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Fitch Rates Kayne Anderson MLP Investment Company's MRPS 'AA'

^{Published on 2011-05-04 20:20:52 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings assigns a 'AA' rating to the following mandatory redeemable preferred shares (MRPS) issued by Kayne Anderson MLP Investment Company (NYSE: KYN), a non-diversified closed-end fund managed by KA Fund Advisors, LLC:

--$100,000,000, 4.95%, Series D MRPS liquidation preference of $25.00 per share due in June 2018.

The main drivers for the assigned rating are sufficient asset coverage relative to Fitch's published criteria, structural protections afforded by mandatory deleveraging provisions in the event of asset coverage declines, the legal and regulatory parameters that govern the fund's operations and the capabilities of KA Fund Advisors, LLC as investment advisor.

The closing date for the MRPS will be May 10, 2011. The fund will use the net proceeds from the sale of the MRPS to repay borrowings under the fund's revolving credit facility, to make new portfolio investments and for general corporate purposes.

The MRPS are expected to trade on the New York Stock Exchange or the NYSE Amex under the ticker 'KYN Pr D' within 30 days after the date of the prospectus, May 3, 2011. Prior to the commencement of trading, MTP Shares will remain illiquid. Fitch's rating on the MRPS addresses only the securities credit risk; it does not address not potential liquidity in the secondary market.

As of Mar. 31, 2011, the fund's total assets were approximately $3.3 billion, including leverage. Total leverage consisted of $620 million of senior unsecured notes rated 'AAA' by Fitch, $160 million of MRPS rated 'AA' by Fitch and $58 million of bank borrowing.

At the time of the issuance, the fund's pro forma asset coverage ratio for the MRPS, as calculated in accordance with the Investment Company Act of 1940 (1940 Act), is expected to be in excess of 200%, which is the minimum asset coverage required by the 1940 Act for such senior securities. Also, at the time of issuance, the fund's pro forma asset coverage ratios with respect to the MRPS, as calculated in accordance with Fitch's 'AA' overcollateralization test is expected to be in excess of 100%, which is the minimum asset coverage levels deemed consistent with a 'AA' rating assigned to the MRPS.

Should the asset coverage tests of the MRPS decline below their minimum threshold amounts and not be 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 overcollateralization 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 MLP Investment Company contain early prepayment penalties. Given that the fund is contractually obligated to honor these penalties in the event of prepayment, Fitch includes these additional conditional liabilities as part of total leverage in calculating the relevant Fitch OC tests.

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. In addition, the fund is managed to optimize the after-tax return. As of Nov. 30, 2010, the fund incurred a deferred tax liability in the amount of $390.7 million arising from unrealized portfolio gain, which the 1940 Act and Fitch exclude from the asset coverage tests. Under a stressed market scenario, the fund may have to liquidate portfolio assets to restore its asset coverage ratios. If such a scenario occurred, any currently existing unrealized gain and associated deferred tax liability would likely be eliminated or significantly reduced as a result of such forced liquidation.

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), and a Securities and Exchange Commission-registered investment adviser. As of Mar. 31, 2011, Kayne Anderson and its affiliates managed approximately $12.6 billion. 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 profiles 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 web site.

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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