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Fitch Affirms Kayne Anderson Energy Total Return Fund's Senior Notes & MRPS at 'AAA/AA'

^{Published on 2011-03-04 16:35:24 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following ratings assigned to Kayne Anderson Energy Total Return Fund, Inc. (NYSE: KYE), a closed-end, non-diversified investment management company advised by KA Fund Advisors, LLC:

--$9,000,000 5.65% Series A senior notes due Aug. 13, 2011 at 'AAA';
--$28,000,000 5.90% Series B senior notes due Aug. 13, 2012 at 'AAA';
--$128,000,000 6.06% Series C senior notes due Aug. 13, 2013 at 'AAA';
--$58,000,000 4.15% Series D senior notes due March 5, 2015 at 'AAA';
--$27,000,000 three-month LIBOR + 155 bps Series E senior notes due March 5, 2015 at 'AAA';
--$90,000,000 5.48% Series A mandatory redeemable preferred stock (MRPS) due March 5, 2017 at 'AA'.

The key drivers behind the rating affirmations are sufficient asset coverage relative to Fitch's published criteria, structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines, the legal and regulatory parameters that govern the funds' operations and the capabilities of KA Fund Advisors, LLC as investment advisor.

As of Jan. 31, 2011, KYE's total assets were approximately $1.4 billion, including leverage. Total leverage consisted of $250 million of unsecured senior notes, at par, $90 million of MRPS, at par, and $51 million of bank borrowing.

At the time of the rating affirmations, KYE's asset coverage ratio for senior notes, as calculated in accordance with the Investment Company Act of 1940 (1940 Act), was in excess of 300%, which is the minimum asset coverage required by the 1940 Act. Also, at the time of these affirmations, the funds asset coverage ratio, as calculated in accordance with the Fitch overcollateralization (OC) test per the 'AAA' rating guidelines outlined in Fitch's applicable criteria was in excess of 100%, which is the minimum asset coverage deemed consistent with Fitch's 'AAA' rating criteria.

In addition, the funds' asset coverage ratio for total outstanding MRPS, as calculated in accordance with the Investment Company Act of 1940, was in excess of 200%, which is the minimum asset coverage level required by the 1940 Act with respect to preferred stock. The funds' pro forma asset coverage ratio, as calculated in accordance with the Fitch OC test per the 'AA' rating guidelines outlined in Fitch's applicable criteria was in excess of 100%, which is the minimum asset coverage deemed consistent with Fitch's 'AA' rating criteria.

Should the asset coverage tests of either the senior notes or the MRPS decline below their minimum threshold amounts and are not cured in a pre-specified timeframe, the governing documents require the funds to reduce the leverage in a sufficient amount to restore compliance with the applicable asset coverage tests.

Fitch's OC test for a given rating category is calculated by dividing the total discounted value of the fund's eligible assets by the sum of total fund's liabilities. Certain securities currently issued or to be issued by Kayne Anderson Energy Total Return Fund contain early prepayment provisions. Given that the fund is contractually obligated to honor these provisions in the event of pre-payment, Fitch includes these potential additional liabilities in the denominator of its calculation of OC. Fitch may also apply additional stress assumptions to account for the variable nature of any make-whole amounts associated with prepayments.

Kayne Anderson Energy Total Return Fund invests principally in equity and debt securities of companies in the energy industry, such as energy-related master limited partnerships (MLPs), U.S. and Canadian royalty trusts and income trusts, marine transportation companies, and coal companies. The fund's objective is to obtain a high total return with an emphasis on current income.

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, 2010, Kayne Anderson and its affiliates managed approximately $11.5 billion. Kayne Anderson has invested in MLPs and other midstream energy companies since 1998.

The rating may be sensitive to material changes in the credit quality or market risk profiles of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating 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 at [ www.fitchratings.com ].

Additional information is available at [ www.fitchratings.com ].

The sources of information used to assess these ratings were the public domain and KA Fund Advisors, LLC.

Applicable Criteria and Related Research:
--'Closed-End Fund Debt and Preferred Stock Rating Criteria' (Aug. 17, 2009);
--'Closed-end Funds: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations' (March 18, 2010).

Applicable Criteria and Related Research:
Closed-End Fund Debt and Preferred Stock Rating Criteria
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462492 ]
Closed-End Funds: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504986 ]

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