Fitch Affirms 4 Kayne Anderson Managed Funds' MRPS at 'A' and Senior Note Ratings at 'AAA'

NEW YORK--()--Fitch Ratings has affirmed the 'AAA' ratings assigned to the senior unsecured notes (Notes) and 'A' ratings assigned to the mandatory redeemable preferred shares (MRPS) issued by Kayne Anderson MLP Investment Company (NYSE: KYN), Kayne Anderson Energy Total Return Fund (NYSE: KYE), Kayne Anderson Midstream/Energy Fund (NYSE: KMF), and the Kayne Anderson Energy Development Company (NYSE: KED) managed by KA Fund Advisors LLC.

KEY RATING DRIVERS

The rating affirmation reflects:

--Sufficient pro forma asset coverage provided to the Notes and 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.

FUND PROFILE

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.

KED is a non-diversified, closed-end fund, which commenced its operations on Sept. 21, 2006. 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, midstream companies and marine transportation companies.

KMF is a non-diversified, closed-end fund, which commenced its operations on Nov. 24, 2010. The fund's investment objective is to provide a high level of total return with an emphasis on making quarterly cash distributions to its common stockholders. The fund seeks to achieve that investment objective by investing at least 80% of its total assets in the securities of companies in the Midstream/Energy Sector, consisting of midstream MLPs, midstream companies, other MLPs and other energy companies.

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 Oct. 31, 2016, KYN's total assets were approximately $3.9 billion with senior securities totalling $767 million of notes, $75 million on the fund's revolving credit facility and $354 million of MRPS. The notes and credit facility/term loan are both unsecured and rank pari passu in the fund's capital structure - both senior to the fund's MRPS.

As of Oct. 31, 2016, KYE's total assets were approximately $646 million with senior securities totalling $115 million of notes, $35 million on the fund's revolving credit facility and $50 million of MRPS. The notes and credit facility/term loan are both unsecured and rank pari passu in the fund's capital structure - both senior to the fund's MRPS.

As of Oct. 31, 2016, KMF's total assets were approximately $518 million with senior securities totalling $91 million of notes, $33 million on the fund's revolving credit facility and $35 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 Oct. 31, 2016, KED's total assets were approximately $337 million with $80 million drawn on the balance on the fund's revolving credit and term loan facility and $25 million of MRPS. The credit facility is unsecured and ranks senior to the fund's MRPS in the capital structure.

ASSET COVERAGE

As of Oct. 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 'AAA' rating guidelines for the notes and 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 Oct. 31, 2016, the funds' asset coverage ratio for the notes, as calculated in accordance with the Investment Company Act of 1940 (1940 Act), was in excess of 300%. 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 notes and MRPS.

NOTES STRUCTURAL PROTECTIONS

Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each week for Fitch OC Tests and on the last business day of each month for 1940 Act tests), under the terms of the notes, the fund is required to deliver notice to the note purchasers. The fund is then expected 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 the 1940 Act test breaches) within a pre-specified time period.

Failure to cure an asset coverage breach as described above is an Event of Default under the terms of the notes. The fund must then deliver notice to the note purchasers and all notes outstanding and any accrued interest is immediately due and payable if a majority of noteholders vote for acceleration.

The fund is also prohibited from paying out a common stock dividend if it fails to cure a breach to the notes' 300% 1940 Act asset coverage test. Fitch views this as an added incentive to cure and deleverage in a timely manner, regardless of acceleration by the notes purchasers.

PARI PASSU CLAIM WITH CREDIT FACILITY

Upon the occurrence of an Event of Default per the Note Purchase Agreements (such as a failure to cure an asset coverage breach) or per the fund's Credit Agreement, the noteholders and the bank lender will share in their claim on funds' assets pari passu when receiving payments as described in each of those agreements. The funds account for this pari passu status in their calculation of the Fitch OC tests.

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 funds are required to deliver notice to the MRPS purchasers.

The funds' 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.

SUBORDINATION RISK

The funds have entered into credit agreements with several lenders. The rights of lenders to receive principal and interest payments on borrowings under the agreement are senior to the rights of the MRPS holders of the funds to receive payment of dividends and redemptions.

Under the credit agreements, the funds may not be permitted to redeem MRPS or make dividend payments unless at such time no event of default or other circumstance exists under the credit agreement that would limit or block redemption payments.

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 Oct. 31, 2016, Kayne Anderson and its affiliates managed assets over $24 billion, including approximately 73% in energy companies. Kayne Anderson has invested in MLPs and other midstream energy companies since 1998.

RATING SENSITIVITIES

The ratings are based on the terms of the Notes and 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, or the note purchasers not declare the Notes due and payable upon an event of default due to an asset coverage breach, this may lengthen exposure to market value risk and cause the ratings to be lowered by Fitch.

Fitch's rating on the MRPS could be negatively affected by material changes in the portfolios' composition, or changes in the credit agreement terms that increases the likelihood that a MRPS dividend or redemption payment could be delayed.

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.

RATING ACTIONS

Fitch takes the following rating actions:

Kayne Anderson MLP Investment Company (KYN)

--$31,000,000 Series W Senior Notes 4.38% due on May 26, 2018 affirmed at 'AAA';

--$20,000,000 Series Y Senior Notes 2.91% due on May 3, 2017 affirmed at 'AAA';

--$15,000,000 Series Z Senior Notes 3.39% due on May 3, 2019 affirmed at 'AAA';

--$15,000,000 Series AA Senior Notes 3.56% due on May 3, 2020 affirmed at 'AAA';

--$35,000,000 Series BB Senior Notes 3.77% due on May 3, 2021 affirmed at 'AAA';

--$76,000,000 Series CC Senior Notes 3.95% due on May 3, 2022 affirmed at 'AAA';

--$75,000,000 Series DD Senior Notes 2.74% due on April 16, 2019 affirmed at 'AAA';

--$50,000,000 Series EE Senior Notes 3.20% due on April 16, 2021 affirmed at 'AAA';

--$65,000,000 Series FF Senior Notes 3.57% due on April 16, 2023 affirmed at 'AAA';

--$45,000,000 Series GG Senior Notes 3.67% due on April 16, 2025 affirmed at 'AAA';

--$30,000,000 Series II Senior Notes 2.88% due on July 30, 2019 affirmed at 'AAA';

--$30,000,000 Series JJ Senior Notes 3.46% due on July 30, 2021 affirmed at 'AAA';

--$80,000,000 Series KK Senior Notes 3.93% due on July 30, 2024 affirmed at 'AAA';

--$50,000,000 Series LL Senior Notes 2.89% due on Oct. 29, 2020 affirmed at 'AAA';

--$40,000,000 Series MM Senior Notes 3.26% due on Oct. 29, 2022 affirmed at 'AAA';

--$20,000,000 Series NN Senior Notes 3.37% due on Oct. 29, 2023 affirmed at 'AAA';

--$90,000,000 Series OO Senior Notes 3.46% due on Oct. 29, 2024 affirmed at 'AAA';

--$8,000,000 Series B MRPS 4.53% due on Nov. 9, 2017 affirmed at 'A';

--$42,000,000 Series C MRPS 5.20% due on Nov. 9, 2020 affirmed at 'A';

--$125,000,000 Series F MRPS 3.50% due on April 15, 2020 affirmed at 'A';

--$50,000,000 Series H MRPS 4.06% due on July 30, 2021 affirmed at 'A';

--$25,000,000 Series I MRPS 3.86% due on Oct. 29, 2022 affirmed at 'A';

--$50,000,000 Series J MRPS 3.36% due on Nov. 9, 2021 affirmed at 'A'.

Kayne Anderson Energy Total Return Fund (KYE)

--$5,076,923 Series I Senior Notes 2.59% due on Aug. 8, 2018 affirmed at 'AAA';

--$24,538,462 Series J Senior Notes 3.07% due on Aug. 8, 2020 affirmed at 'AAA';

--$42,307,692 Series K Senior Notes 3.72% due on Aug. 8, 2023 affirmed at 'AAA';

--$38,076,923 Series L Senior Notes 3.82% due on Aug. 8, 2025 affirmed at 'AAA';

--$5,000,000 Series M Senior Notes 3.36% due on Oct. 7, 2021 affirmed at 'AAA';

--$30,000,000 Series B MRPS 5.13% due on May 10, 2018 affirmed at 'A';

--$20,000,000 Series C MRPS 3.36% due on Sept. 7, 2021 affirmed at 'A'.

Kayne Anderson Midstream/Energy Fund (KMF)

--$21,000,000 Series C Senior Notes 4.00% due on March 22, 2022 affirmed at 'AAA';

--$40,000,000 Series D Senior Notes 3.34% due on May 1, 2023 affirmed at 'AAA';

--$30,000,000 Series E Senior Notes 3.46% due on July 30, 2021 affirmed at 'AAA';

--$35,000,000 Series C MRPS 4.06% due on July 30, 2021 affirmed at 'A'.

Kayne Anderson Energy Development Company (KED)

--$25,000,000 Series A MRPS 3.37% due on April 10, 2020 affirmed at 'A'.

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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The sources of information used to assess this rating were the public domain and KA Fund Advisors.

Applicable Criteria

Rating Closed-End Funds and Market Value Structures (pub. 09 Sep 2016)

https://www.fitchratings.com/site/re/886753

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or
Secondary Analyst
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Analyst
+1-646-582-4917
or
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or
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Email: hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Brian Knudsen
Associate Director
+1-646-582-4904
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Chelsea Nguyen
Analyst
+1-646-582-4917
or
Committee Chairperson
Roger Merritt
Managing Director
+1-212-908-0636
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com