Securities issued by KYN, KYE, TPZ and TYY affected
New York, December 23, 2009 -- Moody's Investors Service has placed on review for possible downgrade
the following ratings of notes and preferred shares issued by closed-end
funds (CEFs) investing in master limited partnerships (MLPs):
$370 million senior notes rated Aaa & $75 million
series D auction rate preferred rated Aa2 issued by Kayne Anderson MLP
Investment Company (KYN)
$165 million senior notes rated Aaa issued by Kayne Anderson
Energy Total Return Fund (KYE)
$20 million senior notes rated Aaa issued by Tortoise Power
and Energy Infrastructure Fund, Inc (TPZ)
$65 million mandatory redeemable preferred shares rated
Aa2 issued by Tortoise Energy Capital Corporation (TYY)
Moody's action is prompted by concerns about the exposure to the
MLP asset class, centering on liquidity risk posed by the thin secondary
market for MLP securities in which only a few large bellwether names trade
in any significant volume. MLPs' highly leveraged credit
profiles and aggressive finance models create a reliance on the capital
markets to meet funding gaps to satisfy large and regular equity distributions.
Additionally, because equity units issued by MLPs are concentrated
in a relatively small subset of the energy industry, Moody's
is concerned about the funds' ability to cover their obligations
in the face of severe asset price deterioration in an energy sector downturn.
Today's rating action also reflects concerns about the risk characteristics
associated with the MLP sector generally. Although the MLP structure
has been utilized for some time, the sector has significant untested
elements, including relatively recent entrants and the move to less
predictable cash-flow businesses. Moreover, energy
MLP senior obligations are typically rated in the low investment grade
or speculative grade space, which may compromise the stability,
under stress, of the cash flows provided to the CEFs by MLP securities.
Moody's believes that in spite of the substantial equity cushions
protecting investors in MLP closed-end fund senior and preferred
securities, the vulnerabilities of the underlying asset class,
which have become more evident during the recent market crisis,
suggest significant tail-risk that may not be compatible with Moody's
highest rating levels.
KYN, KYE, TPZ and TYY are non-diversified, closed-end
management investment companies registered under the Investment Company
Act of 1940 whose stocks trade on the NYSE.
KYN's stated investment objective is to obtain a high after-tax
total return by investing at least 85% of its total assets in energy-related
MLP and their affiliates, and in other companies that, as
their principal business, operate assets used in the gathering,
transporting, processing, storing, refining, distributing,
mining or marketing of natural gas, natural gas liquids (including
propane), crude oil, refined petroleum products or coal.
The last rating actions on KYN's obligations were on:
Nov 4, 2009 when Moody's assigned the Aaa rating to $110
million Series M and N senior notes.
July 29, 2008 when Moody's assigned the Aaa rating to $450
million senior notes including series G, I and Series K .
April, 15 ,2005 when Moody's assigned the Aa2 rating
$75 million series D auction rate preferred stock.
KYE's stated investment objective is to seek a high level of total
return with an emphasis on current cash distributions to stockholders.
To that end, the corporation invests primarily in a diversified
portfolio of MLP securities in the energy infrastructure sector.
The last rating action on KYE's obligations was on Aug 11, 2008
when Moody's assigned a Aaa rating to $225 million Series
A, B and C senior notes. At that time, the rating was
mistakenly characterized as an unpublished rating, and it was not
published on moodys.com. The rating on the KYE notes has
now been published and added to Moody's public ratings database
TPZ seeks to invest in a portfolio of companies focused solely on the
power and energy infrastructure sectors. This sector is expected
to provide stable distributions throughout economic cycles. A significant
portion of the portfolio includes investment grade fixed income securities,
as well as dividend-paying equity securities.
The last rating action on TPZ was on November 12, 2009 when Moody's
assigned Aaa rating to $20 million Series A senior notes.
TYY stated investment objective is to seek a high level of total return
with an emphasis on current distributions paid to shareholders.
To that end TYY invests in a portfolio of publicly traded MLP in the energy
The last rating action on TYY was on Nov 24, 2009 when Moody's
assigned (P)Aa2 rating to $65 million Series I mandatory redeemable
The credit ratings assigned to these obligations were evaluated using
factors we believe are relevant to the credit profile of the issuer,
such as the objectives of the fund, its strategies for achieving
those objectives and the management characteristics of its sponsor.
These attributes were compared against those of other funds and these
ratings are believed to be comparable to ratings assigned to senior notes
and preferred stock issued by closed-end funds of similar risk.
Moody's utilizes an over collateralization approach in ratings obligations
issued by closed end funds. In addition the rating framework factors
in the capital structure of the fund as well as the structural features
of the offering documents.
List of securities impacted
Kayne Anderson MLP Investment Company
$ 75 million series G senior unsecured fixed rate notes
$ 60 million series I senior unsecured fixed rate notes
$ 125 million series K senior unsecured fixed rate notes
$ 60 million series M senior unsecured fixed rate notes
$ 50 million series N senior unsecured floating rate notes
$ 75 million series D auction rate preferred stock rated
Kayne Anderson Energy Total Return Fund
$9 million series A senior unsecured fixed rate notes rated
$28 million series B senior unsecured notes rated Aaa
$128 million series C senior unsecured notes rated Aaa
Tortoise Power and Energy Infrastructure Fund, Inc
$ 20 million series A senior unsecured floating rate notes
Tortoise Energy Capital Corporation
$65 million series I mandatory redeemable preferred shares
Global Managed Investments Group
Moody's Investors Service
Moody's reviews ratings of obligations issued by MLP closed-end funds for possible downgrade
Senior Vice President
Global Managed Investments Group
Moody's Investors Service