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I follow the SEC 13G filings of several activist firms that specialize in closed-end funds. Karpus Management is one of the larger CEF activist firms and manages over $2 billion in client assets for institutions and high net worth individuals.

On January 27, Karpus submitted a large number of 13G and 13G/A filings to the SEC, which are required when firm owns more than 5% of the shares outstanding. All of these filings were for preferred stocks related to closed-end funds. Most of the new filings were for AAA rated preferred stock issued by municipal bond CEFs, and I will discuss those in another Seeking Alpha article.

In this article, I will discuss three filings for ownership of preferred stock issued by MLP closed-end funds which are not AAA rated, but have somewhat higher yields. These preferred stocks are used as a source of stable long term leverage by the closed-end funds.

Note that there are many different quote conventions used for preferred stocks. For this article, I use the Seeking Alpha notation. For example, here are some of the different quoting conventions used for the TYG preferred:

Seeking Alpha: TYG.PA

Google Finance: TYG-A

Yahoo Finance: TYG-PA

Fidelity, NYSE: TYGPRA

These are the Karpus Management ownership amounts reported in 13G filings on January 27 to the SEC:

TYG.PA 564,660 shares 7.74% ($5.96 million)

TYY.PB 698,770 shares 13.98% ($7.14 million)

KYN.PD 211,600 shares 5.29% ($5.39 million)

1) Tortoise Energy Infrastructure Corp Pfd (ticker: TYG.PA)

- Underlying closed-end fund: (NYSE:TYG)

- Coupon Rate: 6.25%(cumulative dividends)

- Issue Date: 11/02/2011Issue Size: $65 Million

- Par Value: $10

- Maturity Date: 12/31/2019 (mandatory redemption)

- Moody's rating: A1

- Fitch rating: AA

- Redeemable by issuer starting 12/31/2012 at $10 plus an optional redemption premium of 1% that declines to $0 after 12/31/2014.

- Pays qualified dividends (15% tax rate).

- Closing Price (January 27, 2012) = 10.55

- Current Distribution Yield: 5.92%

- Approx. Yield to First Call (12/31/2012@10.10) = 1.28%

- Approx. Yield to 12/31/2014 call date = 4.21%

- Approx. Yield to Maturity (12/31/2019) = 5.38%

Some features of this preferred stock that add to its safety are:

  • Asset Coverage Requirement: If the underlying closed-end fund provides asset coverage of less than 225% at the business close of any week, the shares are subject to mandatory redemption at $10 within 30 days unless the asset coverage is restored.
  • Effective Leverage Ratio Requirement: If the effective leverage ratio of TYG exceeds 50% at the close of any business day, the preferred is subject to mandatory redemption
  • Dividend Rate Adjustment: If the preferred credit rating is ever lowered below A1 by Moody's or AA by Fitch, the dividend rate is increased from the base default rate of 6.25% by the following multipliers:

Dividend Rate Adjustment Schedule

Applicable

Moody's

Fitch

Percentage

"Aa3"

"AA−"

110%

"A1" to "A3"

"A+" to "A−"

125%

"Baa1" to "Baa3"

"BBB+" to "BBB−"

150%

"Ba1" and lower

"BB+" and lower

200%

If no rating agency rates the preferred, the 200% multiplier applies, unless the dividend rate is still the base default rate.

2) Tortoise Energy Capital Corp Pfd (ticker: TYY.PB)

- Underlying closed-end fund: (NYSE:TYY)
- Coupon Rate: 5.00% (cumulative monthly dividends)

- Issue Date: 02/10/2011Issue Size: $50 Million

- Par Value: $10

- Maturity Date: 03/01/2018 (mandatory redemption)

- Fitch rating: AA

- Redeemable by issuer starting 03/01/2012 at $10 plus an optional redemption premium of 1% that declines to $0 after 03/01/2014.

- Pays qualified dividends (15% tax rate) or return of capital.

- Closing Price (January 27, 2012) = 10.22

- Current Distribution Yield: 4.89%

- Approx. Yield to First Call (03/01/2012@10.10) = NA (negative)

- Approx. Yield to 03/01/2014 call date = 3.92%

- Approx. Yield to Maturity (03/01/2018) = 4.58%

Some features of this preferred stock that add to its safety are:

  • Asset Coverage Requirement: If the underlying closed-end fund provides asset coverage of less than 225% at the business close of any week, the shares are subject to mandatory redemption at $10 within 30 days unless the asset coverage is restored.
  • Effective Leverage Ratio Requirement: If the effective leverage ratio of TYG exceeds 50% at the close of any business day, the preferred is subject to mandatory redemption
  • Dividend Rate Adjustment: If the preferred credit rating is ever lowered below A by Fitch, the dividend rate is increased from the base default rate of 5.00% by the following amount:

Dividend Rate Adjustment Schedule

Fitch

Enhanced Dividend Amount

"A−"

0.75%

"BBB+"

1.00%

"BBB"

1.25%

"BBB-"

1.50%

BB+ or lower

4.00%

If no rating agency rates the preferred, the +4.00% enhancement applies, unless the dividend rate is still the base default rate which will still remain.

3) Kayne Anderson MLP Investment Co. (ticker: KYN.PD)

- Underlying closed-end fund: (NYSE:KYN)
- Coupon Rate: 4.95% (cumulative monthly dividends)

- Issue Date: 12/06/2011Issue Size: $100 Million

- Par Value: $25

- Maturity Date: 06/01/2018 (mandatory redemption)

- Fitch rating: AA

- Redeemable by issuer starting 05/10/2012 at $25 plus an optional redemption premium of 1% that declines to $0 after 05/10/2014.

- Pays qualified dividends (15% tax rate) or return of capital.

- Closing Price (January 27, 2012) = 25.45

- Current Distribution Yield: 4.86%

- Approx. Yield to First Call (05/10/2012 @25.25) = 2.27%

- Approx. Yield to 05/10/2014 call date = 4.11%

- Approx. Yield to Maturity (06/01/2018) = 4.62%

Some features of this preferred stock that add to its safety are:

  • Asset Coverage Requirement: If the underlying closed-end fund provides asset coverage of less than 225% at the business close of any week, the shares are subject to mandatory redemption at $25 within 30 days unless the asset coverage is restored.
  • Dividend Rate Adjustment: If the preferred credit rating is ever lowered below A by Fitch, the dividend rate is increased from the base default rate of 4.95% by the following amount:

Dividend Rate Adjustment Schedule

Fitch

Enhanced Dividend Amount

"A−"

0.75%

"BBB+"

1.00%

"BBB"

1.25%

"BBB-"

1.50%

BB+ or lower

4.00%

If no rating agency rates the preferred, the +4.00% enhancement applies, unless the dividend rate is still the base default rate which will still remain.
===================================================

It does not appear these purchases are related to closed-end fund activism. Most likely, Karpus Management is using these investments as a way of parking cash in very low risk securities. The yields are fairly low, but are still much higher than those available in comparable US Treasury securities. These preferreds have a similar credit rating to US Treasuries after last year's credit downgrade. But the preferred stocks have an advantage over US Treasuries in that their dividend payments will be enhanced if their credit rating is ever downgraded.

Source: Activist Firm Karpus Management Buys 3 Preferred Stocks Linked To MLP Closed-End Funds