upgrades & Downgrades
- Fitch Ratings
Yuriy Layvand, CFA, +1 212-908-9191
Fitch Ratings, Inc.
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Gwen Fink-Stone, J.D., +1 212-908-9128
Davie R. Rodriguez, CFA, +1 212-908-0386
Brian Bertsch, +1 212-908-0549