NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to $70 million of series M 3.36% senior unsecured notes (notes) due on Oct. 7, 2021 issued by Kayne Anderson Energy Total Return Fund, Inc. (NYSE: KYE), a non-diversified closed-end fund managed by KA Fund Advisors, LLC.
Fitch also affirms ratings on the fund's existing notes and mandatory redeemable preferred stock (MRPS) as listed at the end of this press release.
KEY RATING DRIVERS
The rating assignments and affirmations reflect:
--Sufficient pro forma asset coverage provided to 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.
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 master limited partnerships (MLPs), U.S. and Canadian income trusts, marine transportation companies, midstream companies and coal companies.
As of Aug. 31, 2014, KYE's pro forma total assets were approximately $1,840 million supporting $345 million of notes, $120 million of MRPS, and $48 million of bank borrowing. The notes and credit facility are both unsecured and rank pari-passu in the fund's capital structure, while at the same time they are both senior to the fund's MRPS.
As of Aug. 31, 2014, 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 'AA' 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 Aug. 31, 2014, 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 funds' 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 the fund's governing documents.
NOTES STRUCTURAL PROTECTIONS
Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each week), under the terms of the notes the fund is required to deliver notice to the note purchasers within five business days. The fund manager 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 (a maximum of 47 calendar days for the Fitch OC tests and a longer period for the 1940 Act test).
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 a notice within five business days to the note purchasers and a majority vote of note purchasers may then declare all the notes then outstanding to be immediately due and payable.
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 occurence of an Event of Default per the Note Purchase Agreement (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 fund assets pari passu when receiving payments as described in each of those agreements. The fund accounts 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) the funds are required to deliver notice to the MRPS purchasers within five days of 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 (a maximum of 47 calendar days and a longer period for the Asset Coverage Test).
KA Fund Advisors, LLC is the fund's 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 Aug. 31, 2014, Kayne Anderson and its affiliates managed assets of approximately $30 billion, including over $27 billion in the Energy Sector (of which $22 billion was invested in MLPs and Midstream Companies). Kayne Anderson has invested in MLPs and other midstream energy companies since 1998.
CONCURRENT RATING AFFIRMATIONS
Fitch affirms the following ratings:
Kayne Anderson Energy Total Return Fund (KYE)
--$58,000,000 series D 4.15% notes due on March 5, 2015 at 'AAA';
--$27,000,000 series E 3-month LIBOR + 155bps notes due on March 5, 2015 at 'AAA';
--$30,000,000 series F 3-month LIBOR + 145bps notes due on May 10, 2016 at 'AAA';
--$20,000,000 series G 3.71% notes due on May 10, 2016 at 'AAA';
--$10,000,000 series H 4.38% notes due on May 10, 2018 at 'AAA';
--$6,000,000 series I 2.59% notes due on Aug. 8, 2018 at 'AAA';
--$29,000,000 series J 3.07% notes due on Aug. 8, 2020 at 'AAA';
--$50,000,000 series K 3.72% notes due on Aug. 8, 2023 at 'AAA';
--$45,000,000 series L 3.82% notes due on Aug. 8, 2025 at 'AAA';
--$90,000,000 series A 5.48% MRPS due on March 5, 2017 at 'AA';
--$30,000,000 series B 5.13% MRPS due on May 10, 2018 at 'AA'.
The rating is based on the terms stipulating mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines. In the case of the rated notes, should the fund fail to cure an asset coverage breach, or the note purchasers not declare the notes due and payable upon an event of default, 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 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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Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Sept. 4, 2014);
--'MLP Closed-End Funds: A Capital Structure Case Study' (Dec. 2, 2013).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
MLP Closed-End Funds: A Capital Structure Case Study