NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' ratings assigned to the senior notes (the notes) and 'AA' ratings assigned to the mandatory redeemable preferred shares (MRPS) issued by Kayne Anderson Energy Total Return Fund, Inc. (NYSE: KYE) managed by KA Fund Advisors, LLC. A complete list of rated notes and MRPS follows at the end of this press release.
KEY RATING DRIVERS
The rating affirmations reflect:
--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, 2015, KYE's total assets were approximately $1.1 billion with senior securities totalling $260 million of notes, no balance on the fund's revolving credit facility and $120 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 Aug. 31, 2014, KYE's total assets were approximately $1.8 billion supporting $275 million of notes, $118 million of bank borrowing and $120 million of MRPS.
As of Aug. 31, 2015, the fund's 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. Additionally, Fitch performed further stress testing of the fund's asset values to reflect recent volatility, and found asset coverage tests remained in compliance.
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, 2015, the fund's 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 within five business days. 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 (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 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 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 for Fitch OC Tests and monthly for 1940 Act tests) the fund is 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, 2015, Kayne Anderson and its affiliates managed over $25 billion in assets across private equity, managed accounts and closed-end funds. Kayne Anderson has invested in MLPs and other midstream energy companies since 1998. On July 23, 2015, Kayne Anderson Capital Advisors L.P. announced that it plans to merge with investment manager Ares Management, L.P. The merger is expected to be completed in early 2016.
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 common stock of MLP companies was volatile over the last few months causing the value of the fund's portfolio holding to decline, in line with the peer group. Thus far market volatility has not impacted the fund's ability to liquidate investments to reduce or defease leverage. However, increased volatility that is higher than the stressed volatility used to evaluate the MLP sector in Fitch's CEF ratings criteria, or significant changes to market liquidity of MLP common stock may cause Fitch to re-evaluate criteria for the MLP asset class. Furthermore, additional consolidation of MLP companies may cause pressure to the fund's Fitch OC tests as issuer concentration increase. Fitch will continue to monitor the performance of the fund in light of continuing pressure to the broader energy sector.
In general, 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.
Fitch does not anticipate the announced merger plans of Kayne Anderson and Ares Management L.P. to have any rating implications for the fund's rated notes or MRPS.
Fitch affirms the following ratings:
Kayne Anderson Energy Total Return Fund (KYE)
Following note series affirmed at 'AAA':
--$30,000,000 series F 3-month LIBOR + 145bps Notes due on May 10, 2016;
--$20,000,000 series G 3.71% notes due on May 10, 2016;
--$10,000,000 series H 4.38% notes due on May 10, 2018;
--$6,000,000 series I 2.59% notes due on Aug. 8, 2018;
--$29,000,000 series J 3.07% notes due on Aug. 8, 2020;
--$50,000,000 series K 3.72% notes due on Aug. 8, 2023;
--$45,000,000 series L 3.82% notes due on Aug. 8, 2025;
--$70,000,000 series M 3.36% notes due on Oct. 7, 2021.
Following MRPS series affirmed at 'AA':
--$90,000,000 series A 5.48% MRPS due on March 5, 2017;
--$30,000,000 series B 5.13% MRPS due on May 10, 2018.
In addition, Fitch expects that on Oct. 12, 2015, the $30,000,000 of Series F notes of KYE (currently rated 'AAA' by Fitch) will be fully redeemed and will be marked as 'Paid In Full' at that time.
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.
Rating Closed-End Fund Debt and Preferred Stock (pub. 16 Sep 2015)
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