Click to enlargeKayne Anderson Energy Development Company (NYSE:KED) announced that its stockholders approved a proposal to withdraw the Company’s election to be treated as a business development company (BDC). Here are the details from the press release:
With the withdrawal of its BDC election, the Company will be treated as a non-diversified closed-end management investment company (“closed-end fund”) under the Investment Company Act of 1940. To withdraw its BDC election, the Company plans to file Form N-54C with the Securities and Exchange Commission as soon as practicable. The withdrawal will be effective immediately upon receipt by the SEC.
The Company believes the withdrawal will be beneficial for the following reasons: (i) to provide the Company with more flexibility in meeting its investment objective, (ii) to ensure that the Company has the ability to obtain sources of leverage on reasonable terms, and (iii) to allow the Company to maintain adequate liquidity to repay a portion of its outstanding leverage in the event of a market downturn.
The Company’s investment objective will remain unchanged. In order to achieve its investment objective, the Company expects that, under normal market conditions, its portfolio investments will be comprised of private MLPs (50% to 70%), public MLPs (30% to 50%) and debt securities of public and private energy companies (0% to 20%). The withdrawal does not affect the Company’s distribution policy, tax status or the tax attributes of its distributions.
With the withdrawal of its BDC election, the Company’s investment management agreement with KA Fund Advisors, LLC (the “Adviser”) will be amended to remove the incentive management fee payable to the Adviser. There will be no change in the base management fee payable to the Adviser.
The BDC Reporter has been following the Company’s conversion plan for a few weeks. As the language above implies, the BDC rules were too constricting for KED, which wanted to include more investments in public energy Master Limited Partnerships (MLPs). That is partly due to the fact that its lenders are prepared to allow KED to borrow against such assets, which are highly liquid and get priced in the market daily.
The lenders were less enthusiastic about lending against investments in private Master Limited Partnerships, which are illiquid and whose value is harder to ascertain. Of course, KED went public with a stated strategy of building a portfiolio of private MLPs as its main focus. To date the Company has invested in only a handful of private MLPs (albeit in outsized amounts in each), and has had great difficulty in finding additional investments. As a result KED’s concentration risk is high with 3 private MLPs accounting for 36% of total assets.
Although the Company is no longer a BDC, the BDC Reporter will continue to track KED as before. The Company continues to pay a regular quarterly dividend roughly equal to its earnings (which is the main feature and attraction of a BDC). In fact, two days ago KED announced its distribution for the quarter ended May 31, 2010. The distribution amount was $0.30, unchanged from the prior quarter.
From a liquidity standpoint, the ability to invest more heavily in public MLPs will be a step forward. However, we don’t expect much change in leverage or earnings to follow from this change. Given that shareholders also approved raising equity at below NAV, we may see KED join the ranks of most of the BDCs and seek to go to market for more capital.
Disclosure: No positions