Fitch Takes Rating Action on Tortoise Fund Notes and Pfd Following Merger

By Business Wire,  June 23, 2014, 04:52:00 PM EDT


NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns 'AAA' and 'AA' ratings to $179.4 million of new senior unsecured notes (senior notes) and $50 million of new mandatory redeemable preferred shares (MRPS), respectively, issued by Tortoise Energy Infrastructure Corp (NYSE:TYG) in connection with a fund reorganization completed today.

Fitch concurrently affirms the 'AAA' and 'AA' ratings assigned to $350 million of existing senior notes and $80 million of existing MRPS, respectively, outstanding in TYG.

A full list of rating actions follows at the end of this press release.

Following completion of the merger, TYG will manage approximately $4,319 million of total portfolio assets and have approximately $831.5 million in outstanding total leverage, which includes $172.1 million in non-Fitch rated bank borrowings.

FUND REORGANIZATION

As approved by common and preferred shareholders of all three funds, TYG has acquired the assets and liabilities of Tortoise Energy Capital Corporation (TYY) and Tortoise North American Corp (TYN) (the acquired funds). TYY has previously issued Fitch-rated senior notes, Fitch-rated MRPS and a non-Fitch rated credit facility. TYN previously only utilized a non-Fitch rated credit facility.

The adviser has executed an Assumption Agreement whereby senior notes and MRPS previously held in TYY are exchanged for identical (but different series name securities) in TYG. The Note Purchase Agreement, MRPS Securities Purchase Agreement and MRPS Articles Supplementary have not been altered; hence, all credit protections remain unchanged.

TYG has also upsized its syndicated credit facility to absorb the bank leverage previously utilized in TYY, and opened a new credit facility to absorb the bank leverage previously utilized in TYN.

The fund is expected to benefit from operating cost savings, common stock distribution growth and enhanced secondary market liquidity.

KEY RATING DRIVERS

The rating assignments and affirmations reflect:

--Sufficient pro forma asset coverage provided to senior notes and MRPS as calculated per the fund's asset coverage tests;

--The structural protections afforded by mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines;

--The legal and regulatory parameters that govern the fund's operations;

--The capabilities of Tortoise Capital Advisors, LLC as investment advisor.

FUND PROFILE

TYG is a non-diversified, closed-end management investment company with an investment goal of obtaining a high level of total return with an emphasis on current distributions. The fund invests the majority of its portfolio in equity securities of publicly-traded Master Limited Partnerships (MLPs) and their affiliates in the energy infrastructure sector. These companies gather, transport, process, store, distribute or market natural gas, natural gas liquids, coal, crude oil, refined petroleum products or other natural resources, or explore, develop, manage or produce such commodities.

FUND LEVERAGE

TYG manages a portfolio of approximately $4,319 million in assets and utilizes $831.5 million in leverage. The total leverage ratio is approximately 19%. Leverage consists of $172.1 million in bank borrowings, $529.4 million in Fitch-rated senior notes (pari passu to the bank borrowings), and $130 million in junior Fitch-rated MRPS.

ASSET COVERAGE

The fund's asset coverage ratio, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AAA' rating guidelines for the senior notes and the 'AA' rating guidelines for the MRPS, outlined in Fitch's closed-end fund criteria, were in excess of 100%. These are the minimum asset coverage guideline required by the fund's governing documents.

The Fitch OC tests calculate standardized asset coverage by applying haircuts to portfolio holdings based on riskiness and diversification of the assets and measuring their ability to cover both on and off-balance sheet liabilities at the stress level that corresponds to the assigned rating.

The fund's asset coverage ratio for the senior notes, as calculated in accordance with the Investment Company Act of 1940 (1940 Act) at current market value, was in excess of 300%. The fund's pro forma asset coverage ratio for total leverage, including the MRPS, as calculated in accordance with the 1940 Act also at current market value, was in excess of 200%. These are the minimum asset coverage ratios required by the fund's governing documents.

The fund is expected to carry a deferred tax liability (DTL) as a result of certain unrealized gains typically seen in MLP C-corp closed-end funds for tax purposes. To account for any residual risk dealing with the recognition of those gains upon sale, Fitch's rating criteria reduce the numerator of the Fitch OC Tests by 10% of the DTL. The 10% figure gives credit to the likely event that much of the currently existing unrealized gains would likely be eliminated or significantly reduced as a result of asset price declines in a stressed market scenario.

NOTES STRUCTURAL PROTECTIONS

Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each week), under the terms of the senior notes the fund is required to deliver notice to the note purchasers within five business days. The fund manager is then expected to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC Tests breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC Tests and the 1940 Act test breaches) within a pre-specified time period (a maximum of 47 calendar days for the Fitch OC Tests and a longer period for the 1940 Act test).

Failure to cure an asset coverage breach as described above is an event of default under the terms of the notes. The fund must then deliver a notice within five business days to the senior note purchasers and a majority vote of note purchasers may then declare all the notes then outstanding to be immediately due and payable.

The fund is also prohibited from paying out a common stock dividend if it fails to cure a breach to the notes' 300% 1940 Act asset coverage test. Fitch views this as an added incentive to cure and deleverage in a timely manner, regardless of acceleration by the notes purchasers.

MRPS STRUCTURAL PROTECTIONS

Should the MRPS Asset Coverage Test and Fitch OC Test decline below their minimum threshold amounts (as tested weekly) the fund is required to deliver notice to the MRPS purchasers within five days of becoming aware of such fact.

The fund manager is required to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC Tests breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC Tests and Asset Coverage Test breaches) within a pre-specified time period (a maximum of 47 calendar days).

THE ADVISOR

Tortoise, a wholly owned subsidiary of Tortoise Holdings, LLC, is the fund's investment adviser, responsible for the fund's overall investment strategy and its implementation. The advisor was formed in October 2002, and as of May 31, 2014 it had approximately $17.2 billion in assets under management. Montage Asset Management, LLC, a wholly-owned entity of Mariner Holdings, LLC owns approximately 61% of Tortoise Holdings, LLC, with the remaining interest held by certain senior Tortoise employees.

NEW RATING ASSIGNMENTS

Fitch assigns the following new ratings of securities issued by TYG in connection with the merger:

--$39,400,000 6.7% Series V senior notes due on Dec 21, 2014 'AAA';

--$12,500,000 3.88% Series W senior notes due on June 15, 2016 'AAA';

--$12,500,000 4.55% Series X senior notes due on June 15, 2018 'AAA';

--$12,500,000 2.77% Series Y senior notes due on June 14, 2020 'AAA';

--$12,500,000 2.98% Series Z senior notes due on June 14, 2021 'AAA';

--$10,000,000 3.48% Series AA senior notes due on June 14, 2025 'AAA';

--$12,000,000 2.75% Series BB senior notes due on Sept. 27, 2017 'AAA';

--$15,000,000 3.48% Series CC senior notes due on Sept. 27, 2019 'AAA';

--$13,000,000 4.21% Series DD senior notes due on Sept. 27, 2022 'AAA';

--$5,000,000 series EE floating rate senior notes due on Sept. 27, 2018 at 'AAA';

--$10,000,000 4.16% Series FF senior notes due on Nov. 22, 2023 'AAA';

--$20,000,000 series GG floating rate senior notes due April 17, 2019 'AAA';

--$50,000,000 of Series C MRPS with a liquidation preference of $10 per share due on March 1, 2018 'AA'.

CONCURRENT RATING AFFIRMATIONS

Fitch affirms the following ratings of securities already issued and outstanding of TYG:

--$110,000,000 6.11% Series E senior notes due on April 10, 2015 at 'AAA';

--$30,000,000 5.85% Series G senior notes due on Dec. 21, 2016 at 'AAA';

--$10,000,000 4.35% Series I senior notes due on May. 12, 2018 at 'AAA';

--$15,000,000 3.30% Series J senior notes due on Dec. 19, 2019 at 'AAA';

--$10,000,000 3.87% Series K senior notes due on Dec. 19, 2022 at 'AAA';

--$20,000,000 3.99% Series L senior notes due on Dec. 19, 2024 at 'AAA';

--$13,000,000 2.75% Series M senior notes due on Sept. 27, 2017 at 'AAA';

--$10,000,000 3.15% Series N senior notes due on Sept. 27, 2018 at 'AAA';

--$15,000,000 3.78% Series O senior notes due on Sept. 27, 2020 at 'AAA';

--$12,000,000 4.39% Series P senior notes due on Sept. 27, 2023 at 'AAA';

--$10,000,000 Series Q floating rate senior notes due on Sept. 27, 2018 at 'AAA';

--$25,000,000 3.77% Series R senior notes due on Jan. 22, 2022 at 'AAA';

--$10,000,000 3.99% Series S senior notes due on Jan. 22, 2023 at 'AAA';

--$25,000,000 4.16% Series T senior notes due on Jan. 22, 2024 at 'AAA';

--$35,000,000 series U floating rate senior notes due April 17, 2019 at 'AAA';

--$80,000,000 of series B MRPS with a liquidation preference of $10 per share due on Dec. 31, 2027 at 'AA'.

RATED SECURITIES MARKED AS PAID IN KIND

Fitch marks the following securities previously outstanding in TYY as paid in kind in connection with their transfer to TYG via an Assumption Agreement (there was no change in ratings):

--$39,400,000 6.07% Series D senior notes due on Dec 21, 2014;

--$12,500,000 3.88% Series H senior notes due on June 15, 2016;

--$12,500,000 4.55% Series I senior notes due on June 15, 2018;

--$12,500,000 2.77% Series J senior notes due on June 14, 2020;

--$12,500,000 2.98% Series K senior notes due on June 14, 2021;

--$10,000,000 3.48% Series L senior notes due on June 14, 2025;

--$12,000,000 2.75% Series M senior notes due on Sept. 27, 2017;

--$15,000,000 3.48% Series N senior notes due on Sept. 27, 2019;

--$13,000,000 4.21% Series O senior notes due on Sept. 27, 2022;

--$5,000,000 Series P floating rate senior notes due on Sept. 27, 2018;

--$10,000,000 4.16% Series Q senior notes due on Nov. 22, 2023;

--$20,000,000 Series R floating rate senior notes due April 17, 2019;

--$50,000,000 Series C MRPS with a liquidation preference of $10 per share due on March 1, 2018.

RATED SECURITIES MARKED AS PAID IN FULL

The following senior note previously issued by TYY was paid in full on June 15, 2014:

--$5,000,000 Series G floating rate senior notes due on Jun 15, 2014.

The following senior note previously issued by TYG was paid in full on May. 12, 2014:

--$15,000,000 Series H floating rate senior notes due on May. 12, 2014.

Fitch previously rated both notes 'AAA'.

RATINGS SENSITIVITY

The rating is based on the terms stipulating mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines. In the case of the rated notes, should the fund fail to cure an asset coverage breach, or the note purchasers not declare the notes due and payable upon an event of default, this may lengthen exposure to market value risk and cause the ratings to be lowered by Fitch.

The ratings may also be sensitive to material changes in the credit quality or market risk profile 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 website.

To receive forthcoming complimentary closed-end fund research from Fitch, opt-in at the following link:

http://pages.fitchemail.fitchratings.com/FAMCEFBlankOptin/

Additional information is available at www.fitchratings.com.

The sources of information used to assess this rating were the public domain and Tortoise Capital Advisors.

Applicable Criteria and Related Research:

--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 14, 2013);

--'MLP Closed-End Funds: A Capital Structure Case Study' (Dec. 2, 2013);

--'2014 Outlook: U.S. Closed-End Fund Leverage' (Jan 14, 2014);

--'Use of Leverage in U.S. Closed-End Funds (Slidedeck Apr-2014)' (May 1, 2014);

--'Fitch: US Closed-End Funds Pick Up Steam in Private Placements' (June 2, 2014).

Applicable Criteria and Related Research:

Rating Closed-End Fund Debt and Preferred Stock

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716220

MLP Closed-End Funds: A Capital Structure Case Study

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723839

2014 Outlook: U.S. Closed-End Fund Leverage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=730159

Use of Leverage in U.S. Closed-End Funds (Slidedeck Apr-2014)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747937

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836015

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Source: Fitch Ratings



This article appears in: News Headlines

Referenced Stocks: TYG


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