N-14 8C 1 d585353dn148c.htm N-14 8C N-14 8C
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As filed with the Securities and Exchange Commission on March 20, 2018

Securities Act File No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM N-14

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

        Pre-Effective Amendment No.

 

        Post-Effective Amendment No.

(Check appropriate box or boxes)

 

 

Kayne Anderson MLP Investment Company

(Exact name of registrant as specified in charter)

 

 

811 Main Street, 14th Floor

Houston, TX 77002

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: (877) 657-3863

 

 

David J. Shladovsky, Esq.

KA Fund Advisors, LLC

1800 Avenue of the Stars, Third Floor

Los Angeles, California 90067

(Name and Address of Agent for Service)

 

 

Copies of Communications to:

 

David A. Hearth, Esq.
Paul Hastings LLP
101 California Street, 48th Floor
San Francisco, California 94111
(415) 856-7000
  R. William Burns III, Esq.
Paul Hastings LLP
600 Travis Street, 58th Floor
Houston, Texas 77002
(713) 860-7300

Approximate Date of Proposed Offering: As soon as practicable after this Registration Statement is declared effective.

 

 

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

 

 

Title of
Securities Being Registered
  Amount Being
Registered
  Proposed
Maximum
Offering Price
per Unit(1)
  Proposed
Maximum
Aggregate
Offering Price(1)
  Amount of
Registration Fee

Common Stock, $0.001 par value per share

  10,430,000   $17.26(2)   $180,021,800   $22,412.71(3)

 

 

(1) Estimated solely for the purpose of calculating the registration fee.
(2) Net asset value per share as of March 16, 2018.
(3) Registration fee amount of $22,412.71, which represent a portion of the registration fees attributable to unsold securities under the Registrant’s Registration Statement on Form N-2 (File No. 333-201950, filed on February 6, 2015 and effective March 12, 2015), is being applied to and offset against the registration fee currently due ($22,412.71) pursuant to Rule 457(p) under the Securities Act. Accordingly, no fees are being transmitted via federal wire or otherwise in connection with this filing.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

This Joint Proxy Statement/Prospectus is organized as follows:

 

1. Letter to Stockholders of Kayne Anderson MLP Investment Company (“KYN”) and Kayne Anderson Energy Development Company (“KED”), each a Maryland corporation and registered closed-end management investment company

 

2. Notice of Annual Meeting of KYN and Special Meeting of KED

 

3. Joint Proxy Statement/Prospectus for KYN and KED

 

4. Statement of Additional Information regarding the proposed reorganization of KYN and KED

 

5. Part C Information

 

6. Exhibits

 


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LOGO

Kayne Anderson MLP Investment Company (NYSE: KYN)

Kayne Anderson Energy Development Company (NYSE: KED)

            , 2018

Dear Fellow Stockholder:

You are cordially invited to attend the combined 2018 Annual Meeting of Stockholders (the “Annual Meeting”) of Kayne Anderson MLP Investment Company (“KYN”) and Special Meeting of Stockholders (the “Special Meeting,” and, together with the Annual Meeting, the “Meeting”) of Kayne Anderson Energy Development Company (“KED”) to be held on:

, 2018

             a.m. Central Time

Kayne Anderson

811 Main Street, 14th Floor

Houston, TX 77002

At the Meeting, KED stockholders will be asked to consider and approve a proposal authorizing the combination of KED and KYN, which will be accomplished as a tax-free reorganization of KED into KYN (the “Reorganization”). In addition, KYN stockholders will also be asked to consider routine matters customarily considered at the annual meetings of KYN, namely to (i) elect seven directors of KYN and (ii) ratify PricewaterhouseCoopers LLP as KYN’s independent registered public accounting firm for its fiscal year ending November 30, 2018. Finally, KYN and KED stockholders may be asked to consider and take action on such other business as may properly come before the Meeting, including the adjournment or postponement thereof.

The Board of Directors of KYN and KED each voted unanimously to approve the Reorganization, believes that it is in the best interest of stockholders and recommends you vote “FOR” the approval of the Reorganization and each other proposal for which you are entitled to vote.

Enclosed with this letter are (i) the formal notice of the Meeting, (ii) the joint proxy statement/prospectus, which gives detailed information about the Reorganization and the other proposals and why the Boards of Directors recommends that you vote to approve them, and (iii) a written proxy for you to sign and return. If you have any questions about the enclosed proxy or need any assistance in voting your shares, please call                 .

Your vote is important. Please vote your shares via the internet or by telephone or complete, sign, and date the enclosed proxy card and return it in the enclosed envelope. You may also vote in person if you are able to attend the Meeting. However, even if you plan to attend the Meeting, we urge you to cast your vote early. That will ensure your vote is counted should your plans change.

Sincerely,

 

LOGO

Kevin S. McCarthy

Chairman of the Board of Directors,

CEO of KYN and KED

 


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LOGO

Kayne Anderson MLP Investment Company

Kayne Anderson Energy Development Company

NOTICE OF KYN 2018 ANNUAL MEETING OF STOCKHOLDERS

NOTICE OF KED SPECIAL MEETING OF STOCKHOLDERS

 

To the Stockholders of:   

Kayne Anderson MLP Investment Company

Kayne Anderson Energy Development Company

NOTICE IS HEREBY GIVEN that the 2018 Annual Meeting of Stockholders (the “Annual Meeting”) of Kayne Anderson MLP Investment Company (“KYN”), a Maryland corporation, and a Special Meeting of Stockholders (the “Special Meeting,” and, together with the Annual Meeting, the “Meeting”) of Kayne Anderson Energy Development Company (“KED”), a Maryland corporation, will be held on                 , 2018 at         a.m. Central Time at Kayne Anderson, 811 Main Street, 14th Floor, Houston, TX 77002 for the following purposes:

For KED:

 

  1. To approve the combination of KED and KYN by means of a tax-free reorganization;

For KYN:

 

  2. To elect two directors to serve until KYN’s 2019 Annual Meeting of Stockholders, two directors to serve until KYN’s 2020 Annual Meeting of Stockholders and three directors to serve until KYN’s 2021 Annual Meeting of Stockholders, each until their successors are duly elected and qualified;

 

  3. To ratify the selection of PricewaterhouseCoopers LLP as KYN’s independent registered public accounting firm for the fiscal year ending November 30, 2018; and

For KYN and KED:

 

  4. To consider and take action on such other business as may properly come before the Meeting, including the adjournment or postponement thereof.

The foregoing items of business are more fully described in the joint proxy statement/prospectus accompanying this notice.

Stockholders of record of KYN or KED as of the close of business on                 , 2018 are entitled to notice of and to vote (on KYN’s or KED’s matters, as applicable) at the Meeting (or any adjournment or postponement of the Meeting thereof).

The Boards of Directors unanimously recommend stockholders vote “FOR” each proposal.

WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE AUTHORIZE A PROXY TO VOTE YOUR SHARES OF STOCK BY FOLLOWING THE INSTRUCTIONS PROVIDED ON YOUR PROXY OR VOTING INSTRUCTIONS CARD. IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, THE BOARDS OF DIRECTORS ASKS THAT YOU VOTE PROMPTLY, NO MATTER HOW MANY SHARES YOU OWN.


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By Order of the Boards of Directors,

 

LOGO

David J. Shladovsky

Secretary

            , 2018

Houston, Texas


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The information contained in this joint proxy statement/prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This joint proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to completion, dated March 20, 2018

JOINT PROXY STATEMENT/PROSPECTUS

 

LOGO

Kayne Anderson MLP Investment Company

Kayne Anderson Energy Development Company

811 Main Street, 14th Floor

Houston, TX 77002

(877) 657-3863

2018 ANNUAL MEETING OF STOCKHOLDERS OF KYN

SPECIAL MEETING OF STOCKHOLDERS OF KED

            , 2018

This joint proxy statement/prospectus is being sent to you by the Board of Directors of Kayne Anderson MLP Investment Company (“KYN”), a Maryland corporation, and the Board of Directors of Kayne Anderson Energy Development Company (“KED”), a Maryland corporation. The Boards of Directors are asking you to complete and return the enclosed proxy card, permitting your votes to be cast at the 2018 Annual Meeting of Stockholders of KYN (the “Annual Meeting”) and the Special Meeting of Stockholders of KED (the “Special Meeting,” and, together with the Annual Meeting, the “Meeting”) to be held on:

            , 2018

a.m. Central Time

Kayne Anderson

811 Main Street, 14th Floor

Houston, TX 77002

Stockholders of record of KYN or KED at the close of business on             , 2018 (the “Record Date”) are entitled to vote (on KYN’s or KED’s matters, as applicable) at the Meeting. As a stockholder, for each applicable proposal, you are entitled to one vote for each share of common stock and one vote for each share of preferred stock you hold. This joint proxy statement/prospectus and the enclosed proxy are first being mailed to stockholders on or about             , 2018.

KA Fund Advisors, LLC (“KAFA”), a subsidiary of Kayne Anderson Capital Advisors, L.P. (“KACALP” and together with KAFA, “Kayne Anderson”), externally manages and advises KYN and KED pursuant to investment management agreements with each Company. KAFA is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Kayne Anderson is a leading investor in both public and private energy companies. As of January 31, 2018, Kayne Anderson managed approximately $27 billion, including approximately $17 billion in the energy sector.

This joint proxy statement/prospectus sets forth the information that you should know in order to evaluate each of the following proposals. The following table presents a summary of the proposals and the


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classes of stockholders being solicited with respect to each proposal. In addition to the proposals typically considered at KYN’s annual meetings, this joint proxy statement/prospectus relates to the proposed combination of KED and KYN, which will be accomplished as a tax-free reorganization of KED into KYN (the “Reorganization”). Specifically, KED would transfer substantially all of its assets to KYN, and KYN would assume substantially all of KED’s liabilities, in exchange solely for newly issued shares of common and preferred stock of KYN, which will be distributed by KED to its stockholders in the form of a liquidating distribution (although cash will be distributed in lieu of fractional common shares). KED will then be terminated and dissolved in accordance with its charter and Maryland law. Please refer to the discussion of each proposal in this joint proxy statement/prospectus for information regarding votes required for the approval of each proposal.

 

Proposals

  

Who votes on the proposals?

KED

  

1.  To approve the Reorganization.

  

The holders of common stock and preferred stock, voting together a single class.

 

The holders of preferred stock, voting as a separate class.

KYN

  

2.  To elect the following directors for the specified terms:

  

•  James. C Baker until the 2019 Annual Meeting of Stockholders;

   The holders of preferred stock, voting as a separate class.

•  Albert L. Richey until the 2019 Annual Meeting of Stockholders;

   The holders of common stock and preferred stock, voting together as a single class.

•  William R. Cordes and Barry R. Pearl until the 2020 Annual Meeting of Stockholders;

   The holders of common stock and preferred stock, voting together as a single class.

•  Kevin S. McCarthy and William L. Thacker until the 2021 Annual Meeting of Stockholders; and

   The holders of common stock and preferred stock, voting together as a single class.

•  William H. Shea, Jr. until the 2021 Annual Meeting of Stockholders.

   The holders of preferred stock, voting as a separate class.

3.  To ratify the selection of PricewaterhouseCoopers LLP as KYN’s independent registered public accounting firm for the fiscal year ending November 30, 2018.

   The holders of common stock and preferred stock, voting together a single class.

KYN and KED

  

4.  To consider and take action on such other business as may properly come before the Meeting or any adjournment or postponement thereof.

   The holders of common stock and preferred stock, voting together a single class.

As shown above, the only matter KED stockholders are voting on is the proposed Reorganization. If the Reorganization is approved, KED stockholders will not have the opportunity to vote on the election of individuals to KYN’s Board of Directors until the first annual meeting following the closing of the Reorganization.

 

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The Agreement and Plan of Reorganization between KYN and KED is sometimes referred to herein as the “Reorganization Agreement.” KED and KYN are sometimes referred to herein as a “Company” and collectively as the “Companies.” KYN following the Reorganization is sometimes referred to herein as the “Combined Company.”

On February 15, 2018, KYN announced its intention to change its name to Kayne Anderson MLP/Midstream Investment Company. We believe this change is consistent with recent trends in the midstream sector, with an increasing amount of midstream assets being held by Midstream Energy Companies that are not structured as MLPs. Changing KYN’s name increases its flexibility to invest in securities issued by all types of Midstream Energy Companies. This name change will be effective on or about a date that is 60 days after the date that this joint proxy statement/prospectus is mailed to stockholders.

Additional Information

This joint proxy statement/prospectus sets forth the information stockholders should know before voting on the proposals. The Reorganization constitutes an offering of common stock of KYN, and this joint proxy statement/prospectus serves as a prospectus of KYN in connection with the issuance of its common stock in the Reorganization. Please read it carefully and retain it for future reference. A Statement of Additional Information, dated                , 2018, relating to this joint proxy statement/prospectus (the “Statement of Additional Information”) has been filed with the Securities and Exchange Commission (the “SEC”) and is incorporated herein by reference.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2018 MEETING OF STOCKHOLDERS TO BE HELD ON                 , 2018: You should have received a copy of the Annual Reports for the fiscal year ended November 30, 2017 for KYN and/or KED. If you would like another copy of either Annual Report or the Statement of Additional Information, please write us at Kayne Anderson’s address or call us at (877) 657-3863. The Annual Report(s) and Statement of Additional Information will be sent to you without charge. This joint proxy statement/prospectus, the Annual Report and the Statement of Additional Information can be accessed on our website at www.kaynefunds.com or on the website of the SEC at www.sec.gov.

The Companies are subject to certain informational requirements of the Securities Exchange Act of 1934 and in accordance therewith file reports, proxy statements, proxy materials and other information with the SEC. Materials filed with the SEC can be reviewed and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or downloaded from the SEC’s web site at www.sec.gov. Information on the operation of the SEC’s Public Reference Room may be obtained by calling the SEC at (202) 551-8090. You may also request copies of these materials, upon payment at the prescribed rates of a duplicating fee, by electronic request to the SEC’s e-mail address (publicinfo@sec.gov) or by writing the Public Reference Branch, Office of Consumer Affairs and Information Services, SEC, Washington, DC, 20549-0102.

The currently outstanding shares of common stock of KYN are listed on the New York Stock Exchange (the “NYSE”) under the ticker symbol “KYN” and will continue to be so listed after completion of the Reorganization. KYN’s Series F Mandatory Redeemable Preferred Stock is listed on the NYSE under the symbol “KYNPRF.” The common stock of KYN to be issued in connection with the Reorganization will be listed on the NYSE. The currently outstanding shares of common stock of KED are also listed on the NYSE under the ticker symbol “KED.” Reports, proxy statements and other information concerning KYN and KED may be inspected at the offices of the NYSE, 20 Broad Street, New York, NY 10005.

No person has been authorized to give any information or make any representation not contained in this joint proxy statement/prospectus and, if so given or made, such information or representation must not be relied

 

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upon as having been authorized. This joint proxy statement/prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation.

THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this joint proxy statement/prospectus is                 , 2018.

 

 

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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS

     1  

SUMMARY

     7  

RISK FACTORS

     14  

PROPOSAL ONE: REORGANIZATION

     38  

REASONS FOR THE REORGANIZATION

     38  

INVESTMENT OBJECTIVES AND POLICIES OF KYN

     42  

COMPARISON OF THE COMPANIES

     49  

MANAGEMENT

     51  

CAPITALIZATION

     56  

AUTOMATIC DIVIDEND REINVESTMENT PLAN

     59  

GOVERNING LAW

     60  

DESCRIPTION OF SECURITIES

     61  

MARKET AND NET ASSET VALUE INFORMATION

     77  

FINANCIAL HIGHLIGHTS

     83  

INFORMATION ABOUT THE REORGANIZATION

     91  

TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION

     93  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION

     95  

CERTAIN FEDERAL INCOME TAX MATTERS

     98  

REQUIRED VOTE

     102  

BOARD RECOMMENDATION

     102  

PROPOSAL TWO: ELECTION OF DIRECTORS

     103  

DIRECTOR COMPENSATION

     108  

COMMITTEES OF THE BOARD OF DIRECTORS

     109  

BOARD OF DIRECTOR AND COMMITTEE MEETINGS HELD

     111  

INFORMATION ABOUT EACH DIRECTOR’S QUALIFICATIONS, EXPERIENCE, ATTRIBUTES OR SKILLS

     111  

INFORMATION ABOUT EXECUTIVE OFFICERS

     114  

COMPENSATION DISCUSSION AND ANALYSIS

     115  

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

     116  

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     120  

CORPORATE GOVERNANCE

     121  

REQUIRED VOTE

     123  

BOARD RECOMMENDATION

     123  

PROPOSAL  THREE: RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     124  

INDEPENDENT ACCOUNTING FEES

     124  

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

     124  

AUDIT COMMITTEE REPORT

     125  

REQUIRED VOTE

     126  

BOARD RECOMMENDATION

     126  

MORE INFORMATION ABOUT THE MEETING

     127  

OTHER MATTERS

     127  

OUTSTANDING STOCK

     127  

HOW PROXIES WILL BE VOTED

     127  

HOW TO VOTE

     128  

EXPENSES AND SOLICITATION OF PROXIES

     128  


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DISSENTERS’ OR APPRAISAL RIGHTS

     128  

REVOKING A PROXY

     128  

BROKER NON-VOTES

     128  

QUORUM AND ADJOURNMENT

     128  

INVESTMENT ADVISER

     129  

ADMINISTRATOR

     129  

HOUSEHOLDING OF PROXY MATERIALS

     129  

STOCKHOLDER PROPOSALS

     129  

APPENDIX A FORM OF AGREEMENT AND PLAN OF REORGANIZATION

     A-1  

 


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QUESTIONS AND ANSWERS

Although it is recommended that you read the complete joint proxy statement/prospectus of which this “Questions and Answers” section is a part, a brief overview of the issues to be voted on has been provided below for your convenience.

The anticipated positive impacts of the Reorganization are set forth below. No assurance can be given that the anticipated positive impacts of the Reorganization will be achieved. For information regarding the risks associated with an investment in KYN, see “Risk Factors.”

Questions Regarding the Reorganization

Q: Why is the Reorganization being recommended by the Board of Directors?

A: The Board of Directors of each company has approved the Reorganization because they have determined that it is in the best interests of each Company and its stockholders. In making this determination, the Board of Directors of each Company considered (i) the expected benefits of the transaction for each Company (as outlined in more detail below) and (ii) the fact that both Companies have very similar investment policies and investment strategies. As of February 28, 2018, each Company had over 98% of its long-term investments invested in master limited partnerships and their affiliates (“MLPs”) and 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, crude oil, refined petroleum products or coal (collectively with midstream MLPs, “Midstream Energy Companies”). The Combined Company will pursue KYN’s investment objective of obtaining a high after-tax total return by investing at least 85% of total assets in energy-related MLPs and their affiliates and other Midstream Energy Companies.

Q: What are the benefits of the proposed Reorganization?

A: After careful consideration, the Board of Directors of each Company believes that the Reorganization will benefit the stockholders of the Companies for the reasons noted below:

 

    Cost savings through elimination of duplicative expenses and greater economies of scale

It is anticipated that the Combined Company would have a lower expense level with estimated aggregate cost savings of approximately $1.5 million annually, the majority of which is expected to be attributable to reduced operating costs. Because the Reorganization is expected to be completed during the third quarter of fiscal 2018, and because there are expenses associated with the Reorganization, the full impact of these cost savings will not be entirely recognized this year. We expect the Combined Company to realize the full benefit of these cost savings during fiscal 2019. The Companies incur operating expenses that are fixed (e.g., board fees, printing fees, legal and auditing services) and operating expenses that are variable (e.g., administrative and custodial services that are based on assets under management). Many of these fixed expenses are duplicative between the Companies and can be eliminated as a result of the Reorganization. There will also be an opportunity to reduce variable expenses by taking advantage of greater economies of scale. As a result of these cost savings, it is expected that KED stockholders will enjoy significantly lower operating costs as a percentage of total assets. The Reorganization should also result in modestly lower operating costs as a percentage of total assets for existing KYN stockholders.

 

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    Potential cost savings as a result of reduced management fees

KAFA has agreed to revise its management fee waiver agreement with KYN as part of the Reorganization. The revised fee waiver will lower the effective management fee that KYN pays as its assets appreciate. The table below outlines the current and proposed management fee waivers:

 

KYN Assets

 

Impact of

Proposed Waiver

  Management
Fee Waiver
  Incremental
Management

Fee

Current Fee Waiver

 

Proposed Fee Waiver

     
$0 to $4.5 billion   $0 to $4.0 billion     0.000%   1.375%
$4.5 billion to $9.5 billion   $4.0 billion to $6.0 billion   $0.5 billion lower   0.125%   1.250%
$9.5 billion to $14.5 billion   $6.0 billion to $8.0 billion   $3.5 billion lower   0.250%   1.125%
Greater than $14.5 billion   Greater than $8.0 billion   $6.5 billion lower   0.375%   1.000%

KAFA has also agreed to waive an amount of management fees (based on assets under management at closing of the Reorganization) such that the pro forma fees payable to KAFA are not greater than the aggregate management fees payable if KYN and KED had remained stand-alone companies. The waiver will last for three years and was estimated to be approximately $0.3 million per year as of February 28, 2018. The new fee waivers would be effective at the time the Reorganization closes.

 

    Reorganization expected to be accretive to KYN’s net distributable income and KED’s distribution level

The Reorganization is expected to be accretive to KYN’s net distributable income per share, in part due to the anticipated cost savings from the transaction. In connection with the Reorganization, KYN announced its intention to pay a distribution at its current annualized rate of $1.80 per share for the 12 months ending February 28, 2019. Based on this distribution level, the Reorganization is expected to be accretive to the distribution received by KED’s common stockholders by approximately 13 cents on an annualized basis (approximately 8% accretive). This estimate is based on the relative net asset value (“NAV”) per share of the companies as of February 28, 2018 (which would have resulted in an exchange ratio of approximately 0.96 shares of KYN for each share of KED). See “Risk Factors—Risks Related to Our Investments and Investment Techniques—Cash Flow Risk.”

 

    KED’s stockholders should benefit from the larger asset base of the Combined Company

The larger asset base of the Combined Company relative to KED may provide greater financial flexibility. In particular, as a larger entity, KED’s stockholders should benefit from the Combined Company’s access to more attractive leverage terms (i.e., lower borrowing costs on debt and preferred stock) and a wider range of alternatives for raising capital to grow the Combined Company.

 

    KED’s stockholders should benefit from enhanced market liquidity and may benefit from improved trading relative to NAV per share

The larger market capitalization of the Combined Company relative to KED should provide an opportunity for enhanced market liquidity over the long-term. Greater market liquidity may lead to a narrowing of bid-ask spreads and reduce price movements on a trade-to-trade basis. The table below illustrates the equity market capitalization and average daily trading volume for each Company on a standalone basis as well as for the Combined Company. KED stockholders will be part of a much larger company with significantly higher trading volume. KED’s Board of Directors also considered the fact that KYN has historically traded at a premium to NAV per share whereas KED has historically traded at a discount to NAV per share. For example, for the three years ended February 28, 2018, KYN has traded at an average premium to NAV of 2.4%, and KED has traded at an average discount to NAV of 2.8%.

 

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     KYN      KED      Pro Forma
Combined Company
 

Equity capitalization ($ in millions)

   $ 2,004      $ 180      $ 2,184  

Average daily trading volume(1)

     844        68        NA  

 

As of February 28, 2018.

  (1) 90-day average trading volume in thousands of shares.

Q: Why is KYN changing its name to Kayne Anderson MLP/Midstream Investment Company?

A: KYN is changing its name to Kayne Anderson MLP/Midstream Investment Company because management and the Board of Directors believe this change is consistent with recent trends in the midstream sector, with an increasing amount of midstream assets being held by Midstream Energy Companies that are not structured as MLPs (“Midstream C-Corps”). Changing KYN’s name increases its flexibility to invest in securities issued by all types of Midstream Energy Companies. Without this change, KYN would be required to hold at least 80% of its portfolio in MLPs and would not be able to hold more than 20% of its investments in Midstream C-Corps. This name change will be effective on or about a date that is 60 days after the date that this joint proxy statement/prospectus is mailed to stockholders.

Q: What distributions will KYN and KED pay to common stockholders?

A: KYN intends to pay a distribution at its current annualized rate of $1.80 per share for the 12 months ending February 28, 2019. KYN will continue to pay distributions on a quarterly basis until the Reorganization closes and intends to begin paying distributions on a monthly basis shortly thereafter (expected to commence in September 2018). KED intends to pay a distribution at its current annualized rate of $1.60 per share ($0.40 per quarter) until the Reorganization closes. Payment of future distributions by either KYN or KED is subject to the approval of such Company’s Board of Directors.

Q: Why is KYN providing guidance on the distribution it intends to pay through February 2019?

A: We believe that investors will benefit from increased visibility on KYN’s expected distribution in considering the Reorganization.

Q: Why is KYN converting to monthly distribution payments?

A: We believe many investors will prefer more frequent distribution payments.

Q: What impact will the Reorganization have on leverage levels?

A: The amount of leverage as a percentage of total assets following the Reorganization is not expected to significantly change from that of each Company’s standalone leverage levels. The table below illustrates the leverage of each company on both a standalone and pro forma basis.

 

($ in millions)

   KYN     KED     Pro Forma
Combined
Company
 

Total Debt

   $ 747     $      62     $ 809  

Mandatory Redeemable Preferred Stock

   $ 292     $ 25     $ 317  

Leverage

   $ 1,039     $ 87     $ 1,126  

Leverage as % of total assets

     31     30     31

 

As of February 28, 2018.

 

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Q: How will the Reorganization affect me?

A: KYN stockholders will remain stockholders of KYN. KED stockholders will become stockholders of KYN. KED will then cease its separate existence under Maryland law.

Q: What will happen to the shares of KYN and KED that I currently own as a result of the Reorganization?

A: For KYN stockholders, your currently issued and outstanding shares of common and preferred stock of KYN will remain unchanged.

KED common stockholders will be issued shares of KYN common stock in exchange for their outstanding shares of KED common stock (see below for a description of how the exchange ratio is calculated). No fractional shares of KYN common stock will be issued in the Reorganization; instead KED stockholders will receive cash in an amount equal to the value of the fractional shares of KYN common stock that they would otherwise have received.

KED preferred stockholders will receive, on a one-for-one basis, newly issued KYN preferred shares having identical terms as the KED preferred shares you held immediately prior to the closing of the Reorganization.

Q: How is the exchange ratio determined?

A: The exchange ratio will be determined based on the relative NAVs per share of each Company on the business day prior to the closing of the Reorganization. As of February 28, 2018, KYN’s NAV per share was $17.56 and KED’s was $16.91. For illustrative purposes, if these were the NAVs on the day prior to closing of the Reorganization, then KED common stockholders would be issued approximately 0.96 shares of KYN for each share of KED.

Q: How will the net asset values utilized in calculating the exchange rate be determined?

A: The net asset value of a share of common stock of each Company will be calculated in a manner consistent with past practice and will include the impact of each Company’s pro rata share of the costs of the Reorganization. See “Proposal One: Reorganization—Information About the Reorganization.”

Q: Is the Reorganization expected to be a taxable event for stockholders?

A: No. The Reorganization is intended to qualify as a tax-free reorganization for federal income tax purposes. This means it is expected that stockholders will recognize no gain or loss for federal income tax purposes as a result of the Reorganization, except that gain or loss generally will be recognized by KED common stockholders with respect to cash received in lieu of fractional shares of KYN common stock.

Q: Will I have to pay any sales load, commission or other similar fees in connection with the Reorganization?

A: No, you will not pay any sales loads or commissions in connection with the Reorganization. The Companies will bear the costs associated with the proposed Reorganization. Costs will be allocated on a pro rata basis based upon each Company’s net assets. Costs related to the Reorganization are currently estimated to be approximately $1.0 million or 0.04% of pro forma Combined Company net assets, which equates to $0.9 million or $0.008 per share for KYN and $0.1 million or $0.007 per share for KED as of February 28, 2018. Of the estimated Reorganization costs, $0.6 million is related to out of pocket expenses, and $0.4 million is a write-off of debt issuance cost, which is a non-cash expense. Due to the anticipated cost savings from the Reorganization, we believe the Combined Company will more than recover the costs associated with the Reorganization over time.

 

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Q: Who do we expect to vote on the Reorganization?

A: KED’s common and preferred stockholders are being asked to vote, together as a class, on the Reorganization. KED preferred stockholders will also vote on the Reorganization as a separate class.

Q: Why is the vote of KYN stockholders not being solicited in connection with the Reorganization?

A: Maryland law and the rules of the NYSE (on which KYN’s common stock is listed) only require KYN’s stockholders to approve a merger if the number of shares of KYN common stock to be issued in such merger will be, upon issuance, in excess of 20 percent of the number of shares of KYN common stock outstanding prior to the transaction. Based on the relative NAVs per share as of February 28, 2018, the number of shares of KYN common stock issued would be less than 10% of KYN’s currently outstanding shares.

Q: What happens if KED stockholders do not approve the Reorganization?

A: If KED stockholders do not approve the Reorganization, then the Reorganization will not take place.

Q: What is the timetable for the Reorganization?

A: The Reorganization is expected to take effect as soon as practicable once the stockholder vote and other customary conditions to closing are satisfied, which is expected to occur during the third fiscal quarter of 2018.

General Questions

Q: What other proposals are being considered at the Meeting?

A: In addition to the proposal regarding approval of the Reorganization, this joint proxy statement/prospectus contains additional proposals for KYN stockholders customarily considered at KYN’s annual meetings:

 

    to elect two directors to serve until KYN’s 2019 Annual Meeting of Stockholders, two directors to serve until KYN’s 2020 Annual Meeting of Stockholders and three directors to serve until KYN’s 2021 Annual Meeting of Stockholders, each until their successors are duly elected and qualified; and

 

    to ratify PricewaterhouseCoopers LLP as KYN’s independent registered public accounting firm for the fiscal year ending November 30, 2018.

KYN and KED stockholders may be asked to consider and take action on such other business as may properly come before the Meeting, including the adjournment or postponement thereof.

Q: Will KED stockholders get to vote to elect the directors of KYN?

A: No. It is important for stockholders of KED to understand that, if the Reorganization is approved, it is expected that the Board of Directors will be composed of the individuals described in “Proposal Two: Election of Directors.” Stockholders of KED will not have the opportunity to vote for any of these individuals until the first annual meeting following the closing of the Reorganization, though six of the seven nominees are existing directors of KED. If the Reorganization is not approved by stockholders of KED, KED expects to hold its own 2018 Annual Meeting of Stockholders later in the year.

 

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Q: How do the Boards of Directors suggest that I vote?

A: After careful consideration, the Boards of Directors recommend that you vote “FOR” all proposals on the enclosed proxy card for which you are entitled to vote.

Q: How do I vote my shares?

A: Voting is quick and easy. You may vote your shares via the internet, by telephone (for internet and telephone voting, please follow the instructions on the proxy ballot), or by simply completing and signing the enclosed proxy ballot, and mailing it in the postage-paid envelope included in this package. You may also vote in person if you are able to attend the Meeting. However, even if you plan to attend the Meeting, we urge you to cast your vote early. That will ensure your vote is counted should your plans change.

Q: Whom do I contact for further information?

A: You may contact us at (877) 657-3863 for further information.

Q: Will anyone contact me?

A: You may receive a call from                 , our proxy solicitor, to verify that you received your proxy materials, to answer any questions you may have about the proposals and to encourage you to authorize your proxy. We recognize the inconvenience of the proxy solicitation process and would not impose it on you if we did not believe that the matters being proposed were important. Once your vote has been registered with the proxy solicitor, your name will be removed from the solicitor’s follow-up contact list.

Your vote is very important. We encourage you as a stockholder to participate in the Companies’ governance by authorizing a proxy to vote your shares as soon as possible. If enough stockholders fail to cast their votes, the Companies may not be able to hold the Meeting or to call for a vote on each issue, and will be required to incur additional solicitation costs in order to obtain sufficient stockholder participation.

 

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SUMMARY

The following is a summary of certain information contained elsewhere in this joint proxy statement/prospectus and is qualified in its entirety by reference to the more complete information contained in this joint proxy statement/prospectus and in the Statement of Additional Information. Stockholders should read this entire joint proxy statement/prospectus carefully.

Proposal One: Reorganization

The Board of Directors of KED, including the Directors who are not “interested persons” of KED (as defined in Section 2(a)(19) of the Investment Company Act of 1940) (the “Independent Directors”), has unanimously approved the Reorganization Agreement, declared the Reorganization advisable and directed that the Reorganization proposal be submitted to the KED stockholders for consideration. If the stockholders approve the Reorganization, KED would transfer substantially all of its assets to KYN, and KYN would assume substantially all of KED’s liabilities, in exchange solely for newly issued shares of common and preferred stock of KYN, which will be distributed by KED to its stockholders in the form of a liquidating distribution (although cash will be distributed in lieu of fractional common shares). KED will then cease its separate existence under Maryland law and terminate its registration under the Investment Company Act of 1940 (the “1940 Act”). The aggregate NAV of KYN common stock received by KED common stockholders in the Reorganization will equal the aggregate NAV of KED common stock held on the business day prior to closing of the Reorganization, less the costs of the Reorganization attributable to their common shares. KYN will continue to operate after the Reorganization as a registered, non-diversified, closed-end management investment company with the investment objectives and policies described in this joint proxy statement/prospectus.

In connection with the Reorganization, each holder of a Series A Mandatory Redeemable Preferred Share of KED (“KED MRP Shares”) will receive in a private placement an equivalent number of newly issued Series K Mandatory Redeemable Preferred Shares of KYN (“KYN Series K MRP Shares”) having identical terms as the KED MRP Shares. The aggregate liquidation preference of the KYN Series K MRP Shares received by the holder of KED MRP Shares in the Reorganization will equal the aggregate liquidation preference of the KED MRP Shares held immediately prior to the closing of the Reorganization. The KYN Series K MRP Shares to be issued in the Reorganization will have equal priority with KYN’s existing outstanding preferred shares as to the payment of dividends and the distribution of assets in the event of a liquidation of KYN. In addition, the preferred shares of KYN, including the KYN Series K MRP Shares to be issued in connection with the Reorganization, will be senior in priority to KYN common stock as to payment of dividends and the distribution of assets in the event of a liquidation of KYN.

If the Reorganization is not approved by stockholders of KED, KYN and KED will each continue to operate as a standalone Maryland corporation advised by KAFA and will each continue its investment activities in the normal course. It is important for stockholders of KED to understand that, if the Reorganization is approved, it is expected that the Board of Directors will be composed of the individuals described in “Proposal Two: Election of Directors.” Stockholders of KED will not have the opportunity to vote for any of these individuals until the first annual meeting following the closing of the Reorganization, though six of the seven nominees are existing directors of KED. If the Reorganization is not approved by stockholders of KED, KED expects to hold its own 2018 Annual Meeting of Stockholders later in the year.

Reasons for the Reorganization

The Reorganization seeks to combine two Companies with similar portfolios and investment objectives. Each Company (i) is managed by KAFA, (ii) seeks to achieve its investment objective by investing primarily in MLPs and other Midstream Energy Companies, and (iii) has similar fundamental investment policies and nonfundamental investment policies. Each Company is also taxed as a corporation. The Reorganization will also permit each Company to pursue this investment objective and strategy in a larger fund that will continue to focus on MLPs and other Midstream Energy Companies.

 

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In unanimously approving the Reorganization, the Board of Directors of each Company, including each Company’s Independent Directors, determined that participation in the Reorganization is in the best interests of each Company and its stockholders and that the interests of the stockholders of each Company will not be diluted on the basis of NAV as a result of the Reorganization. Before reaching these conclusions, the Board of Directors of each Company engaged in a thorough review process relating to the proposed Reorganization. The Boards of Directors of each Company, including the Independent Directors, considered the Reorganization at meetings held in 2017 and 2018 and unanimously approved the Reorganization Agreement, declared the Reorganization advisable and, at a meeting held on February 5, 2018, directed that the Reorganization be submitted to the stockholders of KED.

The potential benefits and other factors considered by the Board of Directors of each Company with regard to the Reorganization include, but were not limited to, the following:

 

    Cost savings through elimination of duplicative expenses and greater economies of scale.

 

    Potential cost savings as a result of reduced management fees.

 

    Reorganization expected to be accretive to KYN’s net distributable income and KED’s distribution level.

 

    KED’s stockholders should benefit from the larger asset base of the Combined Company.

 

    KED’s stockholders should benefit from enhanced market liquidity and may benefit from improved trading relative to NAV per share.

 

    No gain or loss is expected to be recognized by stockholders of either Company for U.S. federal income tax purposes as a result of the Reorganization (except with respect to any cash received in lieu of fractional KYN common shares).

 

    The expectation that KED stockholders should carry over to KYN the same aggregate tax basis (reduced by any amount of tax basis allocable to a fractional share of common stock for which cash is received) if the Reorganization is treated as tax-free as intended.

 

    The exchange will take place at the Companies’ relative NAV per share.

 

    Stockholder rights are expected to be preserved in the Combined Company.

 

    KAFA is expected to continue to manage the Combined Company.

The Board of Directors of each Company made its determination with regard to the Reorganization on the basis of each Director’s business judgment after consideration of all of the factors taken as a whole, though individual Directors may have placed different weight on various factors and assigned different degrees of materiality to various factors. See “Proposal One: Reorganization—Reasons for the Reorganization.”

Fees and Expenses for Common Stockholders of the Companies as of November 30, 2017

The following table and example contain information about the change in operating expenses expected as a result of the Reorganization. The table sets forth (i) the fees and expenses, including leverage costs, as a percentage of net assets as of November 30, 2017, for each Company and (ii) the pro forma fees and expenses, including leverage costs, for the Combined Company, assuming the Reorganization had taken place on November 30, 2017. The fees and expenses are presented as a percentage of net assets and not as a percentage of

 

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gross assets or managed assets. By showing expenses as a percentage of net assets, expenses are not expressed as a percentage of all of the assets in which a Company may invest. The annual operating expenses for each Company reflect fixed expenses for the fiscal year ended November 30, 2017 and variable expenses assuming each Company’s capital structure and asset levels as of November 30, 2017. The pro forma presentation includes the change in operating expenses expected as a result of the Reorganization, assuming the Combined Company’s capital structure and asset levels as of November 30, 2017. On a pro forma basis, it is expected that the Combined Company’s other operating expenses as a percentage of total assets (as of November 30, 2017) will be reduced to 0.10%, as compared to 0.44% for KED. This will result in a reduction of annual expenses as a percentage of total assets (as of November 30, 2017) to 2.60% for the Combined Company, as compared to 2.65% for KYN and 2.73% for KED.

 

Stockholder Transaction Expenses

   KYN     KED     Pro Forma
Combined
Company(1)
 

Maximum Sales Load (as a percentage of the offering price) imposed on purchases of common stock(2)(3)

     None       None       None  

Dividend Reinvestment Plan Fees

     None       None       None  

Annual Expenses (as a percentage of net assets attributable to common stock as of November 30, 2017)

      

Management Fees(4)

     2.54     2.09     2.50

Other Operating Expenses (exclusive of current and deferred income tax expense)(5)

     0.19       0.72       0.18  
  

 

 

   

 

 

   

 

 

 

Subtotal

     2.73       2.81       2.68  

Interest Payments (including issuance costs) on Borrowed Funds(6)

     1.54       1.22       1.48  

Dividend Payments (including issuance costs) on Preferred Stock(6)

     0.66       0.50       0.64  
  

 

 

   

 

 

   

 

 

 

Annual Expenses (exclusive of current and deferred income tax expense)

     4.93       4.53       4.80  

Current Income Tax Expense(7)

                  

Deferred Income Tax Expense(7)

                  
  

 

 

   

 

 

   

 

 

 

Total Annual Expenses(8)

     4.93     4.53     4.80
  

 

 

   

 

 

   

 

 

 

 

(1) The pro forma annual operating expenses are projections for a 12-month period and do not include expenses to be borne by the Companies in connection with the Reorganization.

 

(2) Each Company will bear expenses incurred in connection with the Reorganization (whether or not the Reorganization is consummated), including but not limited to, costs related to the preparation and distribution of materials distributed to each Company’s Board of Directors, expenses incurred in connection with the preparation of the Reorganization Agreement and the registration statement on Form N-14, SEC filing fees and legal and accounting fees in connection with the Reorganization, stock exchange fees, transfer agency fees and any similar expenses incurred in connection with the Reorganization. Expenses are allocated on a pro rata basis based upon net assets. Costs related to the Reorganization are currently estimated to be approximately $1.0 million or 0.04% of pro forma Combined Company net assets, which equates to $0.9 million or $0.008 per share for KYN and $0.1 million or $0.007 per share for KED as of February 28, 2018. Of the estimated Reorganization costs, $0.6 million is related to out of pocket expenses, and $0.4 million is a write-off of debt issuance cost, which is a non-cash expense.

 

(3) No sales load will be charged in connection with the issuance of KYN’s shares of common stock as part of the Reorganization. Shares of common stock are not available for purchase from KYN but shares of KYN may be purchased on the NYSE through a broker-dealer subject to individually negotiated commission rates.

 

(4)

KAFA has agreed to revise its management fee waiver agreement with KYN as part of the Reorganization. The revised management fee waiver agreement provides for a management fee of 1.375% on average total assets up to $4.0 billion, a fee of 1.250% on average total assets between $4.0 billion and $6.0 billion, a fee

 

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  of 1.125% on average total assets between $6.0 billion and $8.0 billion and a fee of 1.000% on average total assets in excess of $8.0 billion. Management fees for each Company reflect projections for a 12-month period based on total assets as of November 30, 2017. KAFA has also agreed to waive an amount of management fees (based on assets under management at closing of the Reorganization) such that the pro forma fees payable to KAFA are not greater than the aggregate management fees payable if KYN and KED had remained stand-alone companies. The waiver will last for three years and was estimated to be approximately $0.3 million per year as of February 28, 2018. Management fees for the pro forma Combined Company are projections for a 12-month period, assuming the new management fee waiver is effective at the time of the Reorganization, and assuming each Company’s capital structure and asset levels as of November 30, 2017.

 

(5) Other Operating Expenses for each Company reflect actual expenses for the fiscal year ended November 30, 2017. Other Operating Expenses for the pro forma Combined Company are projections for a 12-month period, assuming each Company’s capital structure and asset levels as of November 30, 2017.

 

(6) Interest and dividend payments (including issuance costs) reflect projections for a 12-month period assuming each Company’s and the Combined Company’s capital structure as of November 30, 2017. KYN’s interest payments on borrowed funds and dividends on preferred stock are higher than KED’s due to the fact that KYN has historically employed fixed rate leverage with maturities ranging from five to 12 years in order to diversify the Company’s sources of leverage and minimize refinancing risk within any one year.

 

(7) For the fiscal year ended November 30, 2017, KYN and KED recorded a net income tax benefit of $86.7 million and $7.9 million, respectively, primarily attributable to unrealized losses. The net income tax expense is assumed to be 0% because each Company recorded a net income tax benefit during the period.

 

(8) The table presents certain annual expenses stated as a percentage of net assets attributable to common shares. This results in a higher percentage than the percentage attributable to annual expenses stated as a percentage of total assets.

Example:

The following example is intended to help you compare the costs of investing in KYN after the Reorganization with the costs of investing in KYN and KED without the Reorganization. An investor would pay the following expenses on a $1,000 investment, assuming (1) the total annual expenses before tax for each Company (as a percentage of net assets attributable to shares of common stock) set forth in the table above, (2) all common stock distributions are reinvested at net asset value, (3) an annual rate of return of 5% on portfolio securities and (4) a 23.1% effective income tax rate (expenses in the table below include income tax expense associated with the 5% assumed rate of return on such portfolio securities).

 

     1 Year      3 Years      5 Years      10 Years  

KYN

   $ 60      $ 186      $ 319      $ 682  

KED

   $ 55      $ 168      $ 287      $ 609  

Pro Forma Combined Company(1)

   $ 59      $ 182      $ 313      $ 669  

 

(1) These figures assume that the Reorganization had taken place on November 30, 2017. These figures reflect the anticipated reduction in other operating expenses due to elimination of certain duplicative expenses as a result of the Reorganization.

 

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Deferred Tax Liabilities

As of November 30, 2017, the net deferred tax liability and net deferred tax liability as a percentage of net assets for each Company are as stated below.

 

     KYN     KED  

Net Deferred Tax Liability ($ in millions)

   $ 493.8     $ 23.2  

Net Deferred Tax Liability As a Percentage of Net Assets

     27.0     13.3

As tax-paying entities, each Company records a deferred tax asset (an amount that can be used to offset future taxable income) or a deferred tax liability (a tax due in the future). As of February 28, 2018, each Company had a net deferred tax liability. These net deferred tax liabilities are primarily attributable to unrealized gains on investments. Any net deferred tax liability is included in each Company’s NAV under GAAP and will be reflected in the exchange rate for the Reorganization. Additionally, the effective tax rate for the Combined Company will be dependent upon the operating results of its underlying portfolio and as such it is expected that over time it may differ slightly from that of the standalone Companies.

Comparison of the Companies

KYN and KED are both Maryland corporations registered as non-diversified, closed-end management investment companies under the 1940 Act. Each Company (i) is managed by KAFA, (ii) seeks to achieve its investment objective by investing primarily in MLPs and other Midstream Energy Companies, and (iii) has similar fundamental investment policies and nonfundamental investment policies. Each Company is also taxed as a corporation. See “Proposal One: Reorganization—Comparison of the Companies” for a more detailed comparison of the Companies. After the Reorganization, the investment strategies and significant operating policies will be those of KYN.

Further Information Regarding the Reorganization

The parties believe that the Reorganization will be characterized for federal income tax purposes as a tax-free reorganization under Section 368(a) of the Code. If the Reorganization so qualifies, in general, stockholders of KED will recognize no gain or loss upon the receipt of KYN’s stock in connection with the Reorganization. Additionally, if the Reorganization so qualifies, KED will recognize no gain or loss as a result of the transfer of all of its assets and liabilities to KYN and neither KYN nor its stockholders will recognize any gain or loss in connection with the Reorganization. If the Reorganization so qualifies, the aggregate tax basis of KYN common shares received by stockholders of KED should be the same as the aggregate tax basis of the common shares of KED surrendered in exchange therefor (reduced by any amount of tax basis allocable to a fractional share of common stock for which cash is received).

Stockholder approval of the Reorganization requires the affirmative vote of (i) the holders of a majority of the issued and outstanding KED common and preferred stock (voting as a class) and (ii) the holders of a majority of the issued and outstanding KED preferred stock (voting as a separate class). For purposes of this proposal, each share of KED common stock and each share of KED preferred stock is entitled to one vote.

Maryland law and the rules of the NYSE (on which KYN’s common stock is listed) only require KYN’s stockholders to approve a merger if the number of shares of KYN common stock to be issued in such merger will be, upon issuance, in excess of 20 percent of the number of shares of KYN common stock outstanding prior to the transaction. Based on the relative NAVs per share as of February 28, 2018, the number of shares of KYN common stock issued would be less than 10% of KYN’s currently outstanding shares.

 

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An additional effect of approval of the Reorganization by KED’s stockholders, and completion of the Reorganization, will be that KED’s stockholders will become stockholders of KYN, which has a different Board of Directors. KED’s Directors would join KYN’s Board of Directors if approved under “Proposal Two: Election of Directors” described below. Additional information about KYN’s current Board of Directors is provided elsewhere in this combined proxy statement/prospectus.

Subject to the requisite approval of the stockholders of KED with regard to the Reorganization, it is expected that the closing date of the Reorganization will be during the third fiscal quarter of 2018, but it may be at a different time as described herein.

The Board of Directors of KED unanimously recommends KED stockholders vote “FOR” the Reorganization.

Proposal Two: Election of Directors

The KYN Board of Directors unanimously nominated the following directors for the specified terms and until their successors have been duly elected and qualified:

 

    Albert L. Richey and James C. Baker until the 2019 Annual Meeting of Stockholders;

 

    William R. Cordes and Barry R. Pearl until the 2020 Annual Meeting of Stockholders; and

 

    Kevin S. McCarthy, William H. Shea, Jr. and William L. Thacker until the 2021 Annual Meeting of Stockholders.

Messrs. Cordes, Pearl, Thacker, Richey and Baker are currently directors of KED and have been nominated to the Board of Directors of KYN to serve whether or not the Reorganization is approved. Mr. Shea is currently a director of KYN and is moving from Class III to Class II. Mr. McCarthy is currently a director of KYN and KED, and his existing term as a KYN director is expiring at the Annual Meeting. Anne K. Costin and Steven C. Good are existing directors of KYN that are not up for election at the Meeting. Ms. Costin’s term expires in 2019. Mr. Good will retire as a director at the Meeting. Following the completion of the Reorganization, the KYN board (as modified) will govern the Combined Company.

Each director has consented to be named in this joint proxy statement/prospectus and has agreed to serve if elected. KYN has no reason to believe that any of the nominees will be unavailable to serve. The persons named on the accompanying proxy card intend to vote at the Meeting (unless otherwise directed) “FOR” the election of the nominees. If any of the nominees is unable to serve because of an event not now anticipated, the persons named as proxies may vote for another person designated by KYN’s Board of Directors.

The elections of Messrs. Cordes, Pearl, McCarthy, Thacker and Richey under this proposal require the affirmative vote of the holders of a majority of KYN’s common stock and preferred stock outstanding as of the Record Date, voting together as a single class. The elections of Messrs. Shea and Baker under this prosposal require the affirmative vote of a majority of KYN’s preferred stock outstanding as of the Record Date, voting as a separate class. For purposes of this proposal, each share of KYN common stock and each share of KYN preferred stock is entitled to one vote. Stockholders do not have cumulative voting rights.

 

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Including the directors nominated for election at the Meeting, KYN will have eight directors as follows:

 

Class

  

Term*

  

Directors

   Common
Stockholders
     Preferred
Stockholders
 
           

I

   Until 2020    William R. Cordes      X        X  
      Barry R. Pearl      X        X  

II

   Until 2021    Kevin S. McCarthy      X        X  
      William H. Shea, Jr.         X  
      William L. Thacker      X        X  

III

   Until 2019    Anne K. Costin      X        X  
      Albert L. Richey      X        X  
      James C. Baker         X  

 

* Each director serves a three-year term until the Annual Meeting of Stockholders for the designated year and until his or her successor has been duly elected and qualified.

The Board of Directors of KYN unanimously recommends KYN stockholders vote “FOR” the election of each nominee.

Proposal Three: Ratification of Selection of Independent Registered Public Accounting Firm

The Audit Committee and the Board of Directors of KYN, including all of KYN’s Independent Directors, have selected PricewaterhouseCoopers LLP as the independent registered public accounting firm for KYN for the year ending November 30, 2018 and are submitting the selection of PricewaterhouseCoopers LLP to the stockholders for ratification.

The ratification of PricewaterhouseCoopers LLP requires the vote of a majority of the votes cast by the holders of KYN’s common stock and preferred stock outstanding as of the Record Date, voting together as a single class. For purposes of this proposal, each share of KYN common stock and each share of KYN preferred stock is entitled to one vote.

The Board of Directors of KYN unanimously recommends KYN stockholders vote “FOR” the ratification of the selection of PricewaterhouseCoopers LLP as the independent registered public accounting firm for KYN.

 

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RISK FACTORS

If the Reorganization is approved and consummated, holders of KED’s common stock will receive shares of KYN’s common stock in exchange. That would represent an investment in KYN’s common stock. KED’s stockholders should understand that, like an investment in KED’s common stock, investing in KYN’s common stock involves risk, including the risk that you may receive little or no return on your investment or that you may lose part or all of your investment. The following discussion summarizes some of the risks that a holder of KED’s common stock should carefully consider before deciding whether to approve the Reorganization. You should carefully consider the following risks before voting on the Reorganization.

This section relates to KYN and the risk factors for KYN’s common stockholders (other parts of this document relate to both KYN and KED). Accordingly, references to “we” “us” “our” or “the Company” in this section are references to KYN.

Risks Related to Our Investments and Investment Techniques

Investment and Market Risk

An investment in our common stock is subject to investment risk, including the possible loss of the entire amount that you invest. Your investment in our common stock represents an indirect investment in MLPs, other Midstream Energy Companies and other securities owned by us, which will generally be traded on a national securities exchange or in the over-the-counter markets. An investment in our common stock is not intended to constitute a complete investment program and should not be viewed as such. The value of these publicly traded securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The value of the securities in which we invest may affect the value of our common stock. Your common stock at any point in time may be worth less than your original investment, even after taking into account the reinvestment of our distributions. We are primarily a long-term investment vehicle and should not be used for short-term trading.

Risks of Investing in MLP Units

In addition to the risks summarized herein, an investment in MLP units involves certain risks, which differ from an investment in the securities of a corporation. Limited partners of MLPs, unlike investors in the securities of a corporation, have limited voting rights on matters affecting the partnership and generally have no rights to elect the directors of the general partner. In addition, conflicts of interest exist between limited partners and the general partner, including those arising from incentive distribution payments, and the general partner does not generally have any duty to the limited partners beyond a “good faith” standard. For example, over the last few years there have been several “simplification” transactions in which the incentive distribution rights were eliminated by either (i) a purchase of the outstanding MLP units by the general partner or (ii) by the purchase of the incentive distribution rights by the MLP. These simplification transactions present a conflict of interest between the general partner and the MLP and may be structured in a way that is unfavorable to the MLP. There are also certain tax risks associated with an investment in MLP units.

Energy Sector Risk

Our concentration in the energy sector may present more risk than if we were broadly diversified over multiple sectors of the economy. A downturn in one or more industries within the energy sector, material declines in energy-related commodity prices (such as those experienced over the last few years), adverse political, legislative or regulatory developments or other events could have a larger impact on us than on an investment company that does not concentrate in the energy sector. The performance of companies in the energy sector may lag the performance of other sectors or the broader market as a whole — in particular, during a

 

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downturn in the energy sector like what was experienced over the last few years. In addition, there are several specific risks associated with investments in the energy sector, including the following:

Supply and Demand Risk

Midstream Energy Companies and other companies that own and operate assets that are used in or provide services to the energy sector, including assets used in exploring, developing, producing, transporting, storing, gathering, processing, refining, distributing, mining or marketing of natural gas, natural gas liquids, crude oil, refined products or coal (“Energy Companies”) could be adversely affected by reductions in the supply of or demand for energy commodities. In addition, Midstream Energy Companies and other Energy Companies could be adversely affected by increases in supply of energy commodities if there is not a corresponding increase in demand for such commodities. The adverse impact of these events could lead to a reduction in the distributions paid by Midstream Energy Companies and other Energy Companies to their equity holders or substantial reduction (or elimination) in the growth rate of distributions paid to equity holders, either of which could lead to a decline in (i) the equity values of the affected Midstream Energy Companies or other Energy Companies and/or (ii) our net distributable income. The volume of production of energy commodities and the volume of energy commodities available for transportation, mining, storage, processing or distribution could be affected by a variety of factors, including depletion of resources, depressed commodity prices, access to capital for Energy Companies engaged in exploration and production, catastrophic events, labor relations, increased environmental or other governmental regulation, equipment malfunctions and maintenance difficulties, volumes of imports or exports, international politics, policies of OPEC, and increased competition from alternative energy sources. A decline in demand for energy commodities could result from factors such as adverse economic conditions; increased taxation; increased environmental or other governmental regulation; increased fuel economy; increased energy conservation or use of alternative energy sources; legislation intended to promote the use of alternative energy sources; or increased commodity prices.

Commodity Pricing Risk

The operations and financial performance of Midstream Energy Companies and other Energy Companies may be directly affected by energy commodity prices, especially those Energy Companies that own the underlying energy commodity or receive payments for services that are based on commodity prices. Such impact may be a result of changes in the price for such commodity or a result of changes in the price of one energy commodity relative to the price of another energy commodity (for example, the price of natural gas relative to the price of natural gas liquids). Commodity prices fluctuate for several reasons, including changes in market and economic conditions, the impact of weather on demand, levels of domestic and international production, policies implemented by OPEC, energy conservation, domestic and foreign governmental regulation and taxation and the availability of local, intrastate and interstate transportation systems. Volatility of commodity prices, which may lead to a reduction in production or supply, may also negatively impact the performance of Midstream Energy Companies that are solely involved in the transportation, processing, storage, distribution or marketing of commodities. For example, crude oil and natural gas liquids prices declined by over 65% from July 2014 to February 2016. Prices have since increased but remain well below July 2014 levels. These severe price declines have negatively impacted the capital expenditure budgets of Energy Companies engaged in exploration and production over the last few years. This reduction in activity levels resulted in a decline in domestic crude oil production, which impacted the operating results and financial performance of Midstream Energy Companies focused on gathering, transporting, marketing and terminalling crude oil. Volatility of commodity prices may also make it more difficult for Midstream Energy Companies and other Energy Companies to raise capital to the extent the market perceives that their performance may be directly or indirectly tied to commodity prices and there is uncertainty regarding these companies’ ability to maintain or grow cash distributions to their equity holders. In addition to the volatility of commodity prices, extremely high commodity prices may drive further energy conservation efforts, which may adversely affect the performance of Energy Companies.

 

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Regulatory Risk

Energy Companies are subject to significant federal, state and local government regulation in virtually every aspect of their operations, including (i) how facilities are constructed, maintained and operated, (ii) how services are provided, (iii) environmental and safety controls, and, in some cases (iv) the prices they may charge for the products and services they provide. Such regulation can change rapidly or over time in both scope and intensity. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them. As a result, state or local governments and agencies may have the ability to significantly delay or stop activities such as hydraulic fracturing, disposal of wastewater or the construction of pipeline infrastructure by enacting laws or regulations or making it difficult or impossible to obtain permits. Violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Stricter laws, regulations or enforcement policies could be enacted in the future which would likely increase compliance costs and may adversely affect the financial performance of Energy Companies. Additionally, government authorities, such as the Federal Energy Regulatory Commission, or FERC, and state authorities regulate the rates charged on many types of midstream assets. Those authorities can change the regulations and, as a result, materially reduce the rates charged for these midstream assets, which may adversely affect the financial performance of Midstream Energy Companies.

In the last few years, several pipeline projects have experienced significant delays related to difficulties in obtaining the necessary permits to proceed with construction (or some phase of construction). These delays have raised concerns about the ability of Energy Companies to place such projects in service and their ability to get the necessary financing to complete such projects. Furthermore, it has become much more common for opponents of energy infrastructure development to utilize the courts, media campaigns and political activism to attempt to stop, or delay as much as possible, these projects. Significant delays could result in a material increase in the cost of developing these projects and could result in the Energy Companies developing such projects failing to generate the expected return on investment or, if the project does not go forward, realizing a financial loss, either of which would adversely affect the results of operations and financial performance of the affected Energy Companies.

Changes to laws and increased regulations or enforcement policies as a result of pipeline spills (both onshore and offshore) or spills attributable to railroad accidents may also adversely affect the financial performance of Midstream Energy Companies and other Energy Companies. Additionally, changes to laws and increased regulation or restrictions to the use of hydraulic fracturing, the disposal of wastewater associated with hydraulic fracturing and production or the emission of greenhouse gases may adversely impact the ability of Energy Companies to economically develop oil and natural gas resources and, in turn, reduce production of such commodities and adversely impact the financial performance of Midstream Energy Companies and other Energy Companies.

The operation of energy assets, including gathering systems, pipelines, processing plants, fractionators, rail transloading facilities, refineries and other facilities, is subject to stringent and complex federal, state and local environmental laws and regulations. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of orders enjoining future operations. Certain environmental statutes, including RCRA, CERCLA, the federal Oil Pollution Act and analogous state laws and regulations, impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed of or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other waste products into the environment.

Federal, state and local governments may enact laws, and federal, state and local agencies (such as the Environmental Protection Agency) may promulgate rules or regulations, that prohibit or significantly regulate the operation of energy assets. For instance, increased regulatory scrutiny of hydraulic fracturing, which is used by

 

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Energy Companies to develop oil and natural gas reserves, could result in additional laws and regulations governing hydraulic fracturing or, potentially, prohibiting the action. Increased regulatory scrutiny of the disposal of wastewater, which is a byproduct of hydraulic fracturing and production from unconventional reservoirs and must be disposed, could result in additional laws or regulations governing such disposal activities. For example, research exists linking the disposal of wastewater to increased earthquake activity in oil and natural gas producing regions, and legislation and regulations have been proposed in states like Oklahoma and Colorado to limit or prohibit further underground wastewater disposal. While we are not able to predict the likelihood of additional laws or regulations or their impact, it is possible that additional restrictions on hydraulic fracturing, wastewater disposal or any other activity necessary for the production of oil, natural gas or natural gas liquids could result in a reduction in production of those commodities. The use of hydraulic fracturing is critical to the recovery of economic amounts of oil, natural gas and natural gas liquids from unconventional reserves, and the associated wastewater must be disposed. MLPs and other Midstream Energy Companies have spent (and continue to spend) significant amounts of capital building midstream assets to facilitate the development of unconventional reserves. As a result, restrictions on hydraulic fracturing or wastewater disposal could have an adverse impact on the financial performance of MLPs and other Midstream Energy Companies.

In response to scientific studies suggesting that emissions of certain gases, commonly referred to as greenhouse gases, including gases associated with oil and gas production such as carbon dioxide, methane and nitrous oxide among others, may be contributing to a warming of the earth’s atmosphere and other adverse environmental effects, various governmental authorities have considered or taken actions to reduce emissions of greenhouse gases. For example, the EPA has taken action to regulate greenhouse gas emissions. In addition, certain states (individually or in regional cooperation), have taken or proposed measures to reduce emissions of greenhouse gases. Also, the U.S. Congress and certain state legislatures have proposed legislative measures for imposing restrictions or requiring emissions fees for greenhouse gases. The adoption and implementation of any federal, state or local regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, MLPs and other Energy Companies could result in significant costs to reduce emissions of greenhouse gases associated with their operations or could adversely affect the supply of or demand for crude oil, natural gas, natural gas liquids or other hydrocarbon products, which in turn could reduce production of those commodities. As a result, any such legislation or regulation could have a material adverse impact on the financial performance of MLPs and other Energy Companies.

There is an inherent risk that Midstream Energy Companies and other Energy Companies may incur material environmental costs and liabilities due to the nature of their businesses and the substances they handle. For example, an accidental release from a pipeline could subject the owner of such pipeline to substantial liabilities for environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury and property damage, and fines or penalties for related violations of environmental laws or regulations. Moreover, the possibility exists that stricter laws, regulations or enforcement policies could significantly increase the compliance costs of Midstream Energy Companies and other Energy Companies. Similarly, the implementation of more stringent environmental requirements could significantly increase the cost for any remediation that may become necessary. Midstream Energy Companies and other Energy Companies may not be able to recover these costs from insurance or recover these costs in the rates they charge customers.

Natural gas transmission pipeline systems, crude oil transportation pipeline systems and certain of storage facilities and related assets owned by MLPs and other Midstream Energy Companies are subject to regulation by the FERC. The regulators have authority to regulate natural gas pipeline transmission and crude oil pipeline transportation services, including; the rates charged for the services, terms and conditions of service, certification and construction of new facilities, the extension or abandonment of services and facilities, the maintenance of accounts and records, the acquisition and disposition of facilities, the initiation and discontinuation of services, and various other matters. Action by the FERC could adversely affect the ability of Midstream Energy Companies to establish or charge rates that would cover future increase in their costs, such as additional costs related to environmental matters including any climate change regulation, or even to continue to

 

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collect rates that cover current costs, including a reasonable return. For example, effective January 2018, the 2017 Tax Cuts and Jobs Act changed several provisions of the federal tax code, including a reduction in the maximum corporate tax rate. Following the 2017 Tax Cuts and Jobs Act being signed into law, filings have been made at FERC requesting that FERC require natural gas and liquids pipelines to lower their transportation rates to account for lower taxes. Following the effective date of the law, FERC orders granting certificates to construct proposed natural gas pipeline facilities have directed pipelines proposing new rates for service on those facilities to re-file such rates so that the rates reflect the reduction in the corporate tax rate, and FERC has issued data requests in pending certificate proceedings for proposed natural gas pipeline facilities requesting pipelines to explain the impacts of the reduction in the corporate tax rate on the rate proposals in those proceedings and to provide re-calculated initial rates for service on the proposed pipeline facilities. Furthermore, on March 15, 2018, the FERC took a number of actions that could materially adversely impact Midstream Energy Companies. First, the FERC reversed a long-standing policy that allowed MLPs to include an income tax allowance when calculating the transportation rates for cost-of-service pipelines owned by such MLPs. Second, the FERC issued a notice of proposed rulemaking to create a process to determine whether cost-of-service natural gas pipelines subject to FERC jurisdiction are overearning in light of either the lower corporate tax rate or the FERC’s policy change related to an MLP’s ability to recover an income tax allowance. Third, with respect to cost-of-service oil and refined products pipelines, the FERC announced that it will account for the lower corporate tax rate and the FERC’s policy change related to an MLP’s ability to recover an income tax allowance in 2020 when setting the next cost inflation index level, which index level sets the maximum allowable rate increases for oil and refined products pipelines and is set by FERC every five years. Finally, the FERC issued a notice of inquiry requesting comments as to how FERC should address accumulated deferred income tax balances on the regulatory books of pipelines regulated by FERC as well as comments on any other effects of the 2017 Tax Cuts and Jobs Act. Many experts believe it is likely that the proposed rule concerning natural gas pipelines will be adopted as-is or in a form very close to what the FERC has proposed. As a result, many natural gas pipelines could be required to lower their transportation rates, either through the FERC process or because shippers may challenge their rates. In addition, oil and refined products pipelines may be forced to reduce rates in 2020 or may not be able to increase rates as previously expected. Finally, the notice of inquiry could result in additional adverse outcomes for pipeline owners, including potentially compensating shippers for the reduction in accumulated deferred income taxes resulting from either the lower corporate tax rate or the FERC’s policy change related to an MLP’s ability to recover an income tax allowance, which compensation could take the form of material cash payments. The MLPs and Midstream Energy Companies that own the affected natural gas, oil or refined products pipelines could experience a material reduction in revenues and cash flows, which may in turn materially adversely affect their financial condition and results of operations. FERC may enact other regulations or issue further requests to pipelines which may lead to lower rates. Any such change could have an adverse impact on the financial condition, results of operations or cash flows of MLPs and other Midstream Energy Companies.

Depletion Risk

Energy reserves naturally deplete as they are produced over time, and to maintain or grow their revenues, companies engaged in the production of natural gas, natural gas liquids, crude oil and other energy commodities need to maintain or expand their reserves through exploration of new sources of supply, through the development of existing sources, through acquisitions, or through long-term contracts to acquire reserves. The financial performance of these Energy Companies may be adversely affected if they are unable to cost-effectively acquire additional reserves sufficient to replace the natural decline. If these Energy Companies fail to add reserves by acquiring or developing them, reserves and production will decline over time as they are produced. If an Energy Company is not able to raise capital on favorable terms, it may not be able to add to or maintain its reserves or production levels. If an Energy Company, as a result of a material decline in commodity prices, has less operating cash flow to reinvest to develop or acquire reserves, it may not be able to add or maintain its reserves or production levels. During the most recent industry downturn, many Energy Companies significantly reduced capital expenditures to develop their acreage/undeveloped reserves. This reduction in activity levels resulted in declines in domestic production levels. Many Energy Companies were forced to monetize reserves or acreage to manage the balance sheets and maintain adequate liquidity levels. Some Energy

 

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Companies were forced to file for bankruptcy in an effort to restructure their balance sheets. These actions have had a negative impact on the operating results and financial performance for MLPs and other Midstream Energy Companies engaged in the transportation, storage, distribution and processing of production from such Energy Companies.

Reserve Risks

Energy Companies engaged in the production of natural gas, natural gas liquids and crude oil estimate the quantities of their reserves. If reserve estimates prove to be inaccurate, these companies’ reserves may be overstated, and no commercially productive amounts of such energy commodities may be discovered. Furthermore, drilling or other exploration activities, may be curtailed, delayed, or cancelled as a result of low commodity prices, unexpected conditions or miscalculations, title problems, pressure or irregularities in formations, equipment failures or accidents, adverse weather conditions, compliance with environmental and other governmental requirements and cost of, or shortages or delays in the availability of, drilling rigs and other exploration equipment. In addition, there are many operational risks and hazards associated with the development of the underlying properties, including natural disasters, blowouts, explosions, fires, leakage of such energy commodities, mechanical failures, cratering, and pollution.

Catastrophic Event Risk

Midstream Energy Companies and other Energy Companies operating in the energy sector are subject to many dangers inherent in the production, exploration, management, transportation, processing and distribution of natural gas, natural gas liquids, crude oil, refined petroleum products and other hydrocarbons. These dangers include leaks, fires, explosions, train wrecks, damage to facilities and equipment resulting from natural disasters, inadvertent damage to facilities and equipment (such as those suffered by BP’s Deepwater Horizon drilling platform in the Macondo oil spill or spills by various onshore oil pipelines) and terrorist acts. The U.S. government has issued warnings that energy assets, specifically domestic energy infrastructure (e.g. pipelines), may be targeted in future terrorist attacks. These dangers give rise to risks of substantial losses as a result of loss or destruction of reserves; damage to or destruction of property, facilities and equipment; pollution and environmental damage; and personal injury or loss of life. Any occurrence of such catastrophic events could bring about a limitation, suspension or discontinuation of the operations of certain assets owned by such Energy Company. Midstream Energy Companies and other Energy Companies operating in the energy sector may not be fully insured against all risks inherent in their business operations and, therefore, accidents and catastrophic events could adversely affect such companies’ financial condition and ability to pay distributions to unitholders or shareholders. We expect that increased governmental regulation to mitigate such catastrophic risk, such as the recent oil spills referred to above, could increase insurance premiums and other operating costs for MLPs and other Energy Companies.

Acquisition Risk

The abilities of Midstream Energy Companies and other Energy Companies to grow and to increase cash distributions to unitholders can be highly dependent on their ability to make acquisitions that result in an increase in cash flows. In the event that Midstream Energy Companies and other Energy Companies are unable to make such accretive acquisitions because they are unable to identify attractive acquisition candidates and negotiate acceptable purchase contracts, because they are unable to raise financing for such acquisitions on economically acceptable terms, or because they are outbid by competitors, their future growth and ability to raise distributions will be limited (or in certain circumstances, their ability to maintain distributions). Furthermore, even if Midstream Energy Companies and other Energy Companies do consummate acquisitions that they believe will be accretive, the acquisitions may instead result in a decrease in cash flow. Any acquisition involves risks, including, among other things: mistaken assumptions about volumes, revenues and costs, including synergies; the assumption of unknown liabilities; limitations on rights to indemnity from the seller; the diversion of management’s attention from other business concerns; unforeseen difficulties operating in new product or geographic areas; and customer or key employee losses at the acquired businesses.

 

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Affiliated Party Risk

Certain MLPs are dependent on their parents or sponsors for a majority of their revenues. Any failure by an MLP’s parents or sponsors to satisfy their payments or obligations would impact the MLP’s revenues and cash flows and ability to make interest payments and distributions.

Contract Rejection/Renegotiation Risk

MLPs and other Midstream Energy Companies that operate midstream assets are also subject to the credit risk of their customers. For example, many Energy Companies that explore for and produce oil, natural gas and natural gas liquids filed for bankruptcy in the last few years as a result of the downturn in commodity prices. During the bankruptcy process, the debtor Energy Company may be able to reject a contract that it has with an MLP or other Midstream Energy Company that provides services for the debtor, which services could include gathering, processing, transporting, fractionating or storing the debtor Energy Company’s production. If a contract is successfully rejected during bankruptcy, the affected MLP or other Midstream Energy Company will have an unsecured claim for damages but will likely only recover a portion of its claim for damages and may not recover anything at all. A Midstream Energy Company that provides services to an Energy Company that is in financial distress could experience a material adverse impact to its financial performance and results of operations.

Sector Specific Risks

Energy Companies are also subject to risks that are specific to the sector in which they operate.

Midstream

MLPs and other Midstream Energy Companies that operate midstream assets are subject to supply and demand fluctuations in the markets they serve, which may be impacted by a wide range of factors including fluctuating commodity prices, weather, increased conservation or use of alternative fuel sources, increased governmental or environmental regulation, depletion, rising interest rates, declines in domestic or foreign production, accidents or catastrophic events, and economic conditions, among others. These supply and demand fluctuations could impact the aggregate volumes that are handled by Midstream Companies in North America or could impact supply flow patterns within North America, which could disproportionately impact certain midstream assets in one geographic area relative to other geographic areas. Further, MLPs and other Midstream Energy Companies are exposed to the natural declines in the production of the oil and gas fields they serve. Gathering and processing assets are most directly impacted by production declines, as volumes will decline if new wells are not drilled and connected to a system, but all midstream assets could potentially be negatively impacted by production declines. For example, as a result of a substantial increase in new midstream assets built over the last five years, several domestic shale basins have excess capacity to take supply to end-user markets. This excess capacity can lead to increased competition between MLPs and other Midstream Energy Companies and lower rates for services provided, which would have a negative impact on the operating results and financial performance for these companies. Further, many newly constructed midstream assets are underpinned by contracts that contain minimum volume commitments for a period of years (typically five to ten years). If volumes are below the level of the minimum volume commitment at the time such commitments expire and/or the rates are above prevailing market rates, the MLP or Midstream Energy Company that owns the impacted midstream assets will experience a negative impact to its operating results and financial performance. In addition, some gathering and processing contracts subject the owner of such assets to direct commodity price risk.

Marine Transportation

MLPs and other Midstream Energy Companies with marine transportation assets are exposed to many of the same risks as other MLPs and Midstream Energy Companies. In addition, the highly cyclical nature of the

 

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marine transportation industry may lead to volatile changes in charter rates and vessel values, which may adversely affect the revenues, profitability and cash flows of such companies in our portfolio. Fluctuations in charter rates result from changes in the supply and demand for vessel capacity and changes in the supply and demand for certain energy commodities. Changes in demand for transportation of commodities over longer distances and supply of vessels to carry those commodities may materially affect revenues, profitability and cash flows. The value of marine transportation vessels may fluctuate and could adversely affect the value of marine transportation company securities in our portfolio. Declining marine transportation values could affect the ability of marine transportation companies to raise cash by limiting their ability to refinance their vessels, thereby adversely impacting such company’s liquidity. Marine transportation company vessels are at risk of damage or loss because of events such as mechanical failure, collision, human error, war, terrorism, piracy, cargo loss and bad weather. In addition, changing economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes, boycotts and government requisitioning of vessels. These sorts of events could interfere with marine transportation shipping lanes and result in market disruptions and a significant reduction in cash flow for the marine transportation companies in our portfolio.

Tax Risks of Investing in Equity Securities of MLPs

Our ability to meet our investment objective will depend, in part, on the level of taxable income and distributions and dividends we receive from the MLP securities in which we invest, a factor over which we have no control. The benefit we derive from our investment in MLPs is largely dependent on the MLPs being treated as partnerships and not as corporations for federal income tax purposes. As a partnership, an MLP has no tax liability at the entity level. If, as a result of a change in current law or a change in an MLP’s business, an MLP were treated as a corporation for federal income tax purposes, such MLP would be obligated to pay federal income tax on its income at the corporate tax rate. If an MLP were classified as a corporation for federal income tax purposes, the amount of cash available for distribution by the MLP would likely be reduced and distributions received by us would be taxed under federal income tax laws applicable to corporate distributions (as dividend income, return of capital, or capital gain), which would reduce our net distributable income. During the last three years, “roll-up” transactions, in which a sponsor acquires the outstanding units of its subsidiary MLP, have become more common, and when the sponsor is a corporation, these transactions have been taxable and resulted in the MLP unitholders becoming shareholders in a corporation. If assets historically owned by MLPs continue to migrate into corporations, by way of roll-up transactions or other merger or acquisition transactions, our net distributable income would likely be reduced. Additionally, treatment of an MLP as a corporation for federal income tax purposes, or a transfer in ownership of MLP assets to corporations, would likely result in a reduction in the after-tax return to us, likely causing a decline in the value of our assets.

The 2017 Tax Cuts and Jobs Act did not eliminate the treatment of MLPs as “pass through entities,” but it did impose certain limitations on the deductibility of interest expense and net operating loss carryforwards that could result in less deduction being passed through to us as the owner of an MLP that is impacted by such limitations. Furthermore, we cannot predict the likelihood that future legislation will result in MLPs no longer being treated as partnerships for tax purposes or result in a material increase in the amount of taxable income that we are allocated from the MLP securities in which we invest.

Non-Diversification Risk

We are a non-diversified, closed-end investment company under the 1940 Act and will not be treated as a regulated investment company under the Internal Revenue Code of 1986, as amended, or the Code. Accordingly, there are no regulatory requirements under the 1940 Act or the Code on the minimum number or size of securities we hold. As of February 28, 2018, we held investments in approximately 40 issuers.

As of February 28, 2018, substantially all of our total assets were invested in publicly traded securities of MLPs and other Midstream Energy Companies. As of February 28, 2018, there were less than 100 publicly

 

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traded partnerships that manage and operate energy assets and less than 20 other publicly traded Midstream Energy Companies we consider to be viable investment candidates. We primarily select our investments from this small pool of alternatives.

As a result of selecting our investments from this small pool of publicly traded securities, a change in the value of the securities of any one of these publicly traded Midstream Energy Companies could have a significant impact on our portfolio. In addition, as there can be a correlation in the valuation of the securities of publicly traded MLPs and other Midstream Energy Companies, a change in value of the securities of one could negatively influence the valuations of the securities of others that we may hold in our portfolio. Similarly, there may be a correlation in the valuation of publicly traded MLPs and commodity prices, particularly crude oil prices, even if a particular Midstream Energy Company has no exposure to crude oil.

As we may invest up to 15% of our total assets in any single issuer, a decline in value of the securities of such an issuer could significantly impact the value of our portfolio.

Dependence on Limited Number of Customers and Suppliers

Certain MLPs and other Midstream Energy Companies in which we may invest depend upon a limited number of customers for a majority of their revenue. Similarly, certain MLPs and other Midstream Energy Companies in which we may invest depend upon a limited number of suppliers of goods or services to continue their operations. The most recent downturn in the energy industry put significant pressure on a number of these customers and suppliers. The loss of any such customers or suppliers, including through bankruptcy, could materially adversely affect such MLPs’ and other Midstream Energy Companies’ results of operation and cash flow, and their ability to make distributions to equity holders could therefore be materially adversely affected.

Capital Markets Risk

Financial markets are volatile, and Energy Companies may not be able to obtain new debt or equity financing on attractive terms or at all. For example, the downturn in commodity prices over the last few years negatively impacted the ability of Energy Companies to raise capital, and equity capital in particular, at attractive levels, and these challenges remain even though crude oil and natural gas liquids prices have increased significantly since the lows of February 2016. Downgrades of the debt of Energy Companies by rating agencies during times of distress could exacerbate this challenge. In addition, downgrades of the credit ratings of Energy Companies by ratings agencies may increase the cost of borrowing under the terms of an Energy Company’s credit facility, and a downgrade from investment grade to below investment may cause an Energy Company to be required to post collateral (or additional collateral) by its contractual counterparties, which could reduce the amount of liquidity available to such Energy Company and increase its need for additional funding sources. If funding is not available when needed, or is available only on unfavorable terms, Midstream Energy Companies and other Energy Companies may have to reduce their distributions (and many have done so over the last few years) to manage their funding needs and may not be able to meet their obligations, which may include multi-year capital expenditure commitments, as they come due. Moreover, without adequate funding, many Midstream Energy Companies and other Energy Companies will be unable to execute their growth strategies, complete future acquisitions, take advantage of other business opportunities or respond to competitive pressures, any of which could have a material adverse effect on their revenues and results of operations.

Political Instability Risk

The Energy Companies in which we may invest are subject to disruption as a result of terrorist activities, war, and other geopolitical events, including the upheaval in the Middle East or other energy producing regions. The U.S. government has issued warnings that energy assets, specifically those related to pipeline and other energy infrastructure, production facilities and transmission and distribution facilities, may be targeted in future terrorist attacks. Internal unrest, acts of violence or strained relations between a government

 

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and energy companies or other governments may affect the operations and profitability of Midstream Energy Companies and other Energy Companies, particularly marine transportation companies, in which we invest. Political instability in other parts of the world may also cause volatility and disruptions in the market for the securities of Midstream Energy Companies and other Energy Companies, even those that operate solely in North America. For example, President Trump has recently announced the imposition of tariffs of 25% on steel imports and 10% on aluminum imports into the United States pursuant to authority granted under Section 232 of the Trade Expansion Act of 1962. These tariffs may be subject to exemptions, but which countries may be exempt (and to what extent) is currently unknown. The steel tariffs could increase the cost of construction of pipelines, processing plants and other midstream assets for Midstream Energy Companies, which could have a material adverse effect on their financial performance and results of operations. Further steel tariffs could increase the cost of drilling and completing new wells for Energy Companies, which could have a material adverse effect on returns, the pace of developing acreage and the financial performance and operating results for such companies. Furthermore, countries outside of the United States have announced their intention to retaliate should they not be exempt from these tariffs. There are many ways in which such retaliation could negatively impact Energy Companies, including, for example, any retaliatory policies that negatively impact the supply of or demand for commodities or that make it more difficult or costly to export commodities.

Weather Risks

Weather conditions and the seasonality of weather patterns play a role in the cash flows of certain Midstream Energy Companies and other Energy Companies. MLPs in the propane industry, for example, rely on the winter heating season to generate almost all of their cash flow. In an unusually warm winter season, propane Midstream Energy Companies experience decreased demand for their product. Although most Midstream Energy Companies and other Energy Companies can reasonably predict seasonal weather demand based on normal weather patterns, extreme weather conditions, such as the hurricanes that severely damaged cities along the U.S. Gulf Coast in the last 15 years, demonstrate that no amount of preparation can protect an Energy Company from the unpredictability of the weather. The damage done by extreme weather also may serve to increase insurance premiums for energy assets owned by Energy Companies, could significantly increase the volatility in the supply of energy-related commodities and could adversely affect such companies’ financial condition and ability to pay distributions to shareholders.

Cash Flow Risk

A substantial portion of the cash flow received by us is derived from our investment in equity securities of MLPs and other Midstream Energy Companies. The amount of cash that an MLP or other Midstream Energy Company has available to service its debt obligations and pay distributions to its equity holders depends upon the amount of cash flow generated from the company’s operations. Cash flow from operations will vary from quarter to quarter and is largely dependent on factors affecting the company’s operations and factors affecting the energy industry in general. Large declines in commodity prices (such as those experienced from mid-2014 to early 2016) can result in material declines in cash flow from operations. In addition to the risk factors described herein, other factors which may reduce the amount of cash an MLP or other Midstream Energy Company has available to pay its debt and equity holders include increased operating costs, maintenance capital expenditures, acquisition costs, expansion or construction costs and borrowing costs (including increased borrowing costs as a result of additional collateral requirements as a result of ratings downgrades by credit agencies). Further, covenants in debt instruments issued by MLPs and other Midstream Energy Companies in which we intend to invest may restrict distributions to equity holders or, in certain circumstances, may not allow distributions to be made to equity holders. In addition, access to the capital markets (or lack thereof) to finance growth initiatives can impact the amount of cash a Midstream Energy Company elects to distribute to its equity holders. Finally, the acquisition of an MLP or other Midstream Energy Company by an acquiror with a lower yield could result in lower distributions to the equity holders of the acquired MLP or Midstream Energy Company. These kind of transactions have become more prevalent in recent years. To the extent MLPs and other Midstream Energy Companies that we own reduce their distributions to equity holders, this will result in reduced levels of net

 

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distributable income and can cause us to reduce our distributions. For example, the Company has reduced its distribution twice since December 2015 for a cumulative reduction of 32%, partly in response to lower distributions from the MLPs and Midstream Energy Companies that we own, and partly as a result of sales of securities to manage our leverage levels. See “—Risks Related to Our Business and Structure—Use of Leverage.” Currently, our net distributable income is below our annualized distribution of $1.80 per share. Over time, we expect that our distribution level will generally track net distributable income. Accordingly, if our net distributable income does not increase (or is not projected to increase) to a level that supports our distribution, the Board of Directors may reduce the distribution again.

Concentration Risk

Our investments are concentrated in the energy sector. The focus of our portfolio on specific industries within the energy sector may present more risks than if our portfolio were broadly diversified over numerous sectors of the economy. A downturn in one or more industries within the energy sector would have a larger impact on us than on an investment company that does not concentrate in the energy sector. The performance of securities in the energy sector may lag the performance of other industries or the broader market as a whole. To the extent that we invest a relatively high percentage of our assets in the obligations of a limited number of issuers, we may be more susceptible than a more widely diversified investment company to any single economic, political or regulatory occurrence.

Interest Rate Risk

Valuations of securities in which we invest are based on numerous factors, including sector and business fundamentals, management expertise, and expectations of future operating results. Most of the securities in which we invest pay quarterly dividends/distributions to investors and are viewed by investors as yield-based investments. As a result, yields for these securities are also susceptible, in the short-term, to fluctuations in interest rates and the equity prices of such securities may decline when interest rates rise. Because we invest in equity securities of MLPs and other Midstream Energy Companies, our net asset value and the asset coverage ratios on our senior securities may decline if interest rates rise.

Inflation / Deflation Risk

Inflation risk is the risk that the value of assets or income from investment will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of our common stock and distributions that we pay declines. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with our use of leverage would likely increase. Deflation risk is the risk that prices throughout the economy decline over time — the opposite of inflation. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer defaults more likely, which may result in a decline in the value of our portfolio.

Risk of Conflicting Transactions by the Investment Adviser

Kayne Anderson manages portfolios of other investment companies and client accounts that invest in similar or the same securities as the company. It is possible that Kayne Anderson would effect a purchase of a security for us when another investment company or client account is selling that same security, or vice versa. Kayne Anderson will use reasonable efforts to avoid adverse impacts on the company’s transactions as a result of those other transactions, but there can be no assurances that adverse impacts will be avoided.

Equity Securities Risk

The vast majority of our assets are invested in equity securities of MLPs and other Midstream Energy Companies. Such securities are subject to general movements in the stock market and a significant drop in the

 

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stock market may depress the price of securities to which we have exposure. Equity securities prices fluctuate for several reasons, including changes in the financial condition of a particular issuer, investors’ perceptions of MLPs and other Midstream Energy Companies, investors’ perceptions of the energy industry, the general condition of the relevant stock market, or when political or economic events affecting the issuers occur. In addition, MLP and other Midstream Energy Company equity securities held by the Company may decline in price if the issuer fails to make anticipated distributions or dividend payments (or reduces the amount of such payments) because, among other reasons, the issuer experiences a decline in its financial condition. In general, the equity securities of MLPs that are publicly traded partnerships tend to be less liquid than the equity securities of corporations, which means that we could have difficulty selling such securities at the time and price we would like.

Small Capitalization Risk

Certain of the MLPs and other Midstream Energy Companies in which we invest may have comparatively smaller capitalizations than other companies whose securities are included in major benchmarked indices. Investing in the securities of smaller MLPs and other Midstream Energy Companies presents some unique investment risks. These MLPs and other Midstream Energy Companies may have limited product lines and markets, as well as shorter operating histories, less experienced management and more limited financial resources than larger MLPs and other Midstream Energy Companies and may be more vulnerable to adverse general market or economic developments. Stocks of smaller MLPs and other Midstream Energy Companies may be less liquid than those of larger MLPs and other Midstream Energy Companies and may experience greater price fluctuations than larger MLPs and other Midstream Energy Companies. In addition, small-cap securities may not be widely followed by the investment community, which may result in reduced demand. This means that we could have greater difficulty selling such securities at the time and price that we would like.

Debt Securities Risks

Debt securities in which we invest are subject to many of the risks described elsewhere in this section. In addition, they are subject to credit risk and other risks, depending on the quality and other terms of the debt security.

Credit Risk

An issuer of a debt security may be unable to make interest payments and repay principal. We could lose money if the issuer of a debt obligation is, or is perceived to be, unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. The downgrade in the credit rating of a security by rating agencies may further decrease its value. Additionally, we may purchase a debt security that has payment-in-kind interest, which represents contractual interest added to the principal balance and due at the maturity date of the debt security in which we invest. It is possible that by effectively increasing the principal balance payable or deferring cash payment of such interest until maturity, the use of payment-in-kind features will increase the risk that such amounts will become uncollectible when due and payable.

Below Investment Grade and Unrated Debt Securities Risk

Below investment grade debt securities (commonly referred to as “junk bonds” or “high yield bonds”) are rated Ba1 or less by Moody’s, BB+ or less by Fitch or Standard & Poor’s, or comparably rated by another rating agency. Below investment grade and unrated debt securities generally pay a premium above the yields of U.S. government securities or debt securities of investment grade issuers because they are subject to greater risks than these securities. These risks, which reflect their speculative character, include the following: greater yield and price volatility; greater credit risk and risk of default; potentially greater sensitivity to general economic or industry conditions; potential lack of attractive resale opportunities (illiquidity); and additional expenses to seek recovery from issuers who default.

 

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In addition, the prices of these below investment grade and other unrated debt securities in which we may invest are more sensitive to negative developments, such as a decline in the issuer’s revenues or profitability or a general economic downturn, than are the prices of higher grade securities. Below investment grade and unrated debt securities tend to be less liquid than investment grade securities, and the market for below investment grade and unrated debt securities could contract further under adverse market or economic conditions. In such a scenario, it may be more difficult for us to sell these securities in a timely manner or for as high a price as could be realized if such securities were more widely traded. The market value of below investment grade and unrated debt securities may be more volatile than the market value of investment grade securities and generally tends to reflect the market’s perception of the creditworthiness of the issuer and short-term market developments to a greater extent than investment grade securities, which primarily reflect fluctuations in general levels of interest rates. In the event of a default by a below investment grade or unrated debt security held in our portfolio in the payment of principal or interest, we may incur additional expense to the extent we are required to seek recovery of such principal or interest. For a further description of below investment grade and unrated debt securities and the risks associated therewith, see “Proposal One: Reorganization—Investment Objective and Policies of KYN”.

Prepayment Risk

Certain debt instruments, particularly below investment grade securities, may contain call or redemption provisions which would allow the issuer thereof to prepay principal prior to the debt instrument’s stated maturity. This is known as prepayment risk. Prepayment risk is greater during a falling interest rate environment as issuers can reduce their cost of capital by refinancing higher yielding debt instruments with lower yielding debt instruments. An issuer may also elect to refinance its debt instruments with lower yielding debt instruments if the credit standing of the issuer improves. To the extent debt securities in our portfolio are called or redeemed, we may be forced to reinvest in lower yielding securities.

Interest Rate Risk for Debt and Equity Securities

Debt securities, and equity securities that pay dividends and distributions, have the potential to decline in value, sometimes dramatically, when interest rates rise or are expected to rise. In general, the values or prices of debt securities vary inversely with interest rates. The change in a debt security’s price depends on several factors, including its maturity. Generally, debt securities with longer maturities are subject to greater price volatility from changes in interest rates. Adjustable rate instruments also react to interest rate changes in a similar manner although generally to a lesser degree (depending, however, on the characteristics of the reset terms).

Risks Associated with Investing in Initial Public Offerings (“IPOs”)

Securities purchased in IPOs are often subject to the general risks associated with investments in companies with small market capitalizations and, at times, are magnified. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In addition, the prices of securities sold in an IPO may be highly volatile. At any particular time, or from time to time, we may not be able to invest in IPOs, or to invest to the extent desired, because, for example, only a small portion (if any) of the securities being offered in an IPO may be available to us. In addition, under certain market conditions, a relatively small number of companies may issue securities in IPOs. Our investment performance during periods when we are unable to invest significantly or at all in IPOs may be lower than during periods when we are able to do so. IPO securities may be volatile, and we cannot predict whether investments in IPOs will be successful. As we grow in size, the positive effect of IPO investments on the Company may decrease.

Risks Associated with a Private Investment in a Public Entity (“PIPE”) Transaction

PIPE investors purchase securities directly from a publicly traded company in a private placement transaction, typically at a discount to the market price of the company’s common stock. Because the sale of the securities is not registered under the Securities Act of 1933, as amended (the “Securities Act”), the securities are

 

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“restricted” and cannot be immediately resold by the investors into the public markets. Until we can sell such securities into the public markets, our holdings will be less liquid, and any sales will need to be made pursuant to an exemption under the Securities Act. We may purchase equity securities in a PIPE transaction that are structured as common equity that pay distributions in kind for a period of time (the “PIK period”) or as convertible preferred equity (that may also pay distributions in kind). The issuers of these securities may not be able to pay us distributions in cash after the PIK period. Further, at the time a convertible preferred equity investment becomes convertible into common equity, the common equity may be worth less than the conversion price, which would make it uneconomic to convert into common equity and, as a result, significantly reduce the liquidity of the investment.

Privately Held Company Risk

Investing in privately held companies involves risk. For example, privately held companies are not subject to SEC reporting requirements, are not required to maintain their accounting records in accordance with generally accepted accounting principles, and are not required to maintain effective internal controls over financial reporting. As a result, we may not have timely or accurate information about the business, financial condition and results of operations of the privately held companies in which we invest. In addition, the securities of privately held companies are generally illiquid, and entail the risks described under “—Liquidity Risk.”

Liquidity Risk

Securities with limited trading volumes may display volatile or erratic price movements. Kayne Anderson is one of the largest investors in MLPs and Midstream Energy Companies. Thus, it may be more difficult for us to buy and sell significant amounts of such securities without an unfavorable impact on prevailing market prices. Larger purchases or sales of these securities by us in a short period of time may cause abnormal movements in the market price of these securities. As a result, these securities may be difficult to dispose of at a fair price at the times when we believe it is desirable to do so. These securities are also more difficult to value, and Kayne Anderson’s judgment as to value will often be given greater weight than market quotations, if any exist. Investment of our capital in securities that are less actively traded or over time experience decreased trading volume may restrict our ability to take advantage of other market opportunities.

We also invest in unregistered or otherwise restricted securities. The term “restricted securities” refers to securities that are unregistered or are held by control persons of the issuer and securities that are subject to contractual restrictions on their resale. Unregistered securities are securities that cannot be sold publicly in the United States without registration under the Securities Act, unless an exemption from such registration is available. Restricted securities may be more difficult to value, and we may have difficulty disposing of such assets either in a timely manner or for a reasonable price. In order to dispose of an unregistered security, we, where we have contractual rights to do so, may have to cause such security to be registered. A considerable period may elapse between the time the decision is made to sell the security and the time the security is registered so that we could sell it. Contractual restrictions on the resale of securities vary in length and scope and are generally the result of a negotiation between the issuer and acquiror of the securities. We would, in either case, bear the risks of any downward price fluctuation during that period. The difficulties and delays associated with selling restricted securities could result in our inability to realize a favorable price upon disposition of such securities, and at times might make disposition of such securities impossible.

Our investments in restricted securities may include investments in private companies. Such securities are not registered under the Securities Act until the company becomes a public company. Accordingly, in addition to the risks described above, our ability to dispose of such securities on favorable terms would be limited until the portfolio company becomes a public company.

Portfolio Turnover Risk

We anticipate that our annual portfolio turnover rate will range between 15% and 25%, but the rate may vary greatly from year to year. Portfolio turnover rate is not considered a limiting factor in KAFA’s execution of

 

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investment decisions. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses, including taxes related to realized gains, that are borne by us. It could also result in an acceleration of realized gains on portfolio securities held by us (and payment of cash taxes on such realized gains). See “Proposal One: Reorganization—Investment Objective and Policies of KYN—Investment Practices—Portfolio Turnover.”

Derivatives Risk

We may purchase and sell derivative investments such as exchange-listed and over-the-counter put and call options on securities, equity, fixed income, interest rate and currency indices, and other financial instruments, enter into total return swaps and various interest rate transactions such as swaps. We also may purchase derivative investments that combine features of these instruments. The use of derivatives has risks, including the imperfect correlation between the value of such instruments and the underlying assets, the possible default of the other party to the transaction or illiquidity of the derivative investments. Furthermore, the ability to successfully use these techniques depends on our ability to predict pertinent market movements, which cannot be assured. Thus, the use of derivatives may result in losses greater than if they had not been used, may require us to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation we can realize on an investment or may cause us to hold a security that we might otherwise sell. Additionally, amounts paid by us as premiums and cash or other assets held in margin accounts with respect to derivative transactions are not otherwise available to us for investment purposes.

During the fiscal year ended November 30, 2017, we wrote covered call options. The fair value of these derivative instruments, measured on a weekly basis, was less than 1% of our total assets during fiscal 2017. In prior years, we have written covered call options and entered into interest rate swaps. We expect to continue to utilize derivative instruments in a manner similar to our activity during fiscal 2017. We will not allow the fair value of our derivative instruments to exceed 25% of total assets.

We have written covered calls in the past and may do so in the future. As the writer of a covered call option, during the option’s life we give up the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but we retain the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price. There can be no assurance that a liquid market will exist when we seek to close out an option position. If trading were suspended in an option purchased by us, we would not be able to close out the option. If we were unable to close out a covered call option that we had written on a security, we would not be able to sell the underlying security unless the option expired without exercise.

Depending on whether we would be entitled to receive net payments from the counterparty on an interest rate swap, which in turn would depend on the general state of short-term interest rates at that point in time, a default by a counterparty could negatively impact the performance of our common stock. In addition, at the time an interest rate transaction reaches its scheduled termination date, there is a risk that we would not be able to obtain a replacement transaction or that the terms of the replacement would not be as favorable as on the expiring transaction. If this occurs, it could have a negative impact on the performance of our common stock. If we fail to maintain any required asset coverage ratios in connection with any use by us of our debt securities, revolving credit facility and other borrowings (collectively, our “Borrowings”) and our preferred stock (together with our Borrowings, “Leverage Instruments”), we may be required to redeem or prepay some or all of the Leverage Instruments. Such redemption or prepayment would likely result in our seeking to terminate early all or a portion of any swap or cap transactions. Early termination of a swap could result in a termination payment by or to us.

 

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We segregate liquid assets against or otherwise cover our future obligations under such swap transactions, in order to provide that our future commitments for which we have not segregated liquid assets against or otherwise covered, together with any outstanding Borrowings, do not exceed 33 1/3% of our total assets less liabilities (other than the amount of our Borrowings). In addition, such transactions and other use of Leverage Instruments by us are subject to the asset coverage requirements of the 1940 Act, which generally restrict us from engaging in such transactions unless the value of our total assets less liabilities (other than the amount of our Borrowings) is at least 300% of the principal amount of our Borrowings and the value of our total assets less liabilities (other than the amount of our Leverage Instruments) are at least 200% of the principal amount of our Leverage Instruments.

Short Sales Risk

Short selling involves selling securities which may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation to replace the borrowed securities at a later date. Short selling allows the short seller to profit from declines in market prices to the extent such declines exceed the transaction costs and the costs of borrowing the securities. A short sale creates the risk of an unlimited loss, in that the price of the underlying security could theoretically increase without limit, thus increasing the cost of buying those securities to cover the short position. There can be no assurance that the securities necessary to cover a short position will be available for purchase. Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss.

Our obligation to replace a borrowed security is secured by collateral deposited with the broker-dealer, usually cash, U.S. government securities or other liquid securities similar to those borrowed. We also are required to segregate similar collateral to the extent, if any, necessary so that the value of both collateral amounts in the aggregate is at all times equal to at least 100% of the current market value of the security sold short. Depending on arrangements made with the broker-dealer from which we borrowed the security regarding payment over of any payments received by us on such security, we may not receive any payments (including interest) on the collateral deposited with such broker-dealer.

Risks Related to Our Business and Structure

Use of Leverage

We currently utilize Leverage Instruments and intend to continue to do so. Under normal market conditions, our policy is to utilize Leverage Instruments in an amount that represents approximately 25% - 30% of our total assets, including proceeds from such Leverage Instruments (which equates to approximately 39% - 50% of our net asset value as of February 28, 2018). Notwithstanding this policy, based on market conditions at such time, we may use Leverage Instruments in amounts greater than our policy (to the extent permitted by the 1940 Act) or less than our policy. As of February 28, 2018, our Leverage Instruments represented approximately 31% of our total assets. Leverage Instruments have seniority in liquidation and distribution rights over our common stock.

As of February 28, 2018, we had $747 million of Notes outstanding and 11,680,000 Mandatory Redeemable Preferred (“MRP”) Shares ($292 million aggregate liquidation preference) outstanding. As of February 28, 2018, we did not have any borrowings outstanding under our term loan or credit facility. Our revolving credit facility has a term of one year and matures on February 15, 2019, and our term loan matures on February 18, 2019. Our Notes and MRP Shares have maturity dates and mandatory redemption dates ranging from 2018 to 2025. If we are unable to renew or refinance our credit facility or term loan prior to maturity or if we are unable to refinance our Notes or MRP Shares as they mature, we may be forced to sell securities in our portfolio to repay debt or MRP Shares as they mature. If we are required to sell portfolio securities to repay outstanding debt or MRP Shares as they mature or to maintain asset coverage ratios, such sales may be at prices lower than what we would otherwise realize if we were not required to sell such securities at such time.

 

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Additionally, we may be unable to refinance our debt or MRP Shares or sell a sufficient amount of portfolio securities to repay debt or MRP Shares as they mature or to maintain asset coverage ratios, which could cause an event of default on our debt securities or MRP Shares.

Leverage Instruments constitute a substantial lien and burden by reason of their prior claim against our income and against our net assets in liquidation. The rights of lenders to receive payments of interest on and repayments of principal of any Borrowings are senior to the rights of holders of common stock and preferred stock, with respect to the payment of distributions or upon liquidation. We may not be permitted to declare dividends and distributions with respect to common stock or preferred stock or purchase common stock or preferred stock unless at such time, we meet certain asset coverage requirements and no event of default exists under any Borrowing. In addition, we may not be permitted to pay distributions on common stock unless all dividends on the preferred stock and/or accrued interest on Borrowings have been paid, or set aside for payment.

In an event of default under any Borrowing, the lenders have the right to cause a liquidation of collateral (i.e., sell MLP units and other of our assets) and, if any such default is not cured, the lenders may be able to control the liquidation as well. If an event of default occurs or in an effort to avoid an event of default, we may be forced to sell securities at inopportune times and, as a result, receive lower prices for such security sales. We may also incur prepayment penalties on Notes and MRP Shares that are redeemed prior to their stated maturity dates or mandatory redemption dates.

Certain types of leverage, including the Notes and MRP Shares, subject us to certain affirmative covenants relating to asset coverage and our portfolio composition. In a declining market, we may need to sell securities in our portfolio to maintain asset coverage ratios, which would impact the distributions to us, and as a result, our cash available for distribution to common stockholders. For example, from August 31, 2014 to April 30, 2016, we reduced our total debt by $759 million and total MRP Shares by $95 million in order to maintain our asset coverage ratios. The decline in cash distributions to us resulting from securities sales to fund this reduction in leverage was one of the factors leading to the reduction in our distribution to common stockholders in December 2015 and March 2017. While we believe maintaining our asset coverage ratios and selling portfolio securities was the prudent course of action, it is unlikely that we would have elected to sell securities at the time had we not had leverage. Furthermore, because we repaid certain of our Notes and MRP Shares prior to their stated maturities or mandatory redemption dates, we incurred prepayment penalties. By continuing to utilize Notes and MRP Shares, we may again be forced to sell securities at an inopportune time in the future to maintain asset coverage ratios and may be forced to pay additional prepayment penalties on our Notes and MRP Shares. Our Notes and MRP Shares also may impose special restrictions on our use of various investment techniques or strategies or in our ability to pay distributions on common stock and preferred stock in certain instances. In addition, we are subject to certain negative covenants relating to transactions with affiliates, mergers and consolidation, among others. We are also subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which issue ratings for Leverage Instruments issued by us. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. Kayne Anderson does not believe that these covenants or guidelines will impede it from managing our portfolio in accordance with our investment objective and policies.

Interest Rate Hedging Risk

We hedge against interest rate risk resulting from our leveraged capital structure. We do not intend to hedge interest rate risk of our portfolio holdings. Interest rate transactions that we may use for hedging purposes will expose us to certain risks that differ from the risks associated with our portfolio holdings. There are economic costs of hedging reflected in the price of interest rate swaps and similar techniques, the cost of which can be significant. In addition, our success in using hedging instruments is subject to KAFA’s ability to predict correctly changes in the relationships of such hedging instruments to our leverage risk, and there can be no assurance that KAFA’s judgment in this respect will be accurate. To the extent there is a decline in interest rates, the value of interest rate swaps could decline, and result in a decline in the net asset value of our common stock

 

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(and asset coverage ratios for our senior securities). In addition, if the counterparty to an interest rate swap or cap defaults, we would not be able to use the anticipated net receipts under the interest rate swap to offset our cost of financial leverage.

Tax Risks

In addition to other risk considerations, an investment in our common stock will involve certain tax risks, including, but not limited to, the risks summarized below and discussed in more detail in this prospectus. The federal, state, local and foreign tax consequences of an investment in and holding of our common stock will depend on the facts of each investor’s situation. Investors are encouraged to consult their own tax advisers regarding the specific tax consequences that may affect them.

Taxability of Distributions Received

We cannot assure you what percentage of the distributions paid on our common stock, if any, will be treated as qualified dividend income or return of capital or what the tax rates on various types of income or gain will be in future years. New legislation could negatively impact the amount and tax characterization of distributions received by our common stockholders. Under current law, qualified dividend income received by individual stockholders is taxed at a maximum federal tax rate of 20% for individuals, provided a holding period requirement and certain other requirements are met. In addition, currently a 3.8% federal tax on net investment income (the “Tax Surcharge”) generally applies to dividend income and net capital gains for taxpayers whose adjusted gross income exceeds $200,000 for single filers or $250,000 for married joint filers. Prior to the December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act, certain legislative proposals called for the elimination of tax incentives widely used by oil, gas and coal companies and the imposition of new fees on certain energy producers. We cannot predict whether such proposals will resurface, and the elimination of such tax incentives and imposition of such fees could adversely affect MLPs in which we invest and the energy sector generally.

Tax Risks of Investing in our Securities

A reduction in the return of capital portion of the distributions that we receive from our portfolio investments or an increase in our earnings and profits and portfolio turnover may reduce that portion of our distribution treated as a tax-deferred return of capital and increase that portion treated as a dividend, resulting in lower after-tax distributions to our common and preferred stockholders.

Other Tax Risks

As a limited partner in the MLPs in which we invest, we will be allocated our distributive share of income, gains, losses, deductions and credits from those MLPs. Historically, a significant portion of income from such MLPs has been offset by tax deductions. We will incur a current tax liability on our distributive share of an MLP’s income and gains that is not offset by tax deductions, losses and credits, or our capital or net operating loss carryforwards or other applicable deductions, if any. The percentage of an MLP’s income and gains which is offset by tax deductions, losses and credits will fluctuate over time for various reasons. A significant slowdown in acquisition activity or capital spending by MLPs held in our portfolio could result in a reduction in the depreciation deduction passed through to us, which may, in turn, result in increased current tax liability to us. In addition, changes to the tax code that impact the amount of income, gain, deduction or loss that is passed through to us from the MLP securities in which we invest (for example through changes to the deductibility of interest expense or changes to how capital expenditures are depreciated) may also result in an increased current tax liability to us. For example, the 2017 Tax Cuts and Jobs Act imposed certain limitations on the deductibility of interest expense that could result in less deduction being passed through to us as the owner of an MLP that is impacted by such limitations. We will accrue deferred income taxes for any future tax liability associated with that portion of MLP distributions considered to be a tax-deferred return of capital as well as capital appreciation

 

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of our investments. Upon the sale of an MLP security, we may be liable for previously deferred taxes, and if an MLP in our portfolio is acquired by another Energy Company in a transaction treated as a sale for federal income tax purposes, including in a “roll-up” transaction, we will not have control of the timing of when we become liable for such deferred taxes.

We rely to some extent on information provided by the MLPs, which may not necessarily be timely, to estimate taxable income allocable to the MLP units held in the portfolio and to estimate the associated current or deferred taxes. Such estimates are made in good faith. From time to time, as new information becomes available, we modify our estimates or assumptions regarding our deferred taxes.

The 2017 Tax Cuts and Jobs Act also imposed limitations on the deductibility of net interest expense and limitations on the usage of net operating loss carryforwards (and elimination of carrybacks). These new limitations may impact certain deductions to taxable income and may result in an increased current tax liability to us. To the extent certain deductions are limited in any given year, we may not be able to utilize such deductions in future periods if we do not have sufficient taxable income. See “Proposal One: Reorganization—Certain Federal Income Tax Matters.”

Deferred Tax Risks of Investing in our Securities

The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%. Because our deferred tax liability is based primarily on the federal corporate tax rate, the enactment of the bill significantly reduced our deferred tax liability and increased our net asset value. We revalued our deferred tax liability at the lower rate on December 22, 2017, which resulted in an increase to our net asset value of $1.84 per share (or 11.0%) at such time. If the federal income tax rate were to increase or return to the 35% rate in the future, our deferred tax liability would increase resulting in a corresponding decrease to our net asset value.

Management Risk; Dependence on Key Personnel of Kayne Anderson

Our portfolio is subject to management risk because it is actively managed. KAFA applies investment techniques and risk analyses in making investment decisions for us, but there can be no guarantee that they will produce the desired results.

We depend upon Kayne Anderson’s key personnel for our future success and upon their access to certain individuals and investments in the MLP and Midstream Energy industries. In particular, we depend on the diligence, skill and network of business contacts of our portfolio managers, who evaluate, negotiate, structure, close and monitor our investments. These individuals manage a number of investment vehicles on behalf of Kayne Anderson and, as a result, do not devote all of their time to managing us, which could negatively impact our performance. Furthermore, these individuals do not have long-term employment contracts with Kayne Anderson, although they do have equity interests and other financial incentives to remain with Kayne Anderson. For a description of Kayne Anderson, see “Proposal One: Reorganization—Management—Investment Adviser.” We also depend on the senior management of Kayne Anderson. The departure of any of our portfolio managers or the senior management of Kayne Anderson could have a material adverse effect on our ability to achieve our investment objective. In addition, we can offer no assurance that KAFA will remain our investment adviser or that we will continue to have access to Kayne Anderson’s industry contacts and deal flow.

Conflicts of Interest of Kayne Anderson

Conflicts of interest may arise because Kayne Anderson and its affiliates generally carry on substantial investment activities for other clients in which we will have no interest. Kayne Anderson or its affiliates may have financial incentives to favor certain of such accounts over us. Any of their proprietary accounts and other customer accounts may compete with us for specific trades. Kayne Anderson or its affiliates may buy or sell securities for us which differ from securities bought or sold for other accounts and customers, even though their

 

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investment objectives and policies may be similar to ours. Situations may occur when we could be disadvantaged because of the investment activities conducted by Kayne Anderson or its affiliates for their other accounts. Such situations may be based on, among other things, legal or internal restrictions on the combined size of positions that may be taken for us and the other accounts, thereby limiting the size of our position, or the difficulty of liquidating an investment for us and the other accounts where the market cannot absorb the sale of the combined position.

Our investment opportunities may be limited by affiliations of Kayne Anderson or its affiliates with MLPs or other Midstream Energy Companies. In addition, to the extent that Kayne Anderson sources and structures private investments in MLPs, certain employees of Kayne Anderson may become aware of actions planned by MLPs, such as acquisitions, that may not be announced to the public. It is possible that we could be precluded from investing in an MLP about which Kayne Anderson has material non-public information; however, it is Kayne Anderson’s intention to ensure that any material non-public information available to certain Kayne Anderson employees not be shared with those employees responsible for the purchase and sale of publicly traded MLP securities.

KAFA also manages Kayne Anderson Energy Total Return Fund, Inc., a closed-end investment company listed on the NYSE under the ticker “KYE,” Kayne Anderson Energy Development Company, a closed-end investment company listed on the NYSE under the ticker “KED” and Kayne Anderson Midstream/Energy Fund, Inc., a closed-end investment company listed on the NYSE under the ticker “KMF.” Contemporaneously with the Reorganization, KMF and KYE are pursuing a similar combination transaction that, if approved, is expected to close at the same time as the Reorganization.

In addition to closed-end investment companies, KAFA also manages separately managed accounts which together had approximately $242 million in combined total assets as of January 31, 2018, and KACALP manages several private investment funds and separately managed accounts (collectively, “Affiliated Funds”). Some of the Affiliated Funds have investment objectives that are similar to or overlap with ours. In particular, certain Affiliated Funds invest in MLPs and other Midstream Energy Companies. Further, Kayne Anderson may at some time in the future, manage other investment funds with the same investment objective as ours or that otherwise create potential conflicts of interest with us. For example, Kayne Anderson formed Kayne Anderson Acquisition Corp. (“KAAC”) in March 2017, a special purpose acquisition company formed for the purpose of effecting a business combination with an Energy Company. KAAC may compete with the MLPs or other Midstream Energy Companies in which we invest or may enter into one or more transactions with Energy Companies that may preclude an investment by us in the same entities for regulatory or other reasons.

Investment decisions for us are made independently from those of Kayne Anderson’s other clients; however, from time to time, the same investment decision may be made for more than one fund or account. When two or more clients advised by Kayne Anderson or its affiliates seek to purchase or sell the same publicly traded securities, the securities actually purchased or sold are allocated among the clients on a good faith equitable basis by Kayne Anderson in its discretion in accordance with the clients’ various investment objectives and procedures adopted by Kayne Anderson and approved by our Board of Directors. In some cases, this system may adversely affect the price or size of the position we may obtain. In other cases, however, our ability to participate in volume transactions may produce better execution for us.

We and our affiliates, including Affiliated Funds, may be precluded from co-investing in private placements of securities, including in any portfolio companies that we control. Except as permitted by law, Kayne Anderson will not co-invest its other clients’ assets in the private transactions in which we invest. Kayne Anderson will allocate private investment opportunities among its clients, including us, based on allocation policies that take into account several suitability factors, including the size of the investment opportunity, the amount each client has available for investment and the client’s investment objectives. These allocation policies may result in the allocation of investment opportunities to an Affiliated Fund rather than to us. The policies contemplate that Kayne Anderson will exercise discretion, based on several factors relevant to the determination,

 

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in allocating the entirety, or a portion, of such investment opportunities to an Affiliated Fund, in priority to other prospectively interested advisory clients, including us. In this regard, when applied to specified investment opportunities that would normally be suitable for us, the allocation policies may result in certain Affiliated Funds having greater priority than us to participate in such opportunities depending on the totality of the considerations, including, among other things, our available capital for investment, our existing holdings, applicable tax and diversification standards to which we may then be subject and the ability to efficiently liquidate a portion of our existing portfolio in a timely and prudent fashion in the time period required to fund the transaction.

The investment management fee paid to KAFA is based on the value of our assets, as periodically determined. A significant percentage of our assets may be illiquid securities acquired in private transactions for which market quotations will not be readily available. Although we have adopted valuation procedures designed to determine valuations of illiquid securities in a manner that reflects their fair value, there typically is a range of prices that may be established for each individual security. Senior management of KAFA, our Board of Directors and its Valuation Committee, and a third-party valuation firm participate in the valuation of our common stock. See “Proposal One: Reorganization—Market and Net Asset Value Information—Net Asset Value.”

Risk of Owning Securities of Affiliates

From time to time, we may “control” or may be an “affiliate” of one or more of our portfolio companies, as each of these terms is defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we and our affiliates owned 25% or more of its outstanding voting securities and would be an “affiliate” of a portfolio company if we and our affiliates owned 5% or more of its outstanding voting securities. The 1940 Act contains prohibitions and restrictions relating to transactions between investment companies and their affiliates (including our investment adviser), principal underwriters and affiliates of those affiliates or underwriters.

We believe that there are several factors that determine whether or not a security should be considered a “voting security” in complex structures such as limited partnerships of the kind in which we invest. We also note that the SEC staff has issued guidance on the circumstances under which it would consider a limited partnership interest to constitute a voting security. Under most partnership agreements, the management of the partnership is vested in the general partner, and the limited partners, individually or collectively, have no rights to manage or influence management of the partnership through such activities as participating in the selection of the managers or the board of the limited partnership or the general partner. As a result, we believe that many of the limited partnership interests in which we invest should not be considered voting securities. However, it is possible that the SEC staff may consider the limited partner interests we hold in certain limited partnerships to be voting securities. If such a determination were made, we may be regarded as a person affiliated with and controlling the issuer(s) of those securities for purposes of Section 17 of the 1940 Act.

In making such a determination as to whether to treat any class of limited partnership interests we hold as a voting security, we consider, among other factors, whether or not the holders of such limited partnership interests have the right to elect the board of directors of the limited partnership or the general partner. If the holders of such limited partnership interests do not have the right to elect the board of directors, we generally have not treated such security as a voting security. In other circumstances, based on the facts and circumstances of those partnership agreements, including the right to elect the directors of the general partner, we have treated those securities as voting securities and, therefore, as affiliates. If we do not consider the security to be a voting security, we will not consider such partnership to be an “affiliate” unless we and our affiliates own more than 25% of the outstanding securities of such partnership. Additionally, certain partnership agreements give common unitholders the right to elect its board of directors, but limit the amount of voting securities any limited partner can hold to no more than 4.9% of the partnership’s outstanding voting securities (i.e., any amounts held in excess of such limit by a limited partner do not have voting rights). In such instances, we do not consider ourself to be an affiliate if we own more than 5% of such partnership’s common units.

 

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As of February 28, 2018, we considered Plains GP Holdings, L.P., Plains AAP, L.P. and Plains All American Pipeline, L.P. to be affiliates. Robert V. Sinnott is Co-Chairman of KACALP, the managing member of KAFA. Mr. Sinnott also serves as a director of PAA GP Holdings LLC, which is the general partner of Plains GP Holdings, L.P. (“PAGP”). Members of senior management of KACALP and KAFA and various affiliated funds managed by KACALP own PAGP shares, Plains All American Pipeline, L.P. (“PAA”) units and interests in Plains AAP, L.P. (“PAGP-AAP”). We believe that we are an affiliate of PAA, PAGP and PAGP-AAP under the 1940 Act by virtue of (i) our and other affiliated Kayne Anderson funds’ ownership interest in PAA, PAGP and PAGP-AAP and (ii) Mr. Sinnott’s participation on the board of PAA GP Holdings LLC.

As of March 2, 2018, we believe we are an affiliate of Buckeye Partners, L.P. due to the aggregate ownership by us and our affiliates exceeding 5% of its voting securities.

We believe that we are an affiliate of KAAC as a result of our being under common control, including as a result of the fact that Messrs. Sinnott, McCarthy and Hart serve as officers or directors of KAAC.

We must abide by the 1940 Act restrictions on transactions with affiliates and, as a result, our ability to purchase securities of Plains GP, PAA and KAAC may be more limited in certain instances than if we were not considered an affiliate of such companies.

There is no assurance that the SEC staff will not consider that other limited partnership securities that we own and do not treat as voting securities are, in fact, voting securities for the purposes of Section 17 of the 1940 Act. If such determination were made, we will be required to abide by the restrictions on “control” or “affiliate” transactions as proscribed in the 1940 Act. We or any portfolio company that we control, and our affiliates, may from time to time engage in certain of such joint transactions, purchases, sales and loans in reliance upon and in compliance with the conditions of certain exemptive rules promulgated by the SEC. We cannot assure you, however, that we would be able to satisfy the conditions of these rules with respect to any particular eligible transaction, or even if we were allowed to engage in such a transaction that the terms would be more or as favorable to us or any company that we control as those that could be obtained in an arm’s length transaction. As a result of these prohibitions, restrictions may be imposed on the size of positions that may be taken for us or on the type of investments that we could make.

Certain Affiliations

We are affiliated with KA Associates, Inc., a Financial Industry Regulatory Authority, INC. member broker-dealer. Absent an exemption from the SEC or other regulatory relief, we are generally precluded from effecting certain principal transactions with affiliated brokers, and our ability to utilize affiliated brokers for agency transactions is subject to restrictions. This could limit our ability to engage in securities transactions and take advantage of market opportunities.

Valuation Risk

Market prices may not be readily available for certain of our investments in restricted or unregistered investments in public companies or investments in private companies. The value of such investments will ordinarily be determined based on fair valuations determined by the Board of Directors or its designee pursuant to procedures adopted by the Board of Directors. Restrictions on resale or the absence of a liquid secondary market may adversely affect our ability to determine our net asset value. The sale price of securities that are not readily marketable may be lower or higher than our most recent determination of their fair value. Additionally, the value of these securities typically requires more reliance on the judgment of KAFA than that required for securities for which there is an active trading market. Due to the difficulty in valuing these securities and the absence of an active trading market for these investments, we may not be able to realize these securities’ true value or may have to delay their sale in order to do so.

 

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Anti-Takeover Provisions

Our Charter, Bylaws and the Maryland General Corporation Law include provisions that could limit the ability of other entities or persons to acquire control of us, to convert us to open-end status, or to change the composition of our Board of Directors. We also have adopted other measures that may make it difficult for a third party to obtain control of us, including provisions of our Charter classifying our Board of Directors in three classes serving staggered three-year terms, and provisions authorizing our Board of Directors to classify or reclassify shares of our stock in one or more classes or series to cause the issuance of additional shares of our stock, and to amend our Charter, without stockholder approval, to increase or decrease the number of shares of stock that we have the authority to issue. These provisions, as well as other provisions of our Charter and Bylaws, could have the effect of discouraging, delaying, deferring or preventing a transaction or a change in control that might otherwise be in the best interests of our stockholders. As a result, these provisions may deprive our common stockholders of opportunities to sell their common stock at a premium over the then current market price of our common stock. See “Description of Capital Stock.”

Additional Risks Related to Our Common Stock

Market Discount from Net Asset Value Risk

Our common stock has traded both at a premium and at a discount to our net asset value. From the beginning of the year until February 28, 2018, our common stock has traded at an average discount of 1.9% to net asset value per share. This discount may persist or widen, and there is no assurance that our common stock will trade at a premium again. Shares of closed-end investment companies frequently trade at a discount to their net asset value. This characteristic is a risk separate and distinct from the risk that our net asset value could decrease as a result of our investment activities and may be greater for investors expecting to sell their shares in a relatively short period following completion of this offering. Although the value of our net assets is generally considered by market participants in determining whether to purchase or sell shares, whether investors will realize gains or losses upon the sale of our common stock depends upon whether the market price of our common stock at the time of sale is above or below the investor’s purchase price for our common stock. Because the market price of our common stock is affected by factors such as net asset value, distribution levels (which are dependent, in part, on expenses), supply of and demand for our common stock, stability of distributions, trading volume, general market and economic conditions, and other factors beyond our control, we cannot predict whether our common stock will trade at, below or above net asset value.

Leverage Risk to Common Stockholders

The issuance of Leverage Instruments represents the leveraging of our common stock. Leverage is a technique that could adversely affect our common stockholders. Unless the income and capital appreciation, if any, on securities acquired with the proceeds from Leverage Instruments exceed the costs of the leverage, the use of leverage could cause us to lose money. When leverage is used, the net asset value and market value of our common stock will be more volatile. There is no assurance that our use of leverage will be successful.

Our common stockholders bear the costs of leverage through higher operating expenses. Our common stockholders also bear management fees, whereas holders of notes or preferred stock do not bear management fees. Because management fees are based on our total assets, our use of leverage increases the effective management fee borne by our common stockholders. In addition, the issuance of additional senior securities by us would result in offering expenses and other costs, which would ultimately be borne by our common stockholders. Fluctuations in interest rates could increase our interest or dividend payments on Leverage Instruments and could reduce cash available for distributions on common stock. Certain Leverage Instruments are subject to covenants regarding asset coverage, portfolio composition and other matters, which may affect our ability to pay distributions to our common stockholders in certain instances. We may also be required to pledge our assets to the lenders in connection with certain other types of borrowing.

 

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Leverage involves other risks and special considerations for common stockholders including: the likelihood of greater volatility of net asset value and market price of our common stock than a comparable portfolio without leverage; the risk of fluctuations in dividend rates or interest rates on Leverage Instruments; that the dividends or interest paid on Leverage Instruments may reduce the returns to our common stockholders or result in fluctuations in the distributions paid on our common stock; the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of our common stock than if we were not leveraged, which may result in a greater decline in the market price of our common stock; and when we use financial leverage, the investment management fee payable to Kayne Anderson may be higher than if we did not use leverage.

While we may from time to time consider reducing leverage in response to actual or anticipated changes in interest rates or actual or anticipated changes in investment values in an effort to mitigate the increased volatility of current income and net asset value associated with leverage, there can be no assurance that we will actually reduce leverage in the future or that any reduction, if undertaken, will benefit our common stockholders. Changes in the future direction of interest rates or changes in investment values are difficult to predict accurately. If we were to reduce leverage based on a prediction about future changes to interest rates (or future changes in investment values), and that prediction turned out to be incorrect, the reduction in leverage would likely result in a reduction in income and/or total returns to common stockholders relative to the circumstance if we had not reduced leverage. We may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and the price of our common stock if the prediction were to turn out to be correct, and determine not to reduce leverage as described above.

Finally, the 1940 Act provides certain rights and protections for preferred stockholders which may adversely affect the interests of our common stockholders. See “Proposal One: Reorganization — Description of Securities.”

 

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PROPOSAL ONE: REORGANIZATION

The Board of Directors of KED, including the Independent Directors, has unanimously approved the Reorganization Agreement, declared the Reorganization advisable and directed that the Reorganization proposal be submitted to the KED stockholders for consideration. If the stockholders approve the Reorganization, KED would transfer substantially all of its assets to KYN, and KYN would assume substantially all of KED’s liabilities, in exchange solely for newly issued shares of common and preferred stock of KYN, which will be distributed by KED to its stockholders in the form of a liquidating distribution (although cash will be distributed in lieu of fractional common shares). KED will then cease its separate existence under Maryland law and terminate its registration under the 1940 Act. The aggregate NAV of KYN common shares received by KED common stockholders in the Reorganization will equal the aggregate NAV of KED common stock held on the business day prior to closing of the Reorganization, less the costs of the Reorganization attributable to their common shares. KYN will continue to operate after the Reorganization as a registered, non-diversified, closed-end management investment company with the investment objectives and policies described in this joint proxy statement/prospectus.

In connection with the Reorganization, each holder of KED MRP Shares will receive in a private placement an equivalent number of newly issued KYN Series K MRP Shares having identical terms as the KED MRP Shares. The aggregate liquidation preference of the KYN Series K MRP Shares received by the holder of KED MRP Shares in the Reorganization will equal the aggregate liquidation preference of the KED MRP Shares held immediately prior to the closing of the Reorganization. The KYN Series K MRP Shares to be issued in the Reorganization will have equal priority with KYN’s existing outstanding preferred shares as to the payment of dividends and the distribution of assets in the event of a liquidation of KYN. In addition, the preferred shares of KYN, including the KYN Series K MRP Shares to be issued in connection with the Reorganization, will be senior in priority to KYN common shares as to payment of dividends and the distribution of assets in the event of a liquidation of KYN.

If the Reorganization is not approved by stockholders of KED, KYN and KED will each continue to operate as a standalone Maryland corporation advised by KAFA and will each continue its investment activities in the normal course. It is important for stockholders of KED to understand that, if the Reorganization is approved, it is expected that the Board of Directors will be composed of the individuals described in “Proposal Two: Election of Directors” of this joint proxy statement/prospectus. Stockholders of KED will not have the opportunity to vote for any of these individuals until the first annual meeting following the closing of the Reorganization, though six of the seven nominees are existing directors of KED. If the Reorganization is not approved by stockholders of KED, KED expects to hold its own 2018 Annual Meeting of Stockholders later in the year.

Reasons for the Reorganization

The Reorganization seeks to combine two Companies with similar portfolios and investment objectives. Each Company (i) is managed by KAFA, (ii) seeks to achieve its investment objective by investing primarily in MLPs and other Midstream Energy Companies, and (iii) has similar fundamental investment policies and nonfundamental investment policies. Each Company is also taxed as a corporation. The Reorganization will also permit each Company to pursue this investment objective and strategy in a larger fund that will continue to focus on MLPs and other Midstream Energy Companies.

In unanimously approving the Reorganization, the Board of Directors of each Company, including each Company’s Independent Directors, determined that participation in the Reorganization is in the best interests of each Company and its stockholders and that the interests of the stockholders of each Company will not be diluted on the basis of NAV as a result of the Reorganization. Before reaching these conclusions, the Board of Directors of each Company engaged in a thorough review process relating to the proposed Reorganization. The Boards of Directors of each Company, including the Independent Directors, considered the Reorganization at meetings held

 

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in 2017 and 2018 and unanimously approved the Reorganization Agreement, declared the Reorganization advisable and, at a meeting held on February 5, 2018, directed that the Reorganization be submitted to the stockholders of KED.

In making this determination, the Board of Directors of each Company considered (i) the expected benefits of the transaction for each Company and (ii) the fact that both Companies have very similar investment policies and investment strategies. As of February 28, 2018, each Company had over 98% of its long-term investments invested in midstream MLPs and other Midstream Energy Companies. KED’s investment objective is to generate both current income and capital appreciation primarily through equity and debt investments. KED seeks to achieve this objective by investing at least 80% of its total assets in Energy Companies. KYN’s investment objective is to obtain a high after-tax total return, which it seeks to achieve by investing at least 85% of its total assets in MLPs and other Midstream Energy Companies. The Combined Company will pursue KYN’s investment objective and follow KYN’s investment policies. In addition, KYN will change its name to Kayne Anderson MLP/Midstream Investment Company. This name change will be effective on or about a date that is 60 days after the date that this joint proxy statement/prospectus is mailed to stockholders.

The potential benefits and other factors considered by the Board of Directors of each Company with regard to the Reorganization include, but were not limited to, the following:

 

    Cost savings through elimination of duplicative expenses and greater economies of scale.

It is anticipated that the Combined Company would have a lower expense level with estimated aggregate cost savings of approximately $1.5 million annually, the majority of which is expected to be attributable to reduced operating costs. Because the Reorganization is expected to be completed during the third quarter of fiscal 2018, and because there are expenses associated with the Reorganization, the full impact of these cost savings will not be entirely recognized this year. We expect the Combined Company to realize the full benefit of these cost savings during fiscal 2019. The Companies incur operating expenses that are fixed (e.g., board fees, printing fees, legal and auditing services) and operating expenses that are variable (e.g., administrative and custodial services that are based on assets under management). Many of these fixed expenses are duplicative between the companies and can be eliminated as a result of the Reorganization. There will also be an opportunity to reduce variable expenses by taking advantage of greater economies of scale. As a result of these cost savings, it is expected that KED will enjoy significantly lower operating costs as a percentage of total assets. The Reorganization should also result in modestly lower operating costs as a percentage of total assets for existing KYN stockholders.

 

    Potential cost savings as a result of reduced management fees.

KAFA has agreed to revise its management fee waiver agreement with KYN as part of the Reorganization. The revised fee waiver will lower the effective management fee that KYN pays as its assets appreciate. The table below outlines the current and proposed management fee waivers:

 

KYN Assets

  

Impact of

Proposed Waiver

   Management
Fee Waiver
     Incremental
Management

Fee
 

Current Fee Waiver

  

Proposed Fee Waiver

        
$0 to $4.5 billion    $0 to $4.0 billion         0.000%        1.375%  
$4.5 billion to $9.5 billion    $4.0 billion to $6.0 billion    $0.5 billion lower      0.125%        1.250%  
$9.5 billion to $14.5 billion    $6.0 billion to $8.0 billion    $3.5 billion lower      0.250%        1.125%  
Greater than $14.5 billion    Greater than $8.0 billion    $6.5 billion lower      0.375%        1.000%  

 

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KAFA has also agreed to waive an amount of management fees (based on assets under management at closing of the Reorganization) such that the pro forma fees payable to KAFA are not greater than the aggregate management fees payable if KYN and KED had remained stand-alone companies. The waiver will last for three years and was estimated to be approximately $0.3 million per year as of February 28, 2018. The new fee waivers would be effective at the time the Reorganization closes.

 

    Reorganization expected to be accretive to KYN’s net distributable income and KED’s distribution level.

The Reorganization is expected to be accretive to KYN’s net distributable income per share, in part due to the anticipated cost savings from the transaction. In connection with the Reorganization, KYN announced its intention to pay a distribution at its current annualized rate of $1.80 per share for the 12 months ending February 28, 2019. Based on this distribution level, the Reorganization is expected to be accretive to the distribution received by KED’s common stockholders by approximately 13 cents on an annualized basis (approximately 8% accretive). This estimate is based on the relative NAV per share of the companies as of February 28, 2018 (which would result in an exchange ratio of approximately 0.96). See “Risk Factors — Risks Related to Our Investments and Investment Techniques — Cash Flow Risk.”

 

    KED’s stockholders should benefit from the larger asset base of the Combined Company.

The larger asset base of the Combined Company relative to KED may provide greater financial flexibility. In particular, as a larger entity, KED’s stockholders should benefit from the Combined Company’s access to more attractive leverage terms (i.e., lower borrowing costs on debt and preferred stock) and a wider range of alternatives for raising capital to grow the Combined Company.

 

    KED’s stockholders should benefit from enhanced market liquidity and may benefit from improved trading relative to NAV per share.

The larger market capitalization of the Combined Company relative to KED should provide an opportunity for enhanced market liquidity over the long-term. Greater market liquidity may lead to a narrowing of bid-ask spreads and reduce price movements on a trade-to-trade basis. The table below illustrates the equity market capitalization and average daily trading volume for each Company on a standalone basis as well as for the Combined Company. KED stockholders will be part of a much larger company with significantly higher trading volume. KED’s Board of Directors also considered the fact that KYN has historically traded at a premium to NAV per share whereas KED has historically traded at a discount to NAV per share. For example, for the three years ended February 28, 2018, KYN has traded at an average premium to NAV of 2.4%, and KED has traded at an average discount to NAV of 2.8%.

 

     KYN      KED      Pro Forma
Combined Company
 

Equity capitalization ($ in millions)

   $ 2,004      $    180      $ 2,184  

Average daily trading volume(1)

     844        68        NA  

 

As of February 28, 2018.

  (1) 90-day average trading volume in thousands of shares.

 

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    No gain or loss is expected to be recognized by stockholders of either Company for U.S. federal income tax purposes as a result of the Reorganization.

The Reorganization is intended to qualify as tax-free for federal income tax purposes. Stockholders of KYN and KED are not expected to recognize any gain or loss for federal income tax purposes as a result of the Reorganization (except with respect to cash received in lieu of fractional KYN common shares). See “Material U.S. Federal Income Tax Consequences of the Reorganization.”

 

    The expectation that KED stockholders should carry over to KYN the same aggregate tax basis (reduced by any amount of tax basis allocable to a fractional share of common stock for which cash is received) if the Reorganization is treated as tax-free as intended.

Based on the intended tax treatment of the Reorganization, the aggregate tax basis of KYN common stock received by a stockholder of KED should be the same as the aggregate tax basis of the common shares of KED surrendered in exchange therefor (reduced by any amount of tax basis allocable to a fractional share of KYN common stock for which cash is received). See “Material U.S. Federal Income Tax Consequences of the Reorganization.”

 

    The exchange will take place at the Companies’ relative NAV per share.

The aggregate net asset value of the KYN shares that KED stockholders will receive in the Reorganization is expected to equal the aggregate net asset value that KED stockholders owned immediately prior to the Reorganization (adjusted for KED’s share of costs related to the Reorganization). No fractional common shares of KYN will be issued to stockholders in connection with the Reorganization, and KED stockholders will receive cash in lieu of such fractional shares.

 

    Stockholder rights are expected to be preserved.

Both of the Companies involved in the Reorganization are organized as Maryland corporations. Common stockholders of each of KYN and KED have substantially similar voting rights as well as rights with respect to the payment of dividends and distribution of assets upon liquidation of their respective Company and have no preemptive, conversion, or exchange rights.

 

    KAFA is expected to continue to manage the Combined Company.

The Companies will retain consistency of management. Stockholders of the Combined Company may benefit from the continuing experience and expertise of KAFA and its commitment to the very similar investment style and strategies to be used in managing the assets of the Combined Company.

Considering the reasons outlined above and other reasons, the Board of Directors of each Company unanimously concluded that consummation of the Reorganization is advisable and in the best interests of each Company and its stockholders. The approval determination was made on the basis of each director’s business judgment after consideration of all of the factors taken as a whole, though individual directors may have placed different weight on various factors and assigned different degrees of materiality to various factors.

 

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Investment Objectives and Policies of KYN

This section relates to KYN and its Investment Objective and Policies (other parts of this document relate to both KYN and KED). Accordingly, references to “we” “us,” “our” or “the Company” in this section are references to KYN.

Our investment objective is to obtain a high after-tax total return by investing at least 85% of our total assets in public and private investments in MLPs and other Midstream Energy Companies. Our investment objective is considered a fundamental policy and therefore may not be changed without the approval of the holders of a “majority of the outstanding” voting securities. When used with respect to our voting securities, a “majority of the outstanding” voting securities means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less. There can be no assurance that we will achieve our investment objective.

Our investment objective and investment policies are substantially similar, but not identical, to those of KED. For a comparison of the Companies, see “— Comparison of the Companies.”

Our non-fundamental investment policies may be changed by the Board of Directors without the approval of the holders of a “majority of the outstanding” voting securities, provided that the holders of such voting securities receive at least 60 days’ prior written notice of any change. On February 5, 2018, our Board of Directors approved a change in our name to Kayne Anderson MLP/Midstream Investment Company and the removal of our non-fundamental investment policy that required that we invest at least 80% of our total assets in MLPs for as long as the word “MLP” is in our name. The name change and the removal of the policy will be effective on or about a date that is 60 days after the date that this joint proxy statement/prospectus is mailed to stockholders. After these changes are effective, the following will be our non-fundamental investment policies:

 

    We intend to invest at least 50% of our total assets in publicly traded securities of MLPs and other Midstream Energy Companies.

 

    Under normal market conditions, we may invest up to 50% of our total assets in unregistered or otherwise restricted securities of MLPs and other Midstream Energy Companies. The types of unregistered or otherwise restricted securities that we may purchase include common units, subordinated units, preferred units, and convertible units of, and general partner interests in, MLPs, and securities of other public and private Midstream Energy Companies.

 

    We may invest up to 15% of our total assets in any single issuer.

 

    We may invest up to 20% of our total assets in debt securities of MLPs and other Midstream Energy Companies, including below investment grade debt securities rated, at the time of investment, at least B3 by Moody’s, B- by Standard & Poor’s or Fitch, comparably rated by another rating agency or, if unrated, determined by Kayne Anderson to be of comparable quality. In addition, up to one-quarter of our permitted investments in debt securities (or up to 5% of our total assets) may be invested in unrated debt securities or debt securities that are rated less than B3/B- of public or private companies.

 

    We may, but are not required to, use derivative investments and engage in short sales to hedge against interest rate and market risks.

 

    Under normal market conditions, our policy is to utilize our Leverage Instruments in an amount that represents approximately 25% - 30% of our total assets (our “target leverage levels”), including proceeds from such Leverage Instruments. However, we reserve the right at any time, based on market conditions, (i) to reduce our target leverage levels or (ii) to use Leverage Instruments to the extent permitted by the 1940 Act.

 

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Unless otherwise stated, all investment restrictions apply at the time of purchase and we will not be required to reduce a position due solely to market value fluctuations.

Our Portfolio

At any given time, we expect that our portfolio will have some or all of the types of the following types of investments: (i) equity securities of Midstream Energy Companies, including midstream MLPs, (ii) equity securities of other Energy Companies and (iii) debt securities of Energy Companies. A description of our investment policies and restrictions and more information about our portfolio investments are contained in this joint proxy statement/prospectus and the Statement of Additional Information.

Description of Midstream Energy Companies

Midstream Energy Companies (including midstream MLPs) are Energy Companies that primarily own and operate midstream assets, which are the assets used by Energy Companies in performing services related to energy logistics. These assets provide the link between the source point of energy products such as natural gas and natural gas liquids and oil (i.e., where it is produced) and the end users (i.e., where it is consumed). Midstream assets include those used in transporting, storing, gathering, treating, processing, fractionating, transloading, distributing or marketing of natural gas, natural gas liquids, oil or refined products. Midstream Energy Companies are often structured in partnership format (as Master Limited Partnership) but are increasingly structured as taxable corporations.

Natural gas related midstream assets serve to collect natural gas from the wellhead in small diameter pipelines, known as gathering systems. After natural gas is gathered, it can be either delivered directly into a natural gas pipeline system or to gas processing and treating plants for removal of natural gas liquids and impurities. After being processed, resulting “residue” natural gas is transported by large diameter intrastate and interstate pipelines across the country to end users. During the transportation process, natural gas may be placed in storage facilities, which consist of salt caverns, aquifers and depleted gas reservoirs, for withdrawal at a later date. Finally, after being transported by the intrastate and interstate pipelines, natural gas enters small diameter distribution lines pipelines, usually owned by local utilities, for delivery to consumers of such natural gas.

Midstream assets also process, store and transport natural gas liquids, or NGLs. Before natural gas can be transported through major transportation pipelines, it must be processed by removing the NGLs to meet pipeline specifications. NGLs are transported by pipelines, truck, rail and barges from natural gas processing plants to fractionators and storage facilities. At the fractionator, the NGLs are separated into component products such as ethane, propane, butane and natural gasoline. These products are then transported to storage facilities and end consumers, such as petrochemical facilities and other industrial users.

Similarly, midstream assets transport crude oil by pipeline, truck, rail and barge from the wellhead to the refinery. At the refinery, oil is refined into gasoline, distillates (such as diesel and heating oil) and other refined products. Refined products are then transported by pipeline, truck, rail and barges from the refinery to storage terminals and are ultimately transported to end users such as gas stations, airports and other industrial users.

Owners of midstream assets generally do not own the energy products flowing through their assets. Instead, midstream assets often charge a fee determined primarily by volume handled and service provided. Further, the fee charged for such service may be regulated by the Federal Energy Regulatory Commission or a similar state agency, may be based on the market price of the transported commodity or may be based on negotiated rates.

Description of How MLPs are Structured

Master limited partnerships are entities that are publicly traded and are treated as partnerships for federal income tax purposes. Master limited partnerships are typically structured as limited partnerships or as limited liability companies treated as partnerships. The units for these entities are listed and traded on a

 

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U.S. securities exchange. To qualify as a master limited partnership, the entity must receive at least 90% of its income from qualifying sources as set forth in Section 7704(d) of the Code. These qualifying sources include natural resource-based activities such as the exploration, development, mining, production, gathering, processing, refining, transportation, storage, distribution and marketing of mineral or natural resources. Limited partnerships have two classes of interests: general partner interests and limited partner interests. The general partner typically controls the operations and management of the partnership through an equity interest in the partnership (typically up to 2% of total equity). Limited partners own the remainder of the partnership and have a limited role in the partnership’s operations and management.

Master limited partnerships organized as limited partnerships typically have two classes of limited partner interests—common units and subordinated units.

MLPs that have two classes of limited partnership interests (common units and subordinated units) are structured such that common units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount (“minimum quarterly distributions” or “MQD”). Common units also accrue arrearages in distributions to the extent the MQD is not paid. Once common units have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and subordinated units is distributed to both common and subordinated units on a pro rata basis. Whenever a distribution is paid to either common unitholders or subordinated unitholders, the general partner is paid a proportional distribution. The holders of incentive distribution rights (“IDRs”), usually the general partner, are eligible to receive incentive distributions if the general partner operates the business in a manner which results in distributions paid per unit surpassing specified target levels. As cash distributions to the limited partners increase, the IDRs receive an increasingly higher percentage of the incremental cash distributions.

For purposes of our investment objective, the term “MLPs” includes affiliates of MLPs that own general partner interests or, in some cases, subordinated units, registered or unregistered common units, or other limited partner units in an MLP.

Investment Practices

Covered Calls

We may write call options with the purpose of generating cash from call premiums, generating realized gains or reducing our ownership of certain securities. We will only write call options on securities that we hold in our portfolio (i.e., covered calls). A call option on a security is a contract that gives the holder of such call option the right to buy the security underlying the call option from the writer of such call option at a specified price at any time during the term of the option. At the time the call option is sold, the writer of a call option receives a premium (or call premium) from the buyer of such call option. If we write a call option on a security, we have the obligation upon exercise of such call option to deliver the underlying security upon payment of the exercise price. When we write a call option, an amount equal to the premium received by us will be recorded as a liability and will be subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by us as realized gains from investments on the expiration date. If we repurchase a written call option prior to its exercise, the difference between the premium received and the amount paid to repurchase the option is treated as a realized gain or realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether we have realized a gain or loss. We, as the writer of the option, bear the market risk of an unfavorable change in the price of the security underlying the written option.

Interest Rate Swaps

We may utilize hedging techniques such as interest rate swaps to mitigate potential interest rate risk on a portion of our Leverage Instruments. Such interest rate swaps would principally be used to protect us against

 

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higher costs on our Leverage Instruments resulting from increases in short-term interest rates. We anticipate that the majority of our interest rate hedges will be interest rate swap contracts with financial institutions.

Use of Arbitrage and Other Derivative-Based Strategies

We may use short sales, arbitrage and other strategies to try to generate additional return. As part of such strategies, we may (i) engage in paired long-short trades to arbitrage pricing disparities in securities held in our portfolio; (ii) purchase call options or put options; (iii) enter into total return swap contracts; or (iv) sell securities short. Paired trading consists of taking a long position in one security and concurrently taking a short position in another security within the same or an affiliated issuer. With a long position, we purchase a stock outright; whereas with a short position, we would sell a security that we do not own and must borrow to meet our settlement obligations. We will realize a profit or incur a loss from a short position depending on whether the value of the underlying stock decreases or increases, respectively, between the time the stock is sold and when we replace the borrowed security. See “Risk Factors — Risks Related to Our Investments and Investment Techniques — Short Sales Risk.” A total return swap is a contract between two parties designed to replicate the economics of directly owning a security. We may enter into total return swaps with financial institutions related to equity investments in certain master limited partnerships.

Value of Derivative Instruments

For purposes of determining compliance with the requirement that we invest 85% of our total assets in MLPs and other Midstream Energy Companies, we value derivative instruments based on their respective current fair market values.

Other Risk Management Strategies

To a lesser extent, we may use various hedging and other risk management strategies to seek to manage market risks. Such hedging strategies would be utilized to seek to protect against possible adverse changes in the market value of securities held in our portfolio, or to otherwise protect the value of our portfolio. We may execute our hedging and risk management strategy by engaging in a variety of transactions, including buying or selling options or futures contracts on indexes. See “Risk Factors — Risks Related to Our Investments and Investment Techniques — Derivatives Risk.”

Portfolio Turnover

We anticipate that our annual portfolio turnover rate will range between 15% and 25%, but the rate may vary greatly from year to year. Portfolio turnover rate is not considered a limiting factor in KAFA’s execution of investment decisions. The types of MLPs in which we intend to invest historically have made cash distributions to limited partners, a substantial portion of which would be treated as a non-taxable return of capital to the extent of our basis. As a result, the tax related to the portion of such distributions treated as return of capital would be deferred until subsequent sale of our MLP units, at which time we would pay any required tax on capital gain. Therefore, the sooner we sell such MLP units, the sooner we would be required to pay tax on resulting capital gains, and the cash available to us to pay distributions to our common stockholders in the year of such tax payment would be less than if such taxes were deferred until a later year. In addition, the greater the number of such MLP units that we sell in any year, i.e., the higher our turnover rate, the greater our potential tax liability for that year. These taxable gains may increase our current and accumulated earnings and profits, resulting in a greater portion of our common stock distributions being treated as dividend income to our common stockholders. In addition, a higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by us. See “— Certain Federal Income Tax Matters.”

Use of Leverage

We generally will seek to enhance our total returns through the use of financial leverage, which may include the issuance of Leverage Instruments. Under normal market conditions, our policy is to utilize Leverage

 

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Instruments in an amount that represents approximately 25% - 30% of our total assets, including proceeds from such Leverage Instruments (which equates to 39% - 50% of our net asset value as of February 28, 2018). Notwithstanding this policy, based on market conditions at such time, we may use Leverage Instruments in amounts greater than our policy (to the extent permitted by the 1940 Act) or less than our policy. As of February 28, 2018, our Leverage Instruments represented approximately 31% of our total assets. At February 28, 2018, our asset coverage ratios under the 1940 Act were 410% and 295% for debt and total leverage (debt plus preferred stock), respectively. We target asset coverage ratios that give us ability to withstand declines in the market value of the securities we hold before breaching the financial covenants in our Leverage Instruments. These targets are dependent on market conditions and may vary from time to time. Currently, we are targeting asset coverage ratios that provide an approximate 30% cushion relative to our financial covenants (i.e., market values could decline by approximately 30% before our asset coverage ratios would be equal to our financial covenants). Depending on the type of Leverage Instruments involved, our use of financial leverage may require the approval of our Board of Directors. Leverage creates a greater risk of loss, as well as potential for more gain, for our common stock than if leverage is not used. Our common stock is junior in liquidation and distribution rights to our Leverage Instruments. We expect to invest the net proceeds derived from any use of Leverage Instruments according to the investment objective and policies described in this joint proxy statement/prospectus.

Leverage creates risk for our common stockholders, including the likelihood of greater volatility of net asset value and market price of our common stock, and the risk of fluctuations in dividend rates or interest rates on Leverage Instruments which may affect the return to the holders of our common stock or will result in fluctuations in the distributions paid by us on our common stock. To the extent the return on securities purchased with funds received from Leverage Instruments exceeds their cost (including increased expenses to us), our total return will be greater than if Leverage Instruments had not been used. Conversely, if the return derived from such securities is less than the cost of Leverage Instruments (including increased expenses to us), our total return will be less than if Leverage Instruments had not been used, and therefore, the amount available for distribution to our common stockholders will be reduced. In the latter case, KAFA in its best judgment nevertheless may determine to maintain our leveraged position if it expects that the long-term benefits of so doing will outweigh the near-term impact of the reduced return to our common stockholders.

The management fees paid to KAFA will be calculated on the basis of our total assets including proceeds from Leverage Instruments. During periods in which we use financial leverage, the management fee payable to KAFA may be higher than if we did not use a leveraged capital structure. Consequently, we and KAFA may have differing interests in determining whether to leverage our assets. Our Board of Directors monitors our use of Leverage Instruments and this potential conflict. The use of leverage creates risks and involves special considerations. See “Risk Factors — Additional Risks Related to Our Common Stock — Leverage Risk to Common Stockholders.”

The Maryland General Corporation Law authorizes us, without prior approval of our common stockholders, to borrow money. In this regard, we may obtain proceeds through Borrowings and may secure any such Borrowings by mortgaging, pledging or otherwise subjecting as security our assets. In connection with such Borrowings, we may be required to maintain minimum average balances with the lender or to pay a commitment or other fee to maintain a line of credit. Any such requirements will increase the cost of such Borrowing over its stated interest rate.

Under the requirements of the 1940 Act, we, immediately after issuing any senior securities representing indebtedness, must have an asset coverage of at least 300% after such issuance. With respect to such issuance, asset coverage means the ratio which the value of our total assets, less all liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of senior securities representing indebtedness issued by us.

The rights of our lenders to receive interest on and repayment of principal of any Borrowings will be senior to those of our common stockholders, and the terms of any such Borrowings may contain provisions

 

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which limit certain of our activities, including the payment of distributions to our common stockholders in certain circumstances. Under the 1940 Act, we may not declare any dividend or other distribution on any class of our capital stock, or purchase any such capital stock, unless our aggregate indebtedness has, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, an asset coverage of at least 300% after declaring the amount of such dividend, distribution or purchase price, as the case may be. Further, the 1940 Act does (in certain circumstances) grant our lenders certain voting rights in the event of default in the payment of interest on or repayment of principal.

Certain types of Leverage Instruments subject us to certain affirmative covenants relating to asset coverage and portfolio composition and may impose special restrictions on our use of various investment techniques or strategies or on our ability to pay distributions on common stock in certain circumstances. In addition, we are subject to certain negative covenants relating to transactions with affiliates, mergers and consolidations among others. We are also subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which issue ratings for the Leverage Instruments issued by us. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. It is not anticipated that these covenants or guidelines will impede KAFA from managing our portfolio in accordance with our investment objective and policies.

If an event of default is not cured, under any Borrowing, the lenders have the right to cause our outstanding Borrowings to be immediately due and payable and proceed to protect and enforce their rights by an action at law, suit in equity or other appropriate proceeding. If an event of default occurs or in an effort to avoid an event of default, we may be forced to sell securities at inopportune times and, as a result, receive lower prices for such security sales. We may also incur prepayment penalties on unsecured notes (“Notes”) and MRP Shares that are redeemed prior to their stated maturity dates or mandatory redemption dates.

Under the 1940 Act, we are not permitted to issue preferred stock unless immediately after such issuance the value of our total assets less all liabilities and indebtedness not represented by senior securities is at least 200% of the sum of the liquidation value of the outstanding preferred stock plus the aggregate amount of senior securities representing indebtedness. In addition, we are not permitted to declare any cash dividend or other distribution on our common or preferred stock unless, at the time of such declaration, our preferred stock has an asset coverage of at least 200%. Further, while the MRP Shares are outstanding, we are not permitted to issue preferred stock unless immediately after such issuance the value of our total assets less all liabilities and indebtedness not represented by senior securities is at least 225% of the sum of the liquidation value of the outstanding preferred stock plus the aggregate amount of senior securities representing indebtedness. In addition, we are not permitted to declare any cash dividend or other distribution on our common or preferred stock unless, at the time of such declaration, our preferred stock has an asset coverage of at least 225%. If necessary, we will purchase or redeem our preferred stock to maintain the applicable asset coverage ratio. In addition, as a condition to obtaining ratings on the preferred stock, the terms of any preferred stock include asset coverage maintenance provisions which will require the redemption of the preferred stock in the event of non-compliance by us and may also prohibit distributions on our common stock in such circumstances. In order to meet redemption requirements, we may have to liquidate portfolio securities. Such liquidations and redemptions would cause us to incur related transaction costs and could result in capital losses to us. If we have preferred stock outstanding, two of our directors will be elected by the holders of our preferred stock (voting as a class). Our remaining directors will be elected by holders of our common stock and preferred stock voting together as a single class. In the event we fail to pay dividends on our preferred stock for two years, holders of preferred stock would be entitled to elect a majority of our directors.

To the extent that we use additional Leverage Instruments, the Borrowings that we anticipate issuing will have maturity dates ranging from 1 to 12 years from the date of issuance. The preferred stock we anticipate issuing is a mandatory redeemable preferred that must be redeemed within 5 to 10 years from the date of issuance. If we are unable to refinance such Leverage Instruments when they mature, we may be forced to sell securities in our portfolio to repay such Leverage Instruments. Further, if we do not repay the Leverage

 

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Instruments when they mature, we will trigger an event of default on our Borrowings (which will increase the interest rate on such Borrowings and give the holders of such Borrowings certain rights) and will trigger a higher dividend rate on our preferred stock.

We may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of our common stock. See “— Investment Objective and Policies of KYN — Our Portfolio —Temporary Defensive Position.”

Effects of Leverage

As of February 28, 2018, we had $747 million, aggregate principal amount, of fixed rate Notes outstanding.

As of February 28, 2018, we did not have any outstanding borrowings under our revolving credit facility. The interest rate payable by us on borrowings under our revolving credit facility with JPMorgan Chase Bank, N.A., Bank of America, N.A., Citibank, N.A., Scotiabank, Morgan Stanley Bank, N.A., Wells Fargo Bank, N.A. and Royal Bank of Canada may vary between one-month LIBOR plus 1.30% and one-month LIBOR plus 1.95%, depending on asset coverage ratios. Outstanding loan balances accrue interest daily at a rate equal to one-month LIBOR plus 1.30% per annum based on asset coverage ratios as of February 28, 2018. We pay a commitment fee equal to a rate of 0.20% per annum on any unused amounts of the $150 million commitment for the revolving credit facility. Our revolving credit facility has a one-year term maturing on February 15, 2019.

As of February 28, 2018, we did not have any borrowings outstanding under our term loan. The interest rate payable by us on our borrowings under our term loan with Sumitomo Mitsui Banking Corporation is LIBOR plus 1.30% per annum. We pay a commitment fee equal to a rate of 0.25% per annum on any unused amounts of the $150 million commitment for the term loan. Amounts borrowed under our term loan can be repaid and subsequently reborrowed. Our term loan matures on February 18, 2019.

As of February 28, 2018, we had $292 million aggregate liquidation value of MRP Shares outstanding.

Assuming that our leverage costs remain as described above, our average annual cost of leverage would be 3.85%. Income generated by our portfolio as of February 28, 2018 must exceed 1.60% in order to cover such leverage costs. These numbers are merely estimates used for illustration; actual dividend or interest rates on the Leverage Instruments will vary frequently and may be significantly higher or lower than the rate estimated above.

The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on common stock total return, assuming investment portfolio total returns (comprised of income and changes in the value of securities held in our portfolio) of minus 10% to plus 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by us. See “Risk Factors.” Further, the assumed investment portfolio total returns are after all of our expenses other than expenses associated with leverage, but such leverage expenses are included when determining the common stock total return. The table further reflects the issuance of Leverage Instruments representing 31% of our total assets (actual leverage at February 28, 2018), and our estimated leverage costs of 3.85%. The cost of leverage is expressed as a blended interest/dividend rate and represents the weighted average cost on our Leverage Instruments.

 

Assumed Portfolio Total Return (Net of Expenses)

     (10 )%      (5 )%      0     5     10

Common Stock Total Return

     (19.5 )%      (11.1 )%      (2.7 )%      5.7     14.1

Common stock total return is composed of two elements: common stock distributions paid by us (the amount of which is largely determined by our net distributable income after paying dividends or interest on our

 

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Leverage Instruments) and gains or losses on the value of the securities we own. As required by SEC rules, the table above assumes that we are more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% we must assume that the distributions we receive on our investments is entirely offset by losses in the value of those securities.

Comparison of the Companies

Each Company (i) is managed by KAFA, (ii) seeks to achieve its investment objective by investing primarily in MLPs and other Midstream Energy Companies, and (iii) has similar fundamental investment policies and similar nonfundamental investment policies. Each Company is also taxed as a corporation. The table below provides a more detailed comparison of the Companies.

 

KYN

  

KED

Organization:
Maryland corporation registered as a non-diversified, closed-end management investment company under the 1940 Act
Fiscal Year End:
November 30
Investment Advisor:
KA Fund Advisors, LLC
Investment Advisory Fee Structure:
1.375% of average total assets(1)    1.75% of average total assets(2)
Net Assets as of February 28, 2018:
$2,022 million    $182 million
Listing of Common Shares:
NYSE: KYN    NYSE: KED
Investment Objective:
Obtain a high after-tax total return by investing at least 85% of total assets in MLPs and other Midstream Energy Companies    Generate both current income and capital appreciation primarily through equity and debt investments
Fundamental Investment Policies:
Without appropriate approval, KYN may not:    Without appropriate approval, KED may not:

•  Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments

  

•  Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments

•  Purchase or sell commodities

  

•  Purchase or sell commodities

•  Borrow money or issue senior securities, except to the extent permitted by the 1940 Act or the SEC

  

•  Borrow money or issue senior securities, except to the extent permitted by the 1940 Act or the SEC

 

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KYN

  

KED

•  Make loans to other persons except (a) through the lending of its portfolio securities, (b) through the purchase of debt obligations, loan participations and/or engaging in direct corporate loans in accordance with its investment objectives and policies, and (c) to the extent the entry into a repurchase agreement is deemed to be a loan (in each case subject to certain exceptions)

  

•  Make loans to other persons except (a) through the lending of its portfolio securities, (b) through the purchase of debt obligations and/or engaging in direct corporate loans in accordance with its investment objective and policies, and (c) to the extent the entry into a repurchase agreement is deemed to be a loan (in each case subject to certain exceptions)

•  Act as an underwriter except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under applicable securities laws

  

•  Act as an underwriter except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under applicable securities laws

•  Concentrate its investments in a particular “industry” (other than MLPs and other Midstream Energy Companies and investments in securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities)

  

•  Modify its intention to concentrate its investments in the energy industry.

Nonfundamental Investment Policies:

•  Invest at least 80% of total assets in MLPs under normal market conditions (for so long as long as the word “MLP” is in its name)(3)

  

•  Invest at least 80% of total assets in Energy Companies

•  Invest at least 50% of total assets in publicly traded securities of MLPs and other Midstream Energy Companies

  

•  Permitted use of derivative investments and engagement in short sales to hedge against interest rate, market and issuer risks

•  Under normal market conditions, invest up to 50% of total assets in unregistered or otherwise restricted securities of MLPs and other Midstream Energy Companies

  

•  Under normal market conditions, use Leverage Instruments in an amount that equals 20% to 30% of total assets

•  Up to 15% of total assets in any single issuer.

  

•  Up to 20% of total assets in debt securities of MLPs and other Midstream Energy Companies, including below investment grade debt securities (commonly referred to as “junk bonds” or “high yield bonds”) rated, at the time of investment, at least B3 by Moody’s Investors Service, Inc., B- by Standard & Poor’s or Fitch Ratings, comparably rated by another rating agency or, if unrated, determined by Kayne Anderson to be of comparable quality

  

•  Up to one-quarter of permitted investments in debt securities (or up to 5% of total assets) invested in unrated debt securities or debt securities that are rated less than B3/B- of public or private companies

  

 

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KYN

  

KED

•  Permitted use of derivative investments and engagement in short sales to hedge against interest rate, market and issuer risks

  

•  Under normal market conditions, use Leverage Instruments in an amount that represents approximately 30% of total assets, including proceeds from such Leverage Instruments

  
Tax Treatment:
Corporation for federal income tax purposes

 

(1) KAFA has agreed to revise its management fee waiver agreement with KYN as part of the Reorganization. The revised management fee waiver agreement provides for a management fee of 1.375% on average total assets up to $4.0 billion, a fee of 1.250% on average total assets between $4.0 billion and $6.0 billion, a fee of 1.125% on average total assets between $6.0 billion and $8.0 billion and a fee of 1.000% on average total assets in excess of $8.0 billion. Management fees for each Company reflect actual expenses for the fiscal year ended November 30, 2017. KAFA has also agreed to waive an amount of management fees (based on assets under management at closing of the Reorganization) such that the pro forma fees payable to KAFA are not greater than the aggregate management fees payable if KYN and KED had remained stand-alone companies. The waiver will last for three years and was estimated to be approximately $0.3 million per year as of February 28, 2018. For the fiscal year ended November 30, 2017, KYN paid management fees at an annual rate of 1.375% of quarterly average total assets. See “— Management — Investment Management Agreement — KYN.”

 

(2) KAFA has agreed, for a period of one year ending on March 30, 2018, to waive a portion of its management fee. The fee waiver agreement provides for a fee waiver that could reduce the management fee by up to 0.50% (resulting in an annual fee of 1.25%) based on the percentage of KED’s long-term investments that is not publicly traded (i.e., Level 3 investments). If KED’s public investments (i.e., Level 1 and Level 2 investments) exceed 25% of its total long-term investments, then for every 1% by which those public investments exceed 25% of KED’s total long-term investments, the management fee would be reduced by 0.0067%. The maximum waiver of 0.50% will apply if KED holds 100% public investments. For the fiscal year ended November 30, 2017, KED paid management fees at an annual rate of 1.27% of its quarterly average total assets. See “— Management — Investment Management Agreement — KED.”

 

(3) On February 5, 2018, KYN’s Board of Directors approved a change in KYN’s name to Kayne Anderson MLP/Midstream Investment Company and the removal of its non-fundamental investment policy related to the word “MLP” in its name. The name change and the removal of the policy will be effective on or about a date that is 60 days after the date that this joint proxy statement/prospectus is mailed to stockholders.

Management

Directors and Officers

Each Company’s business and affairs are managed under the direction of its Board of Directors, including supervision of the duties performed by KAFA. Following the Reorganization, it is expected that KYN’s Board of Directors will consist of eight directors (subject to the election of all nominated directors identified in “Proposal Two: Election of Directors”). KED’s Board of Directors currently consists of seven directors. Each Board of Directors includes a majority of Independent Directors. Each Board of Directors elects each Company’s officers, who serve at the Board’s discretion, and are responsible for day-to-day operations. Additional information regarding each Company’s Board of Directors and their committees is set forth in “Proposal Two: Election of Directors” and under “Management” in the Statement of Additional Information.

 

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Investment Adviser

KAFA is each Company’s investment adviser and is registered with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). KAFA also is responsible for managing each Company’s business affairs and providing certain clerical, bookkeeping and other administrative services. KAFA is a Delaware limited liability company. The managing member of KAFA is KACALP, an investment adviser registered with the SEC under the Advisers Act. Kayne Anderson has one general partner, Kayne Anderson Investment Management, Inc., and a number of individual limited partners. Kayne Anderson Investment Management, Inc. is a Nevada corporation controlled by Richard A. Kayne. Kayne Anderson’s predecessor was established as an independent investment advisory firm in 1984.

KAFA’s management of each Company’s portfolio is led by three of its Senior Managing Directors, Kevin S. McCarthy, J.C. Frey and James C. Baker. Messrs. McCarthy and Frey have each served as portfolio managers since KYN’s and KED’s inception in 2004 and 2006, respectively. Mr. Baker has served as portfolio manager since November 2017. Each portfolio manager is jointly and primarily responsible for the day-to-day management of each Company’s portfolio. The portfolio managers draw on the support of the research analyst team at Kayne Anderson, as well as the experience and expertise of other professionals at Kayne Anderson, including its Co-Chairmen, Richard Kayne, and Robert V. Sinnott.

Portfolio Management

Kevin S. McCarthy is each Company’s Chief Executive Officer, and he has served as the Chief Executive Officer and co-portfolio manager of KYN since September 2004, of Kayne Anderson Energy Total Return Fund, Inc. since March 2005, of KED since September 2006, and Kayne Anderson Midstream/Energy Fund, Inc. since November 2010. Mr. McCarthy has served as the Chairman of the Board of Directors of Kayne Anderson Acquisition Corp. since March 2017. Mr. McCarthy currently serves as a Managing Partner of KACALP and Co-Managing Partner of KAFA. Prior to joining Kayne Anderson, Mr. McCarthy was global head of energy at UBS Securities LLC. In that role, Mr. McCarthy had senior responsibility for all of UBS’ energy investment banking activities. Mr. McCarthy was with UBS from 2000 to 2004. From 1995 to 2000, Mr. McCarthy led the energy investment banking activities of Dean Witter Reynolds and then PaineWebber Incorporated. Mr. McCarthy began his investment banking career in 1984. Mr. McCarthy earned a BA degree in Economics and Geology from Amherst College in 1981, and an MBA degree in Finance from the University of Pennsylvania’s Wharton School in 1984.

J.C. Frey is a Managing Partner of KACALP and Co-Managing Partner of KAFA. Mr. Frey serves as portfolio manager of Kayne Anderson’s funds investing in MLP securities, including service as a co-portfolio manager, Executive Vice President, Assistant Secretary and Assistant Treasurer of each Company, Kayne Anderson Energy Total Return Fund, Inc. and Kayne Anderson Midstream/Energy Fund, Inc. Mr. Frey began investing in MLPs on behalf of Kayne Anderson in 1998 and has served as portfolio manager of Kayne Anderson’s MLP funds since their inception in 2000. Prior to joining Kayne Anderson in 1997, Mr. Frey was a CPA and audit manager in KPMG Peat Marwick’s financial services group, specializing in banking and finance clients, and loan securitizations. Mr. Frey graduated from Loyola Marymount University with a BS degree in Accounting in 1990. In 1991, he received a Master’s degree in Taxation from the University of Southern California.

James C. Baker is a Senior Managing Director of Kayne Anderson. He serves as each Company’s co-portfolio manager and President and as co-portfolio manager and President of Kayne Anderson Energy Total Return Fund, Inc. and Kayne Anderson Midstream/Energy Fund, Inc., and serves on the Board of Directors of KED. Prior to joining Kayne Anderson in 2004, Mr. Baker was a director in the energy investment banking group at UBS Securities LLC. At UBS, Mr. Baker focused on securities underwriting and mergers and acquisitions in the MLP industry. Mr. Baker received a BBA degree in Finance from the University of Texas at Austin in 1995 and an MBA degree in Finance from Southern Methodist University in 1997.

 

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Firm Management

Richard A. Kayne is Co-Chairman of Kayne Anderson. Mr. Kayne began his career in 1966 as an analyst with Loeb, Rhodes & Co. in New York. Prior to forming Kayne Anderson’s predecessor in 1984, Mr. Kayne was a principal of Cantor Fitzgerald & Co., Inc., where he managed private accounts, a hedge fund and a portion of the firm’s capital. Mr. Kayne is a trustee of and the former Chairman of the Investment Committee of the University of California at Los Angeles Foundation, and is a trustee and Co-Chairman of the Investment Committee of the Jewish Community Foundation of Los Angeles. Mr. Kayne earned a BS degree in Statistics from Stanford University in 1966 and an MBA degree from UCLA’s Anderson School of Management in 1968.

Robert V. Sinnott is Co-Chairman of Kayne Anderson. Mr. Sinnott has been member of the Board of Directors that oversees Plains All American Pipeline, LP and Plains GP Holdings, L.P. since 1998, has been a director of California Resources Corporation since 2014, and has served as the Vice-Chairman of the Board of Directors of Kayne Anderson Acquisition Corp. since March 2017. He joined Kayne Anderson in 1992. From 1986 to 1992, Mr. Sinnott was Vice President and senior securities officer of Citibank’s Investment Banking Division, concentrating in high-yield corporate buyouts and restructuring opportunities. From 1981 to 1986, Mr. Sinnott served as director of corporate finance for United Energy Resources, a pipeline company. Mr. Sinnott began his career in the financial industry in 1976 as a Vice President and debt analyst for Bank of America, N.A. in its oil and gas finance department. Mr. Sinnott graduated from the University of Virginia in 1971 with a BA degree in Economics. In 1976, Mr. Sinnott received an MBA degree in Finance from Harvard University.

Michael Levitt joined Kayne Anderson as its Chief Executive Officer in July 2016. Mr. Levitt was formerly Vice Chairman of Credit with Apollo Global Management, LLC. Prior to Apollo, Mr. Levitt founded and served as Chairman and CEO of Stone Tower Capital LLC, a credit-focused alternative investment management firm that was acquired by Apollo in 2012. Previously, Mr. Levitt worked as a partner with Hicks, Muse, Tate & Furst Incorporated, where he was involved in many of the firm’s media and consumer investments. Prior thereto, Mr. Levitt served as the Co-Head of the Investment Banking Division of Smith Barney Inc. Mr. Levitt began his investment banking career at, and ultimately served as a Managing Director of, Morgan Stanley & Co., Inc. Mr. Levitt oversaw the firm’s corporate finance and advisory businesses related to private equity firms and non-investment grade companies. Mr. Levitt has a BBA degree from the University of Michigan and a JD degree from the University of Michigan Law School. Mr. Levitt serves on the University of Michigan’s Investment Advisory Board.

Investment Professionals

Ron M. Logan, Jr. is a Senior Managing Director of Kayne Anderson. He serves as each Company’s Senior Vice President and as Senior Vice President and assistant portfolio manager of Kayne Anderson Energy Total Return Fund, Inc. and Kayne Anderson Midstream/Energy Fund, Inc. Prior to joining Kayne Anderson in 2006, Mr. Logan was an independent consultant to several leading energy firms. From 2003 to 2005, he served as Senior Vice President of Ferrellgas Inc. with responsibility for the firm’s supply, wholesale, transportation, storage, and risk management activities. Before joining Ferrellgas, Mr. Logan was employed for six years by Dynegy Midstream Services where he was Vice President of the Louisiana Gulf Coast Region and also headed the company’s business development activities. Mr. Logan began his career with Chevron Corporation in 1984, where he held positions of increasing responsibility in marketing, trading and commercial development through 1997. Mr. Logan earned a BS degree in Chemical Engineering from Texas A&M University in 1983 and an MBA degree from the University of Chicago in 1994.

Jody C. Meraz is a Managing Director for Kayne Anderson. He serves as each Company’s Vice President and as Vice President and assistant portfolio manager of Kayne Anderson Energy Total Return Fund, Inc. and Kayne Anderson Midstream/Energy Fund, Inc. He is responsible for providing analytical support for

 

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investments in master limited partnerships and other energy sub-sectors. Prior to joining Kayne Anderson in 2005, Mr. Meraz was a member of the energy investment banking group at Credit Suisse First Boston, where he focused on securities underwriting transactions and mergers and acquisitions. From 2001 to 2003, Mr. Meraz was in the Merchant Energy group at El Paso Corporation. Mr. Meraz earned a BA degree in Economics from The University of Texas at Austin in 2001 and an MBA degree in Finance and Economics from the University of Chicago in 2010.

Alan Boswell is a Managing Director for Kayne Anderson. He serves as each Company’s Vice President and as Vice President at Kayne Anderson Energy Total Return Fund, Inc. and Kayne Anderson Midstream/Energy Fund, Inc. He is responsible for providing analytical support for investments in master limited partnerships and other energy sub-sectors. Prior to joining Kayne Anderson in 2012, Mr. Boswell was a Vice President in the global energy group at Citigroup Global Markets Inc. where he focused on securities underwriting and mergers and acquisitions, primarily for midstream energy companies. Prior to joining Citigroup, Mr. Boswell practiced corporate securities law for Vinson & Elkins L.L.P. from 2005 to 2007. Mr. Boswell received an AB degree in Economics from Princeton University in 2001 and a JD degree from The University of Texas School of Law in 2005.

Eric Javidi is a Managing Director for Kayne Anderson. He is responsible for providing analytical support for investments in the area of master limited partnerships and other midstream companies. Prior to joining Kayne Anderson in 2015, Mr. Javidi was an executive director in the energy investment banking group at UBS Securities LLC. Before joining UBS in 2012, Mr. Javidi began his investment banking career in the natural resources group at Lehman Brothers Holdings, Inc. and Barclays Capital Inc. Mr. Javidi’s investment banking experience focused on securities underwriting and mergers and acquisitions in the MLP/midstream sector. Prior to pursuing his MBA degree in 2007, Mr. Javidi was a wealth management analyst at Morgan Stanley & Co. LLC. Mr. Javidi earned an AB degree with majors in Economics and Psychology from the University of California, Davis in 2003 and an MBA degree with emphases in Financial Analysis and Finance & Accounting from Duke University in 2009.

The principal office of KAFA is located at 811 Main Street, 14th Floor, Houston, Texas 77002. KACALP’s principal office is located at 1800 Avenue of the Stars, Third Floor, Los Angeles, California 90067. For additional information concerning KAFA, including a description of the services to be provided by KAFA, see “—Investment Management Agreement.”

Investment Management Agreement

KYN

Pursuant to an investment management agreement between KYN and KAFA, effective for periods commencing on or after December 12, 2006 (the “KYN Investment Management Agreement”), KYN pays a management fee, computed and paid quarterly at an annual rate of 1.375% of its average quarterly total assets less a fee waiver.

KAFA has agreed to revise its management fee waiver agreement with KYN as part of the Reorganization. The revised fee waiver will lower the effective management fee that KYN pays as its assets appreciate. The table below outlines the current and proposed management fee waivers:

 

KYN Assets

  

Impact of
Proposed Waiver

   Management
Fee Waiver
   Incremental
Management
Fee

Current Fee Waiver

  

Proposed Fee Waiver

        
$0 to $4.5 billion    $0 to $4.0 billion       0.000%    1.375%
$4.5 billion to $9.5 billion    $4.0 billion to $6.0 billion    $0.5 billion lower    0.125%    1.250%
$9.5 billion to $14.5 billion    $6.0 billion to $8.0 billion    $3.5 billion lower    0.250%    1.125%
Greater than $14.5 billion    Greater than $8.0 billion    $6.5 billion lower    0.375%    1.000%

 

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KAFA has also agreed to waive an amount of management fees (based on assets under management at closing of the Reorganization) such that the pro forma fees payable to KAFA are not greater than the aggregate management fees payable if KYN and KED had remained stand-alone companies. The waiver will last for three years and was estimated to be approximately $0.3 million per year as of February 28, 2018. The new fee waivers would be effective at the time the Reorganization closes.

For the fiscal year ended November 30, 2017, KYN paid management fees at an annual rate of 1.375% of quarterly average total assets.

For purposes of calculating the management fee, the “average total assets” for each quarterly period are determined by averaging the total assets at the last day of that quarter with the total assets at the last day of the prior quarter. KYN’s total assets shall be equal to its average quarterly gross asset value (which includes assets attributable to or proceeds from its use of Leverage Instruments and excludes any deferred tax assets), minus the sum of its accrued and unpaid distribution on any outstanding common stock and accrued and unpaid dividends on any outstanding preferred stock and accrued liabilities (other than liabilities associated with Leverage Instruments issued by us and any accrued taxes). For purposes of determining KYN’s total assets, KYN values derivative instruments based on their current fair market values. Liabilities associated with Leverage Instruments include the principal amount of any Borrowings that KYN issues, the liquidation preference of any outstanding preferred stock, and other liabilities from other forms of borrowing or leverage such as short positions and put or call options held or written by KYN.

In addition to KAFA’s management fee, KYN pays all other costs and expenses of our operations, such as compensation of its directors (other than those employed by Kayne Anderson), custodian, transfer agency, administrative, accounting and distribution disbursing expenses, legal fees, borrowing or leverage expenses, marketing, advertising and public/investor relations expenses, expenses of independent auditors, expenses of personnel including those who are affiliates of Kayne Anderson reasonably incurred in connection with arranging or structuring portfolio transactions for KYN, expenses of repurchasing KYN’s securities, expenses of preparing, printing and distributing stockholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any.

The KYN Investment Management Agreement and related fee waiver agreement will continue in effect from year to year after its current one-year term commencing on March 31, 2017, so long as its continuation is approved at least annually by KYN’s Board of Directors including a majority of Independent Directors or by the vote of a majority of our outstanding voting securities. The Investment Management Agreement may be terminated at any time without the payment of any penalty upon 60 days’ written notice by either party, or by action of the Board of Directors or by a vote of a majority of KYN’s outstanding voting securities, accompanied by appropriate notice. It also provides that it will automatically terminate in the event of its assignment, within the meaning of the 1940 Act. This means that an assignment of the KYN Investment Management Agreement to an affiliate of Kayne Anderson would normally not cause a termination of the KYN Investment Management Agreement.

Because KAFA’s fee is based upon a percentage of KYN’s total assets, KAFA’s fee will be higher to the extent KYN employs financial leverage. As noted, KYN has issued Leverage Instruments in a combined amount equal to approximately 31% of its total assets as of February 28, 2018. A discussion regarding the basis of the KYN Board of Directors’ decision to approve the continuation of the KYN Investment Management Agreement will be available in KYN’s May 31, 2018 Semi-Annual Report to Stockholders.

KED

Pursuant to an investment management agreement (the “KED Investment Management Agreement”) between KED and KAFA, KED pays a management fee, computed and paid quarterly at an annual rate of 1.75% of its average total assets. KAFA has agreed, for a period of one year ending on March 31, 2018, to waive a

 

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portion of its management fee. The fee waiver agreement provides for a fee waiver that could reduce the management fee by up to 0.50% (resulting in an annual fee of 1.25%) based on the percentage of KED’s long-term investments that is not publicly traded (i.e., Level 3 investments). If KED’s public investments (i.e., Level 1 and Level 2 investments) exceed 25% of its total long-term investments, then for every 1% by which those public investments exceed 25% of KED’s total long-term investments, the management fee would be reduced by 0.0067%. The maximum waiver of 0.50% will apply if KED holds 100% public investments.

For the fiscal year ended November 30, 2017, KED paid management fees at an annual rate of 1.27% of its quarterly average total assets.

For purposes of calculating the management fee, the “average total assets” for each quarterly period are determined by averaging the total assets at the last day of that quarter with the total assets at the last day of the prior quarter. Total assets (excluding deferred taxes) shall equal gross asset value (which includes assets attributable to or proceeds from the use of leverage instruments), minus the sum of accrued and unpaid distributions on common and preferred stock and accrued liabilities (other than liabilities associated with leverage and deferred taxes). Liabilities associated with leverage include the principal amount of any borrowings, commercial paper or notes that KED may issue, the liquidation preference of outstanding preferred stock, and other liabilities from other forms of leverage such as short positions and put or call options held or written by KED.

In addition to KAFA’s management fee, KED pays all other costs and expenses of its operations, such as compensation of our directors (other than those affiliated with Kayne Anderson), custodian, transfer agency, administrative, accounting and dividend disbursing expenses, legal fees, leverage expenses, expenses of independent auditors, expenses of personnel including those who are affiliates of KAFA reasonably incurred in connection with arranging or structuring portfolio transactions for KED, expenses of repurchasing our securities, expenses of preparing, printing and distributing stockholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any.

The KED Investment Management Agreement and related fee waiver agreement will continue in effect from year to year after its current one-year term commencing on March 31, 2017, so long as its continuation is approved at least annually by KED’s Board of Directors including a majority of Independent Directors or by the vote of a majority of our outstanding voting securities. The Investment Management Agreement may be terminated at any time without the payment of any penalty upon 60 days’ written notice by either party, or by action of the Board of Directors or by a vote of a majority of KED’s outstanding voting securities, accompanied by appropriate notice. It also provides that it will automatically terminate in the event of its assignment, within the meaning of the 1940 Act. This means that an assignment of the KED Investment Management Agreement to an affiliate of Kayne Anderson would normally not cause a termination of the KED Investment Management Agreement.

Because KAFA’s fee is based upon a percentage of KED’s total assets, KAFA’s fee will be higher to the extent KED employs financial leverage. As noted, KED has issued Leverage Instruments in a combined amount equal to approximately 30% of its total assets as of February 28, 2018. If the Reorganization is not consummated and KED continues as a standalone Company, it is expected that KAFA would continue in its role. If applicable, a discussion regarding the basis of the KED Board of Directors’ decision to approve the continuation of the KED Investment Management Agreement will be available in KED’s May 31, 2018 Semi-Annual Report to Stockholders.

Capitalization

The table below sets forth the capitalization of KYN and KED as of November 30, 2017, and the pro forma capitalization of the Combined Company as if the Reorganization had occurred on that date.

 

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    As of November 30, 2017  
    KYN     KED     Pro Forma
Combined
Company
 
    ($ in thousands, except per share data)  

Cash and Cash Equivalents

  $ 77,305     $ 7,745     $ 85,050  

Term Loan(1)

          60,000       60,000  

Notes

    747,000             747,000  

Mandatory Redeemable Preferred Stock(2):

     

Series C MRP Shares, $0.001 par value per share, liquidation preference $25.00 per share (1,680,000 shares issued and outstanding, 1,680,000 shares authorized)

    42,000             42,000  

Series F MRP Shares, $0.001 par value per share, liquidation preference $25.00 per share (5,000,000 shares issued and outstanding, 5,000,000 authorized)

    125,000             125,000  

Series H MRP Shares, $0.001 par value per share, liquidation preference $25.00 per share (2,000,000 shares issued and outstanding, 2,000,000 authorized)

    50,000             50,000  

Series I MRP Shares, $0.001 par value per share, liquidation preference $25.00 per share (1,000,000 shares issued and outstanding, 1,000,000 authorized)

    25,000             25,000  

Series J MRP Shares, $0.001 par value per share, liquidation preference $25.00 per share (2,000,000 shares issued and outstanding, 2,000,000 authorized)

    50,000             50,000  

Series A MRP Shares, $0.001 par value per share, liquidation preference $25.00 per share (1,000,000 shares issued and outstanding, 1,000,000 shares authorized)

          25,000        

Series K MRP Shares, $0.001 par value per share, liquidation preference $25.00 per share (1,000,000 shares issued and outstanding, 1,000,000 authorized(3)

                25,000  

Common Stockholders’ Equity:

     

Common stock, $0.001 par value per share (188,320,000 KYN shares, 199,000,000 KED shares and 187,320,000 Combined Company shares authorized; 114,877,080 KYN shares, 10,777,174 KED shares and 125,832,711 Combined Company shares issued and outstanding)(2)(4)

  $ 115     $ 11     $ 126  

Paid-in capital(4)

    1,989,481       188,375       2,176,893  

Accumulated net investment loss, net of income taxes, less dividends

    (1,520,467     (129,881     (1,650,348

Accumulated realized gains on investments, options and interest rate swap contracts, net of income taxes

    1,005,086       117,861       1,122,947  

Net unrealized gains on investments and options, net of income taxes

    351,958       (2,207     349,751  
 

 

 

   

 

 

   

 

 

 

Net assets applicable to common stockholders

  $ 1,826,173     $ 174,159     $ 1,999,369  
 

 

 

   

 

 

   

 

 

 

 

(1) As of November 30, 2017, KYN and KED had unsecured revolving credit facilities and term loans. The Pro Forma Combined Company assumes the termination of KED’s credit facility and term loan and a subsequent increase in KYN’s term loan to absorb the amount of outstanding KED borrowings as of November 30, 2017.

 

(2) Neither KYN nor KED holds any of its common stock or preferred stock for its own account.

 

(3) Reflects the new KYN MRP Shares to be issued in the Reorganization to replace the currently outstanding KED Series A MRP Shares.

 

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(4) Reflects the capitalization adjustments giving the effect of the transfer of shares of KYN which KED stockholders will receive as if the Reorganization had taken place on November 30, 2017. Costs related to the Reorganization are currently estimated to be approximately $963 or 0.04% of pro forma Combined Company net assets, which equates to $886 or $0.008 per share for KYN and $77 or $0.007 per share for KED as of February 28, 2018. Of the total $963 of estimated Reorganization costs, $521 is related to out of pocket expenses, and $442 is a write-off of debt issuance cost, which is a non-cash expense.

 

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Automatic Dividend Reinvestment Plan

This section relates to KYN and its Automatic Dividend Reinvestment Plan (other parts of this document relate to both KYN and KED). Accordingly, references to “we” “us,” “our” or “the Company” in this section are references to KYN.

We have adopted a Dividend Reinvestment Plan (the “Plan”) that provides that, unless you elect to receive your dividends or distributions in cash, they will be automatically reinvested by the Plan Administrator, American Stock Transfer & Trust Company, in additional shares of our common stock. If you elect to receive your dividends or distributions in cash, you will receive them in cash paid by check mailed directly to you by the Plan Administrator.

No action is required on the part of a registered stockholder to have their cash distribution reinvested in shares of our common stock. Unless you or your brokerage firm decides to opt out of the Plan, the number of shares of common stock you will receive will be determined as follows:

 

  (1) The number of shares to be issued to a stockholder shall be based on share price equal to 95% of the closing price of our common stock one day prior to the dividend payment date.

 

  (2) Our Board of Directors may, in its sole discretion, instruct us to purchase shares of our common stock in the open market in connection with the implementation of the Plan as follows: if our common stock is trading below net asset value at the time of valuation, upon notice from us, the Plan Administrator will receive the dividend or distribution in cash and will purchase common stock in the open market, on the NYSE or elsewhere, for the participants’ accounts, except that the Plan Administrator will endeavor to terminate purchases in the open market and cause us to issue the remaining shares if, following the commencement of the purchases, the market value of the shares, including brokerage commissions, exceeds the net asset value at the time of valuation. Provided the Plan Administrator can terminate purchases on the open market, the remaining shares will be issued by us at a price equal to the greater of (i) the net asset value at the time of valuation or (ii) 95% of the then current market price. It is possible that the average purchase price per share paid by the Plan Administrator may exceed the market price at the time of valuation, resulting in the purchase of fewer shares than if the dividend or distribution had been paid entirely in common stock issued by us.

You may withdraw from the Plan at any time by giving written notice to the Plan Administrator, or by telephone in accordance with such reasonable requirements as we and the Plan Administrator may agree upon. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan and you will receive a cash payment for any fractional shares in your account. If you wish, the Plan Administrator will sell your shares and send the proceeds to you, less brokerage commissions. The Plan Administrator is authorized to deduct a $15 transaction fee plus a $0.10 per share brokerage commission from the proceeds.

The Plan Administrator maintains all common stockholders’ accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. Common stock in your account will be held by the Plan Administrator in non-certificated form. The Plan Administrator will forward to each participant any proxy solicitation material and will vote any shares so held only in accordance with proxies returned to us. Any proxy you receive will include all common stock you have received under the Plan.

There is no brokerage charge for reinvestment of your dividends or distributions in common stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Administrator when it makes open market purchases.

 

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Automatically reinvesting dividends and distributions does not avoid a taxable event or the requirement to pay income taxes due upon the receipt of dividends and distributions, even though you have not received any cash with which to pay the resulting tax.

If you hold your common stock with a brokerage firm that does not participate in the Plan, you will not be able to participate in the Plan and any distribution reinvestment may be effected on different terms than those described above. Consult your financial advisor for more information.

The Plan Administrator’s fees under the Plan will be borne by us. There is no direct service charge to participants in the Plan; however, we reserve the right to amend or terminate the Plan, including amending the Plan to include a service charge payable by the participants, if in the judgment of the Board of Directors the change is warranted. Any amendment to the Plan, except amendments necessary or appropriate to comply with applicable law or the rules and policies of the SEC or any other regulatory authority, require us to provide at least 30 days written notice to each participant. Additional information about the Plan may be obtained from American Stock Transfer & Trust Company at 6201 15th Avenue, Brooklyn, New York  11219.

Governing Law

Each Company is organized as a corporation under the laws of the State of Maryland. KYN was formed in June 2004 and began investment activities in September 2004 after its initial public offering. KED was formed in May 2006 and began investment activities in September 2006 after its initial public offering.

Each Company is also subject to federal securities laws, including the 1940 Act and the rules and regulations promulgated by the SEC thereunder, and applicable state securities laws. Each Company is registered as a non-diversified, closed-end management investment company under the 1940 Act.

 

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Description of Securities

This section contains a Description of Securities issued (or to be issued) by KYN (other parts of this document relate to both KYN and KED). Accordingly, references to “we” “us,” “our” or “the Company” in this section are references to KYN.

The following description is based on relevant portions of the Maryland General Corporation Law and on our Charter and Bylaws. This summary is not necessarily complete, and we refer you to the Maryland General Corporation Law and our Charter and Bylaws for a more detailed description of the provisions summarized below. In addition, the description of our common stock and preferred stock also generally describe the outstanding common stock and preferred stock of KED (including the KED Series A MRP Shares that will be replaced with new Series K MRP Shares of KYN in the Reorganization).

Common Stock

General

As of February 28, 2018, KYN had 115,133,064 shares of common stock issued and outstanding (out of an authorized total of 188,320,000). Shares of KYN’s common stock are listed on the New York Stock Exchange under the symbol “KYN.”

As of February 28, 2018, KED had 10,777,174 shares of common stock issued and outstanding (out of an authorized total of 199,000,000). Shares of KED’s common stock are listed on the New York Stock Exchange under the symbol “KED.”

As of February 28, 2018, neither KYN nor KED held any of its common stock or preferred stock for its own account.

All common stock offered pursuant to this joint proxy statement/prospectus will be, upon issuance, duly authorized, fully paid and nonassessable. All common stock offered pursuant to this joint proxy statement/prospectus will be of the same class and will have identical rights, as described below. Holders of shares of common stock are entitled to receive distributions when, as and if authorized by the Board of Directors and declared by us out of assets legally available for the payment of distributions. Holders of common stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any of our securities. Shares of common stock are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. All shares of common stock have equal earnings, assets, distribution, liquidation and other rights.

Distributions

Distributions may be paid to the holders of our common stock if, as and when authorized by our Board of Directors and declared by us out of funds legally available therefor.

The yield on our common stock will likely vary from period to period depending on factors including the following:

 

    market conditions;

 

    the timing of our investments in portfolio securities;

 

    the securities comprising our portfolio;

 

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    changes in interest rates (including changes in the relationship between short-term rates and long-term rates);

 

    the amount and timing of the use of borrowings and other leverage by us;

 

    the effects of leverage on our common stock (discussed under “— Effects of Leverage”);

 

    the timing of the investment of offering proceeds and leverage proceeds in portfolio securities; and

 

    our net assets and operating expenses.

Consequently, we cannot guarantee any particular yield on our common stock, and the yield for any given period is not an indication or representation of future yield on the common stock.

Limitations on Distributions

So long as our MRP Shares are outstanding, holders of common stock or other shares of stock, if any, ranking junior to our MRP Shares as to dividends or upon liquidation will not be entitled to receive any distributions from us unless (1) we have declared and paid all accumulated dividends due on the MRP Shares on or prior to the date of such distribution; (2) we have redeemed the full number of MRP Shares required to be redeemed by any provision for mandatory redemption contained in the articles supplementary of such MRP Shares; (3) our asset coverage (as defined in the 1940 Act) with respect to outstanding debt securities and preferred stock would be at least 225%; and (4) the assets in our portfolio have a value, discounted in accordance with guidelines set forth by each applicable rating agency, at least equal to the basic maintenance amount required by such rating agency under its specific rating agency guidelines, in each case, after giving effect to distributions.

So long as senior securities representing indebtedness, including the Notes, are outstanding, holders of shares of common stock will not be entitled to receive any distributions from us unless (1) there is no event of default existing under the terms of our Borrowings, including the Notes, (2) our asset coverage (as defined in the 1940 Act) with respect to any outstanding senior securities representing indebtedness would be at least 300% and (3) the assets in our portfolio have a value, discounted in accordance with guidelines set forth by each applicable rating agency, at least equal to the basic maintenance amount required by such rating agency under its specific rating agency guidelines, in each case, after giving effect to such distribution.

Liquidation Rights

Common stockholders are entitled to share ratably in our assets legally available for distribution to stockholders in the event of liquidation, dissolution or winding up, after payment of or adequate provision for all known debts and liabilities, including any outstanding debt securities or other borrowings and any interest thereon. These rights are subject to the preferential rights of any other class or series of our stock, including the MRP Shares. The rights of common stockholders upon liquidation, dissolution or winding up are subordinated to the rights of holders of outstanding Notes and the MRP Shares.

Voting Rights

Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of the common stockholders, including the election of directors. The presence of the holders of shares of stock entitled to cast a majority of all the votes entitled to be cast shall constitute a quorum at a meeting of stockholders. Our Charter provides that, except as otherwise provided in the Bylaws, directors shall be elected by the affirmative vote of the holders of a majority of the shares of stock outstanding and entitled to vote thereon. There is no cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders,

 

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the holders of a majority of the outstanding shares of stock entitled to vote will be able to elect all of the successors of the class of directors whose terms expire at that meeting, except that holders of preferred stock, as a class, have the right to elect two directors at all times. Pursuant to our Charter and Bylaws, the Board of Directors may amend the Bylaws to alter the vote required to elect directors.

Under the rules of the NYSE applicable to listed companies, we normally will be required to hold an annual meeting of stockholders in each fiscal year. If we are converted into an open-end company or if for any reason the shares are no longer listed on the NYSE (or any other national securities exchange the rules of which require annual meetings of stockholders), we may amend our Bylaws so that we are not otherwise required to hold annual meetings of stockholders.

Issuance of Additional Shares

The provisions of the 1940 Act generally require that the public offering price of common stock of a closed-end investment company (less underwriting commissions and discounts) must equal or exceed the NAV of such company’s common stock (calculated within 48 hours of pricing), unless such sale is made with the consent of a majority of the company’s outstanding common stockholders. Any sale of common stock by us will be subject to the requirement of the 1940 Act.

Preferred Stock

In addition to our currently outstanding preferred stock, this section includes a brief description of the terms of the KYN Series K MRP Shares to be issued in the Reorganization, as if such shares had been outstanding as of the relevant dates. The terms of the KYN Series K MRP Shares will be substantially identical, as of the time of the exchange, to the outstanding KED MRP Shares for which they are exchanged.

General

The table below sets forth the key terms of each series of KYN’s outstanding MRP Shares as of February 28, 2018:

 

Series

   Shares
Outstanding(1)
     Liquidation Value
($ in millions)
     Dividend Rate     Mandatory
Redemption
Date
 

C

     1,680,000        42        5.20     November 2020  

F

     5,000,000        125        3.50     April 2020  

H

     2,000,000        50        4.06     July 2021  

I

     1,000,000        25        3.86     October 2022  

J

     2,000,000        50        3.36     November 2021  
  

 

 

    

 

 

      
     11,680,000      $ 292       
  

 

 

    

 

 

      

 

(1) Each share has a liquidation preference of $25.00.

As of February 28, 2018, KED had 1,000,000 Series A MRP Shares (out of 1,000,000 shares authorized). The Series A MRP Shares have a liquidation preference of $25.00 per share, a dividend rate of 3.37% per annum, and a mandatory redemption date of April 10, 2020. In connection with the Reorganization, we will issue 1,000,000 KYN Series K MRP Shares to replace the KED Series A MRP Shares. In this section, we collectively refer to our outstanding preferred stock, together with the KYN Series K MRP Shares, as the “MRP Shares.”

Preference

Preferred stock (including the MRP Shares) ranks junior to our debt securities (including the Notes), and senior to all common stock. Under the 1940 Act, we may only issue one class of senior equity securities

 

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(preferred stock), and we are not permitted to issue preferred stock unless immediately after such issuance the value of our total assets less all liabilities and indebtedness not represented by senior securities is at least 200% of the sum of the liquidation value of the outstanding preferred stock plus the aggregate amount of senior securities representing indebtedness. So long as any MRP Shares are outstanding, additional issuances of preferred stock must be considered to be of the same class as any MRP Shares under the 1940 Act and interpretations thereunder and must rank on a parity with the MRP Shares with respect to the payment of dividends or the distribution of assets upon our liquidation or winding up (“Parity Shares”). Pursuant to the terms of our MRP Shares, we may issue Parity Shares if, upon issuance (1) we meet the asset coverage test of at least 225%, and (2) we maintain assets in our portfolio that have a value, discounted in accordance with current applicable rating agency guidelines, at least equal to the basic maintenance amount required under such rating agency guidelines. The Series C MRP Shares, the Series H MRP Shares, the Series I MRP Shares, the Series J MRP Shares and the KYN Series K MRP Shares (collectively, the “Private MRP Shares”) shall have the benefit of any rights substantially similar to certain mandatory redemption and voting provisions in the articles supplementary for the Parity Shares which are additional or more beneficial than the rights of the holders of the MRP Shares. Such rights incorporated by reference into the articles supplementary for each series of MRP Shares shall be terminated when and if terminated with respect to the other Parity Shares and shall be amended and modified concurrently with any amendment or modification of such other Parity Shares.

Dividends and Dividend Periods

General.    Holders of the MRP Shares will be entitled to receive cash dividends, when, as and if authorized by the Board of Directors and declared by us, out of funds legally available therefor, on the initial dividend payment date with respect to the initial dividend period and, thereafter, on each dividend payment date with respect to a subsequent dividend period at the rate per annum (the “Dividend Rate”) equal to the applicable rate (or the default rate) for each dividend period. The applicable rate is computed on the basis of a 360 day year. Dividends so declared and payable shall be paid to the extent permitted under Maryland law and to the extent available and in preference to and priority over any distributions declared and payable on our common stock.

Payment of Dividends, Dividend Periods and Fixed Dividend Rate.    Dividends on the Private MRP Shares will be payable quarterly and dividends on the Series F MRP Shares will be payable monthly. Dividend periods for each series of the Private MRP Shares will end on February 28, May 31, August 31 and November 30, and dividend periods for the Series F MRP Shares will end the last calendar day of each month. Dividends will be paid on the first business day following the last day of each dividend period and upon redemption of such series of the MRP Shares. The table below sets forth applicable rate (per annum) for each series of MRP Shares, and may be adjusted upon a change in the credit rating of such series of MRP Shares.

 

Series

   Fixed Dividend Rate  

C

     5.20%  

F

     3.50%  

H

     4.06%  

I

     3.86%  

J

     3.36%  

K

     3.37%  

Adjustment to MRP Shares Fixed Dividend Rate—Ratings.    So long as each series of MRP Shares are rated on any date no less than “A” by Fitch (and no less than an equivalent of such ratings by some other rating agency), then the Dividend Rate will be equal to the applicable rate for such series of MRP Shares. As of February 28, 2018, Fitch and KBRA have assigned each of our outstanding series of MRP Shares a rating of “A” and “A+,” respectively. If the lowest credit rating assigned on any date to the then outstanding Private MRP Shares by Fitch (or any other rating agency) is equal to one of the ratings set forth in the table below (or its equivalent by some other rating agency), the Dividend Rate applicable to such outstanding MRP Shares for such

 

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date will be adjusted by adding the respective enhanced dividend amount (which shall not be cumulative) set opposite such rating to the applicable rate.

 

Fitch

  Enhanced Dividend Amount  

“A–”

    0.5%  

“BBB+” to “BBB–”

    2.0%  

“BB+” and lower

    4.0%  

If the highest credit rating assigned by Fitch (or any other rating agency) on any date to the then outstanding Series F MRP Shares is equal to one of the ratings set forth in the table below (or its equivalent by some other rating agency), the Dividend Rate applicable to the Series F MRP Shares for such date will be adjusted by adding the respective enhanced dividend amount (which shall not be cumulative) set forth opposite such rating to the applicable rate.

 

Fitch

  Enhanced Dividend Amount  

“A–”

    0.75%  

“BBB+”

    1.00%  

“BBB”

    1.25%  

“BBB–”

    1.50%  

“BB+” and lower

    4.00%  

If no rating agency is rating our MRP Shares, the Dividend Rate (so long as no rating exists) applicable to such series of MRP Shares for such date shall be the rate equal to the applicable rate plus 4.0%, unless the Dividend Rate is the default rate (namely, the applicable rate in effect on such calendar day, without adjustment for any credit rating change on such MRP Shares, plus 5% per annum), in which case the Dividend Rate shall remain the default rate.

Default RateDefault Period.    The Dividend Rate will be the default rate in the following circumstances. Subject to the cure provisions below, a “Default Period” with respect to MRP Shares will commence on a date we fail to (i) pay directly (or deposit irrevocably in trust in same-day funds with the paying agent by 3:00 p.m. New York City time for the Series F MRP Shares) the full amount of any dividends on the MRP Shares payable on the dividend payment date (a “Dividend Default”) or (ii) pay directly, or deposit irrevocably in trust in same-day funds with the paying agent by 1:00 p.m. (or 3:00 p.m. for the Series F MRP Shares), New York City time, the full amount of any redemption price payable on a mandatory redemption date (a “Redemption Default”).

In the case of a Dividend Default, the Dividend Rate for each day during the Default Period will be equal to the default rate. The “default rate” for any calendar day shall be equal to the applicable rate in effect on such day (without adjustment for any credit rating change on such series of MRP Shares) plus five percent (5%) per annum. Subject to the cure period discussed in the following paragraph, a default period with respect to a Dividend Default or a Redemption Default shall end on the business day on which by 12:00 noon, New York City time, all unpaid dividends and any unpaid redemption price shall have directly paid (or shall, in the case of Series F MRP Shares, have been deposited irrevocably in trust in same-day funds with the paying agent for the Series F MRP Shares).

No Default Period with respect to a Dividend Default or Redemption Default (if such default is not solely due to our willful failure) will be deemed to commence if the amount of any dividend or any redemption price due is paid (or shall, in the case of Series F MRP Shares, have been deposited irrevocably in trust in same-day funds with the paying agent for the Series F MRP Shares) within three business days (the “Default Rate Cure Period”) after the applicable dividend payment date or redemption date, together with an amount equal to the default rate applied to the amount of such non-payment based on the actual number of days within the Default Rate Cure Period divided by 360.

 

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Upon failure to pay dividends for two years or more, the holders of MRP Shares will acquire certain additional voting rights. See “— Voting Rights.” Such rights shall be the exclusive remedy of the holders of MRP Shares upon any failure to pay dividends on the MRP Shares.

Distributions.    Distributions declared and payable shall be paid to the extent permitted under Maryland law and to the extent available and in preference to and priority over any distribution declared and payable on the common stock or any other junior securities. Because the cash distributions received from the MLPs in our portfolio are expected to exceed the earnings and profits associated with owning such MLPs, it is possible that a portion of a distribution payable on our preferred stock will be paid from sources other than our current or accumulated earnings and profits. The portion of such distribution which exceeds our current or accumulated earnings and profits would be treated as a return of capital to the extent of the stockholder’s basis in our preferred stock, then as capital gain.

Redemption

Term Redemption.    We are required to redeem all of the Series C MRP Shares on November 9, 2020, all of the Series F MRP Shares on April 15, 2020, all of the Series H MRP Shares on July 30, 2021, all of the Series I MRP Shares on October 29, 2022, all of the Series J MRP Shares on November 9, 2021 and all of the KYN Series K MRP Shares on April 10, 2020 (each such date, a “Term Redemption Date”).

Private MRP SharesOptional Redemption.    To the extent permitted under the 1940 Act and Maryland law, we may, at our option, redeem the Private MRP Shares, in whole or in part (in the case of the KYN Series K MRP Shares, in an amount not less than 5% of the shares then outstanding in the case of a partial redemption), out of funds legally available therefor, at any time and from time to time, upon not less than 20 calendar days nor more than 40 calendar days prior notice. The optional redemption price per MRP Share shall be the $25.00 per share (the “Liquidation Preference Amount”) plus accumulated but unpaid dividends and distributions on such series of MRP Shares (whether or not earned or declared by us) to, but excluding, the date fixed for redemption, plus an amount determined in accordance with the applicable articles supplementary for each such series of MRP Shares which compensates the holders of such series of MRP Shares for certain losses resulting from the early redemption of such series of MRP Shares (the “Make-Whole Amount”). Notwithstanding the foregoing, we may, at our option, redeem the Private MRP Shares within 180 days (60 days in the case of the KYN Series K MRP Shares) prior to the applicable Term Redemption Date for such series of MRP Shares, at the Liquidation Preference Amount plus accumulated but unpaid dividends and distributions thereon (whether or not earned or declared by us but excluding interest thereon) to, but excluding, the date fixed for redemption.

In addition to the rights to optionally redeem the Private MRP Shares described above, if the asset coverage with respect to outstanding debt securities and preferred stock is greater than 225% (not required for the Series J MRP Shares), but less than or equal to 235%, for any five business days within a ten business day period determined in accordance with the terms of the articles supplementary for such series of MRP Shares, we, upon notice (as provided below) of not less than 12 days, nor more than 40 days’ notice in any case, may redeem such series of MRP Shares at the Liquidation Preference Amount plus accumulated but unpaid dividends and distributions thereon (whether or not earned or declared) to, but excluding, the date fixed for redemption, plus a redemption amount equal to 2% of the liquidation preference amount. The amount of the Private MRP Shares that may be so redeemed shall not exceed an amount of such series of MRP Shares which results in an asset coverage of more than 250% pro forma for such redemption.

We shall not give notice of or effect any optional redemption unless (in the case of any partial redemption of a series of MRP Shares) on the date of such notice and on the date fixed for the redemption, we would satisfy the basic maintenance amount set forth in current applicable rating agency guidelines and the asset coverage with respect to outstanding debt securities and preferred stock is greater than or equal to 225% immediately subsequent to such redemption, if such redemption were to occur on such date.

 

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Series F MRP SharesOptional Redemption.    To the extent permitted under the 1940 Act and Maryland law, we may, at our option, redeem the Series F MRP Shares, as the case may be, in whole or in part, out of funds legally available therefor, at any time and from time to time, upon not less than 30 calendar days nor more than 40 calendar days prior notice, at a price per share equal to the liquidation preference per share, plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared but excluding interest thereon) to (but excluding) the date fixed for redemption.

If fewer than all of the outstanding Series F MRP Shares, as the case may be, are to be redeemed in an optional redemption, we shall allocate the number of shares required to be redeemed pro rata among the holders of such series of MRP Shares in proportion to the number of shares they hold, by lot or by such other method as we shall deem fair and equitable.

We shall not effect any optional redemption unless (i) on the date of such notice and on the date fixed for redemption we have available either (A) cash or cash equivalents or (B) any other Deposit Securities (as defined in the articles supplementary for the Series F MRP Shares) with a maturity or tender date not later than one day preceding the applicable redemption date, or any combination thereof, having an aggregate value not less than the amount, including any applicable premium, due to holders of the Series F MRP Shares, as the case may be, by reason of the redemption of the applicable Series of MRP Shares on such date fixed for the redemption and (ii) we would satisfy the basic maintenance amount for such series of MRP Shares.

We also reserve the right, but have no obligation, to repurchase Series F MRP Shares, in market or other transactions from time to time in accordance with applicable law and our charter and at a price that may be more or less than the liquidation preference of the Series F MRP Shares, as the case may be.

Mandatory Redemption.    If, while any MRP Shares are outstanding, we fail to satisfy the asset coverage as of the last day of any month or the basic maintenance amount as of any valuation date, and such failure is not cured as of the close of business on the date that is 30 days from such business day (any such day, an “Asset Coverage Cure Date”), the MRP Shares will be subject to mandatory redemption out of funds legally available therefor at the Liquidation Preference Amount plus accumulated but unpaid dividends and distributions thereon (whether or not earned or declared by us, but excluding interest thereon) to, but excluding, the date fixed for redemption, plus, in the case of the Private MRP Shares, a redemption amount equal to 1% of the Liquidation Preference Amount.

The number of MRP Shares to be redeemed under these circumstances will be equal to the product of (1) the quotient of the number of outstanding MRP Shares of each series divided by the aggregate number of outstanding shares of preferred stock (including the MRP Shares) which have an asset coverage test greater than or equal to 225% times (2) the minimum number of outstanding shares of preferred stock (including the MRP Shares) the redemption of which, would result in us satisfying the asset coverage and basic maintenance amount as of the Asset Coverage Cure Date, as applicable (provided that, if there is no such number of MRP Shares of such series the redemption of which would have such result, we shall, subject to certain limitation set forth in the next paragraph, redeem all MRP Shares of such series then outstanding).

We are required to effect such mandatory redemptions not later than 40 days after the Asset Coverage Cure Date (and in the case of the Series F MRP Shares, not earlier than 30 days after such date) (each a “Mandatory Redemption Date”), except (1) if we do not have funds legally available for the redemption of, or (2) such redemption is not permitted under our credit facility, any agreement or instrument consented to or agreed to by the applicable preferred stock holders pursuant to the applicable articles supplementary or the note purchase agreements relating to the Notes to redeem or (3) if we are not otherwise legally permitted to redeem the number of MRP Shares which we would be required to redeem under the articles supplementary of such series of MRP Shares if sufficient funds were available, together with shares of other preferred stock which are subject to mandatory redemption under provisions similar to those contained in the articles supplementary for such series of MRP Shares, we shall redeem those MRP Shares, and any other preferred stock which we were

 

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unable to redeem, on the earliest practical date on which we will have such funds available, and we are otherwise not prohibited from redeeming pursuant to the credit facility or the note purchase agreements relating to the Notes or other applicable laws. In addition, our ability to make a mandatory redemption may be limited by the provisions of the 1940 Act or Maryland law.

If fewer than all of the outstanding shares of a series of Private MRP Shares are to be redeemed in an optional or mandatory redemption, we shall allocate the number of shares required to be redeemed pro rata among the holders of such series of MRP Shares in proportion to the number of shares they hold. If fewer than all of the outstanding Series F MRP Shares are to be redeemed in an optional or mandatory redemption, we shall allocate the number of shares required to be purchased pro rata among the holders of such series of MRP Shares in proportion to the number of shares they hold, by lot or by such other method as we shall deem fair and equitable.

Redemption Procedure.    In the event of a redemption, we will, if required, file a notice of our intention to redeem any MRP Shares with the SEC under Rule 23c-2 under the 1940 Act or any successor provision to the extent applicable. We also shall deliver a notice of redemption to the paying agent and the holders of MRP Shares to be redeemed as specified above for an optional or mandatory redemption (“Notice of Redemption”).

If Notice of Redemption has been given, then upon the deposit with the paying agent sufficient to effect such redemption, dividends on such shares will cease to accumulate and such shares will be no longer deemed to be outstanding for any purpose and all rights of the holders of the shares so called for redemption will cease and terminate, except the right of the holders of such shares to receive the redemption price, but without any interest or additional amount.

Notwithstanding the provisions for redemption described above, but subject to provisions on liquidation rights described below, no MRP Shares may be redeemed unless all dividends in arrears on the outstanding MRP Shares and any of our outstanding shares ranking on a parity with the MRP Shares with respect to the payment of dividends or upon liquidation have been or are being contemporaneously paid or set aside for payment. However, at any time, we may purchase or acquire all the outstanding MRP Shares pursuant to the successful completion of an otherwise lawful purchase or exchange offer made on the same terms to, and accepted by, holders of all outstanding MRP Shares.

Except for the provisions described above, nothing contained in the articles supplementary for each series of MRP Shares limits our legal right to purchase or otherwise acquire any MRP Shares at any price, whether higher or lower than the price that would be paid in connection with an optional or mandatory redemption, so long as, at the time of any such purchase (1) there is no arrearage in the payment of dividends on, or the mandatory or optional redemption price with respect to, any MRP Shares for which a Notice of Redemption has been given, (2) we are in compliance with the asset coverage with respect to our outstanding debt securities and preferred stock of 225% and the basic maintenance amount set forth in the current applicable rating agency guidelines after giving effect to such purchase or acquisition on the date thereof and (3) only with respect to a purchase of shares of a series of Private MRP Shares, we make an offer to purchase or otherwise acquire any shares of such series of Private MRP Shares pro rata to the holders of all such MRP Shares at the time outstanding upon the same terms and conditions.

Any shares purchased, redeemed or otherwise acquired by us shall be returned to the status of authorized but unissued shares of common stock.

Series F MRP SharesTerm Redemption Liquidity Account.    On or prior to December 15, 2019 for the Series F MRP Shares (a “Liquidity Account Initial Date”), we will cause our custodian to segregate, by means of appropriate identification on its books and records or otherwise in accordance with the custodian’s normal procedures, from our other assets (the “Term Redemption Liquidity Account”) Deposit Securities (each a “Liquidity Account Investment” and collectively, the “Liquidity Account Investments”) with an aggregate

 

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market value equal to at least 110% of the Term Redemption Amount (as defined below) with respect to Series F MRP Shares. The “Term Redemption Amount” for the Series F MRP Shares is equal to the Redemption Price to be paid on the Term Redemption Date, based on the number of Series F MRP Shares then outstanding, assuming for this purpose that the Dividend Rate in effect at the Liquidity Account Initial Date will be the Dividend Rate in effect until the Term Redemption Date. If, on any date after the Liquidity Account Initial Date, the aggregate market value of the Liquidity Account Investments included in the Term Redemption Liquidity Account for the Series F MRP Shares as of the close of business on any business day is less than 110% of the Term Redemption Amount, then we will cause the custodian to take all such necessary actions, including segregating our assets as Liquidity Account Investments, so that the aggregate market value of the Liquidity Account Investments included in the Term Redemption Liquidity Account is at least equal to 110% of the Term Redemption Amount not later than the close of business on the next succeeding business day.

We may instruct the custodian on any date to release any Liquidity Account Investments from segregation with respect to the Series F MRP Shares and to substitute therefor other Liquidity Account Investments not so segregated, so long as the assets segregated as Liquidity Account Investments at the close of business on such date have a market value equal to 110% of the Term Redemption Amount. We will cause the custodian not to permit any lien, security interest or encumbrance to be created or permitted to exist on or in respect of any Liquidity Account Investments included in the Term Redemption Liquidity Account, other than liens, security interests or encumbrances arising by operation of law and any lien of the custodian with respect to the payment of its fees or repayment for its advances.

The Liquidity Account Investments included in the Term Redemption Liquidity Account may be applied by us, in our sole discretion, towards payment of the redemption price for the Series F MRP Shares. The Series F MRP Shares shall not have any preference or priority claim with respect to the Term Redemption Liquidity Account or any Liquidity Account Investments deposited therein. Upon the deposit by us with the Series F MRP Shares paying agent of Liquidity Account Investments having an initial combined Market Value sufficient to effect the redemption of the Series F MRP Shares on the Term Redemption Date, the requirement to maintain the Term Redemption Liquidity Account as described above will lapse and be of no further force and effect.

Limitations on Distributions

So long as we have senior securities representing indebtedness and Notes outstanding, holders of preferred stock will not be entitled to receive any distributions from us unless (1) asset coverage (as defined in the 1940 Act) with respect to outstanding debt securities and preferred stock would be at least 225%, (2) the assets in our portfolio that have a value, discounted in accordance with guidelines set forth by each applicable rating agency, at least equal to the basic maintenance amount required by such rating agency under its specific rating agency guidelines, in each case, after giving effect to such distributions, (3) full cumulative dividends on the MRP Shares due on or prior to the date of such distribution have been declared and paid, and (4) we have redeemed the full number of MRP Shares required to be redeemed by any provision for mandatory redemption applicable to the MRP Shares, and (5) there is no event of default or default under the terms of our senior securities representing indebtedness or Notes.

Liquidation Rights

In the event of any liquidation, dissolution or winding up, the holders of MRP Shares then outstanding, together with the holders of any other shares of preferred stock ranking in parity with the MRP Shares would be entitled to receive a preferential liquidating distribution, which is expected to equal the liquidation preference per share plus accumulated and unpaid dividends, whether or not earned or declared, but without interest, before any distribution of assets is made to holders of common stock. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of preferred stock will not be entitled to any further participation in any distribution of our assets. If, upon any such liquidation, dissolution or winding up of our

 

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affairs, whether voluntary or involuntary, our assets available for distribution among the holders of all outstanding preferred stock shall be insufficient to permit the payment in full to such holders of the amounts to which they are entitled, then available assets shall be distributed among the holders of all outstanding preferred stock ratably in that distribution of assets according to the respective amounts which would be payable on all such shares if all amounts thereon were paid in full. Preferred stock ranks junior to our debt securities upon our liquidation, dissolution or winding up of our affairs.

Voting Rights

Except as otherwise indicated in our Charter or Bylaws, or as otherwise required by applicable law, holders of preferred stock have one vote per share and vote together with holders of common stock as a single class.

The 1940 Act requires that the holders of any preferred stock, voting separately as a single class, have the right to elect at least two directors at all times. The remaining directors will be elected by holders of common stock and preferred stock, voting together as a single class. In addition, the holders of any shares of preferred stock have the right to elect a majority of the directors at any time two years’ accumulated dividends on any preferred stock are unpaid. The 1940 Act also requires that, in addition to any approval by stockholders that might otherwise be required, the approval of the holders of a majority of shares of any outstanding preferred stock, voting separately as a class, would be required to (i) adopt any plan of reorganization that would adversely affect the preferred stock, and (ii) take any action requiring a vote of security holders under Section 13(a) of the 1940 Act, including, among other things, changes in our subclassification as a closed-end investment company or changes in our fundamental investment restrictions. See “Certain Provisions of the Maryland General Corporation Law and our Charter and Bylaws.” As a result of these voting rights, our ability to take any such actions may be impeded to the extent that any shares of our preferred stock are outstanding.

The affirmative vote of the holders of a majority of the outstanding preferred stock determined with reference to a 1940 Act Majority, voting as a separate class, will be required to approve any plan of reorganization (as such term is used in the 1940 Act) adversely affecting such shares or any action requiring a vote of our security holders under Section 13(a) of the 1940 Act. The affirmative vote of the holders of the 1940 Act Majority (as defined in our Charter) of the outstanding preferred stock, voting as a separate class will be required (1) to amend, alter or repeal any of the preferences, rights or powers of holders of our preferred stock so as to affect materially and adversely such preferences, rights or powers, and (2) to approve the creation, authorization or issuance of shares of any class of stock (or the issuance of a security convertible into, or a right to purchase, shares of a class or series) ranking senior to our preferred stock with respect to the payment of dividends or the distribution of assets. The class vote of holders of preferred stock described above will in each case be in addition to any other vote required to authorize the action in question.

Repurchase Rights

We will have the right (to the extent permitted by applicable law) to purchase or otherwise acquire any preferred stock, other than the MRP Shares, so long as (1) asset coverage (as defined in the 1940 Act) with respect to outstanding debt securities and preferred stock would be at least 225%, (2) the assets in our portfolio have a value, discounted in accordance with guidelines set forth by each applicable rating agency, at least equal to the basic maintenance amount required by such rating agency under its specific rating agency guidelines, in each case after giving effect to such transactions, (3) full cumulative dividends on the MRP Shares due on or prior to the date of such purchase or acquisition have been declared and paid and (4) we have redeemed the full number of MRP Shares required to be redeemed by any provision for mandatory redemption applicable to the MRP Shares.

 

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Market

Our Private MRP Shares are not listed (and the KYN Series K MRP Shares will not be listed) on an exchange or an automated quotation system. Our Series F MRP Shares are listed on the NYSE under the symbol “KYNPRF”.

Transfer Agent, Registrar, Dividend Paying Agent and Redemption Agent

The Bank of New York Mellon Trust Company, N.A., 601 Travis Street, 16th Floor, Houston, Texas 77002, serves as the transfer agent, registrar, dividend paying agent and redemption agent with respect to our Private MRP Shares. American Stock Transfer & Trust Company serves as the transfer agent, registrar, dividend paying agent and redemption agent with respect to our Series F MRP Shares.

Debt Securities

Under Maryland law and our Charter, we may borrow money, without prior approval of holders of common and preferred stock to the extent permitted by our investment restrictions and the 1940 Act. We may issue debt securities, including additional unsecured fixed and floating rate notes, or other evidence of indebtedness (including bank borrowings or commercial paper) and may secure any such notes or borrowings by mortgaging, pledging or otherwise subjecting as security our assets to the extent permitted by the 1940 Act or rating agency guidelines. Any borrowings will rank senior to the preferred stock and the common stock.

General

As of February 28, 2018, the Company had $747 million aggregate principal amount of Notes. The Notes are subordinated in right of payment to any of our secured indebtedness or other secured obligations to the extent of the value of the assets that secure the indebtedness or obligation. The Notes may be prepaid prior to their maturity at our option, in whole or in part, under certain circumstances and are subject to mandatory prepayment upon an event of default.

So long as Notes are outstanding, additional debt securities must rank on a parity with the Notes with respect to the payment of interest and upon the distribution of our assets. The table below sets forth the key terms of each series of the Notes.

 

Series

   Principal
Outstanding
($ in millions)
     Fixed Interest Rate   Maturity  

W

   $ 31      4.38%     May 2018  

Z

     15      3.39%     May 2019  

AA

     15      3.56%     May 2020  

BB

     35      3.77%     May 2021  

CC

     76      3.95%     May 2022  

DD

     75      2.74%     April 2019  

EE

     50      3.20%     April 2021  

FF

     65      3.57%     April 2023  

GG

     45      3.67%     April 2025  

II

     30      2.88%     July 2019  

JJ

     30      3.46%     July 2021  

KK

     80      3.93%     July 2024  

LL

     50      2.89%     October 2020  

MM

     40      3.26%     October 2022  

NN

     20      3.37%     October 2023  

OO

     90      3.46%     October 2024  
  

 

 

      
   $         747       
  

 

 

      

 

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Interest

The Notes will bear interest from the date of issuance at the fixed or floating rate shown above. Holders of our floating rate Notes are entitled to receive quarterly cash interest payments at an annual rate that may vary for each rate period. Holders of our fixed rate Notes are entitled to receive semi-annual cash interest payments at an annual rate per the terms of such notes. If we do not pay interest when due, it will trigger an event of default and we will be restricted from declaring dividends and making other distributions with respect to our common stock and preferred stock. As of February 28, 2018, each series of Notes were rated “AAA” by Fitch. As of February 28, 2018, each series of Notes were rated “AAA” by KBRA. In the event the credit rating on any series of Notes falls below “A-” (Fitch) or the equivalent rating from a nationally recognized statistical ratings organization, the interest rate (including any applicable default rate) on such series will increase by 1% during the period of time such series is rated below “A-” or the equivalent rating from a nationally recognized statistical ratings organization.

Limitations

Under the requirements of the 1940 Act, immediately after issuing any senior securities representing indebtedness, we must have an asset coverage of at least 300%. Asset coverage means the ratio which the value of our total assets, less all liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of senior securities representing indebtedness. Under the 1940 Act, we may only issue one class of senior securities representing indebtedness. So long as any Notes are outstanding, additional debt securities must rank on a parity with Notes with respect to the payment of interest and upon the distribution of our assets. We are subject to certain restrictions imposed by Fitch, including restrictions related to asset coverage and portfolio composition. Borrowings also may result in our being subject to covenants in credit agreements that may be more stringent than the restrictions imposed by the 1940 Act. For a description of limitations with respect to our preferred stock, see “— Preferred Stock — Limitations on Distributions.”

Prepayment

To the extent permitted under the 1940 Act and Maryland law, we may, at our option, prepay the Notes, in whole or in part in the amounts set forth in the purchase agreements relating to such Notes, at any time from time to time, upon advance prior notice. The amount payable in connection with prepayment of the fixed rate notes is equal to 100% of the amount being repurchased, together with interest accrued thereon to the date of such prepayment and the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The amount payable in connection with prepayment of the floating rate notes is equal to 100% of the amount being repurchased, together with interest accrued thereon to the date of such prepayment and a prepayment premium, if any, and any LIBOR breakage amount, in each case, determined for the prepayment date with respect to such principal amount. In the case of each partial prepayment, the principal amount of a series of Notes to be prepaid shall be allocated among all of such series of Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. If our asset coverage is greater than 300%, but less than 325%, for any five business days within a ten business day period, in certain circumstances, we may prepay all or any part of the Notes at par plus 2%, so long as the amount of Notes redeemed does not cause our asset coverage to exceed 340%.

Events of Default and Acceleration of Notes; Remedies

Any one of the following events will constitute an “event of default” under the terms of the Notes:

 

    default in the payment of any interest upon a series of debt securities when it becomes due and payable and the continuance of such default for 5 business days;

 

    default in the payment of the principal of, or premium on, a series of debt securities whether at its stated maturity or at a date fixed for prepayment or by declaration or otherwise;

 

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    default in the performance, or breach, of certain financial covenants, including financial tests incorporated from other agreements evidencing indebtedness pursuant to the terms of the Notes, and covenants concerning the rating of the Notes, timely notification of the holders of the Notes of events of default, the incurrence of secured debt and the payment of dividends and other distributions and the making of redemptions on our capital stock, and continuance of any such default or breach for a period of 30 days; provided, however, in the case of our failure to maintain asset coverage or satisfy the basic maintenance test, such 30-day period will be extended by 10 days if we give the holders of the Notes notice of a prepayment of Notes in an amount necessary to cure such failure;

 

    default in the performance, or breach, of any covenant (other than those covenants described above) of ours under the terms of the Notes, and continuance of such default or breach for a period of 30 days after the earlier of (1) a responsible officer obtaining actual knowledge of such default and (2) our receipt of written notice of such default from any holder of such Notes;

 

    certain voluntary or involuntary proceedings involving us and relating to bankruptcy, insolvency or other similar laws;

 

    KAFA or one of its affiliates is no longer our investment adviser;

 

    if, on the last business day of each of twenty-four consecutive calendar months, the debt securities have a 1940 Act asset coverage of less than 100%;

 

    other defaults with respect to Borrowings in an aggregate principal amount of at least $5 million, including payment defaults and any other default that would cause (or permit the holders of such Borrowings to declare) such Borrowings to be due prior to stated maturity;

 

    if our representations and warranties or any representations and warranties of our officers made in connection with transaction relating to the issuance of the Notes prove to have been materially false or incorrect when made; or

 

    other certain “events of default” provided with respect to the Notes that are typical for Borrowings of this type.

Upon the occurrence and continuance of an event of default, the holders of a majority in principal amount of a series of outstanding Notes may declare the principal amount of that series of Notes immediately due and payable upon written notice to us. Upon an event of default relating to bankruptcy, insolvency or other similar laws, acceleration of maturity occurs automatically with respect to all series of Notes. At any time after a declaration of acceleration with respect to a series of Notes has been made, and before a judgment or decree for payment of the money due has been obtained, the holders of a majority in principal amount of the outstanding Notes of that series, by written notice to us, may rescind and annul the declaration of acceleration and its consequences if all events of default with respect to that series of Notes, other than the non-payment of the principal of, and interest and certain other premiums relating to, that series of Notes which has become due solely by such declaration of acceleration, have been cured or waived and other conditions have been met.

Liquidation Rights

In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to us or to our creditors, as such, or to our assets, or (b) any liquidation, dissolution or other winding up of us, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of ours, then (after any payments with respect to any

 

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secured creditor of ours outstanding at such time) and in any such event the holders of our Notes shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all debt securities (including any interest accruing thereon after the commencement of any such case or proceeding), or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of our Notes, before the holders of any of our common or preferred stock are entitled to receive any payment on account of any redemption proceeds, liquidation preference or dividends from such shares. The holders of our Notes shall be entitled to receive, for application to the payment thereof, any payment or distribution of any kind or character, whether in cash, property or securities, including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of ours being subordinated to the payment of our Notes, which may be payable or deliverable in respect of our Notes in any such case, proceeding, dissolution, liquidation or other winding up event.

Unsecured creditors of ours may include, without limitation, service providers including KAFA, custodian, administrator, broker-dealers and the trustee, pursuant to the terms of various contracts with us. Secured creditors of ours may include without limitation parties entering into any interest rate swap, floor or cap transactions, or other similar transactions with us that create liens, pledges, charges, security interests, security agreements or other encumbrances on our assets.

A consolidation, reorganization or merger of us with or into any other company, or a sale, lease or exchange of all or substantially all of our assets in consideration for the issuance of equity securities of another company shall not be deemed to be a liquidation, dissolution or winding up of us.

Voting Rights

Our Notes have no voting rights, except to the extent required by law or as otherwise provided in the terms of the Notes relating to the acceleration of maturity upon the occurrence and continuance of an event of default. In connection with any other borrowings (if any), the 1940 Act does in certain circumstances grant to the lenders certain voting rights in the event of default in the payment of interest on or repayment of principal.

Market

Our Notes are not listed on an exchange or automated quotation system.

Paying Agent

The Bank of New York Mellon Trust Company, N.A., 601 Travis Street, 16th Floor, Houston, Texas 77002, shall serve as the paying agent with respect to all of our Notes.

Certain Provisions of the Maryland General Corporation Law and our Charter and Bylaws

The Maryland General Corporation Law and our Charter and Bylaws contain provisions that could make it more difficult for a potential acquiror to acquire us by means of a tender offer, proxy contest or otherwise. KED’s Charter and Bylaws contain substantially similar provisions. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our Board of Directors. We believe the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms. We have not elected to become subject to the Maryland Control Share Acquisition Act.

Classified Board of Directors

Our Board of Directors is divided into three classes of directors serving staggered three-year terms. The current terms for the first, second and third classes will expire in 2020, 2018 and 2019, respectively. Upon

 

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expiration of their current terms, directors of each class will be elected to serve until the third annual meeting following their election and until their successors are duly elected and qualify and each year one class of directors will be elected by the stockholders. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified Board of Directors will help to ensure the continuity and stability of our management and policies.

Election of Directors

Our Charter and Bylaws provide that the affirmative vote of the holders of a majority of the outstanding shares of stock entitled to vote in the election of directors will be required to elect a director. As noted above, pursuant to our Charter, our Board of Directors may amend the Bylaws to alter the vote required to elect directors.

Number of Directors; Vacancies; Removal

Our Charter provides that the number of directors will be set only by the Board of Directors in accordance with our Bylaws. Our Bylaws provide that a majority of our entire Board of Directors may at any time increase or decrease the number of directors. However, the number of directors may never be less than the minimum number required by the Maryland General Corporation Law or, unless our Bylaws are amended, more than fifteen. We have elected by provision in our Charter to be subject to the provision of Subtitle 8 of Title 3 of the Maryland General Corporation Law regarding the filling of vacancies on the Board of Directors. Accordingly, except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any and all vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the 1940 Act.

Our Charter provides that, subject to the rights of one or more classes or series of preferred stock to elect or remove one or more directors, a director may be removed only for cause, as defined in the Charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors.

Action by Stockholders

Under the Maryland General Corporation Law, stockholder action can be taken only at an annual or special meeting of stockholders or, with respect to the holders of common stock, unless the charter provides for stockholder action by less than unanimous written consent (which is not the case for our Charter), by unanimous written consent in lieu of a meeting. These provisions, combined with the requirements of our Bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals.    Our Bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures of the Bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the Board of Directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) provided that the Board of Directors has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the Bylaws.

 

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Calling of Special Meetings of Stockholders

Our Bylaws provide that special meetings of stockholders may be called by our Board of Directors and certain of our officers. Additionally, our Bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by the secretary of the corporation upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.

Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws

Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, convert, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless advised by the board and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our Charter generally provides for approval of Charter amendments and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. Our Charter also provides that certain Charter amendments, including but not limited to any charter amendment that would make our stock a redeemable security (within the meaning of the 1940 Act) or would cause us, whether by merger or otherwise, to convert from a closed-end company to an open-end company, and any proposal for our liquidation or dissolution, requires the approval of the stockholders entitled to cast at least 80% of the votes entitled to be cast on such matter. However, if such amendment or proposal is approved by at least 80% of our continuing directors (in addition to approval by our Board of Directors), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. The “continuing directors” are defined in our Charter as our current directors as well as those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors then on the Board of Directors. Our Charter and Bylaws provide that the Board of Directors will have the exclusive power to adopt, alter or repeal any provision of our Bylaws and to make new Bylaws.

 

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Market and Net Asset Value Information

Shares of KYN’s and KED’s common stock are listed on the NYSE under the symbols “KYN” and “KED,” respectively. KYN’s and KED’s common stock commenced trading on the NYSE on September 28, 2004 and September 21, 2006, respectively.

Each Company’s common stock has traded both at a premium and at a discount in relation to its net asset value. As of February 28, 2018, each Company’s common stock was trading at a discount to net asset value, and we cannot assure that the common stock will trade at a premium in the future. Any issuance of common stock may have an adverse effect on prices in the secondary market for the Companies’ common stock by increasing the number of shares of common stock available, which may create downward pressure on the market price for the common stock. Shares of closed-end investment companies frequently trade at a discount to net asset value. See “Risk Factors — Additional Risks Related to Our Common Stock — Market Discount From Net Asset Value Risk.”

The following tables set forth for each of the fiscal quarters indicated the range of high and low closing sales price of the Companies’ common stock and the quarter-end sales price, each as reported on the NYSE, the net asset value per share of common stock and the premium or discount to net asset value per share at which the Companies’ shares were trading. Net asset value is determined on a daily basis. See “—Net Asset Value” for information as to the determination of net asset value.

KYN

 

     Quarterly Closing Sales
Price
     Quarter-End Closing  
             High                      Low                      Sales Price              Net Asset Value
Per Share of
Common Stock(1)
     Premium/
(Discount) of
Sales Price
to Net Asset
Value(2)
 

Fiscal Year 2017

              

Fourth Quarter

   $ 18.30      $ 14.59      $ 15.32      $ 15.90        (3.6 )% 

Third Quarter

     19.11        16.73        17.81        17.26        3.2  

Second Quarter

     21.75        18.75        18.89        18.42        2.6  

First Quarter

     22.06        18.83        21.61        20.77        4.0  

Fiscal Year 2016

              

Fourth Quarter

   $ 20.95      $ 18.21      $ 19.72      $ 19.18        2.8

Third Quarter

     21.05        18.38        19.68        19.31        1.9  

Second Quarter

     19.08        14.57        19.08        18.59        2.6  

First Quarter

     17.87        11.03        15.31        14.40        6.3  

Fiscal Year 2015

              

Fourth Quarter

   $ 28.93      $ 18.02      $ 18.23      $ 19.20        (5.1 )% 

Third Quarter

     34.25        25.05        29.06        24.96        16.4  

Second Quarter

     36.16        33.32        34.24        32.19        6.4  

First Quarter

     38.91        32.60        36.61        33.09        10.6  

 

(1) NAV per share is determined as of close of business on the last day of the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low closing sales prices, which may or may not fall on the last day of the quarter. NAV per share is calculated as described under the caption “Net Asset Value.”

 

(2) Calculated as of the quarter-end closing sales price divided by the quarter-end NAV.

On February 28, 2018, the last reported sales price of KYN’s common stock on the NYSE was $17.41, which represented a discount of approximately 0.9% to the NAV per share reported by KYN on that date.

 

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As of February 28, 2018, KYN had approximately 115 million shares of common stock outstanding and had net assets applicable to common stockholders of approximately $2.0 billion.

KED

 

     Quarterly Closing Sales
Price
     Quarter-End Closing  
             High                      Low                      Sales Price              Net Asset Value
Per Share of
Common Stock(1)
     Premium/
(Discount) of
Sales Price
to Net Asset
Value(2)
 

Fiscal Year 2017

              

Fourth Quarter

   $ 17.87      $ 14.45      $ 15.15      $ 16.16        (6.3 )% 

Third Quarter

     18.42        15.93        16.74        17.44        (4.0

Second Quarter

     20.25        18.07        18.42        18.46        (0.2

First Quarter

     20.35        18.85        20.24        20.74        (2.4

Fiscal Year 2016

              

Fourth Quarter

   $ 19.68      $ 17.50      $ 19.48      $ 19.14        1.8

Third Quarter

     20.01        17.01        18.67        19.28        (3.2

Second Quarter

     19.16        13.57        18.60        18.51        0.5  

First Quarter

     17.91        10.21        14.20        14.97        (5.1

Fiscal Year 2015

              

Fourth Quarter

   $ 24.90      $ 17.39      $ 17.39      $ 18.89        (7.9 )% 

Third Quarter

     28.12        20.87        22.66        23.44        (3.3

Second Quarter

     33.01        27.44        28.26        28.61        (1.2

First Quarter

     36.29        29.47        33.45        29.72        12.6  

 

(1) NAV per share is determined as of close of business on the last day of the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low closing sales prices, which may or may not fall on the last day of the quarter. NAV per share is calculated as described under the caption “Net Asset Value.”

 

(2) Calculated as of the quarter-end closing sales price divided by the quarter-end NAV.

On February 28, 2018, the last reported sales price of KED’s common stock on the NYSE was $16.74, which represented a discount of approximately 1.0% to the NAV per share reported by KED on that date.

As of February 28, 2018, KED had approximately 11 million shares of common stock outstanding and had net assets applicable to common stockholders of approximately $182 million.

Performance Information

The performance table below illustrates the past performance of an investment in each Company by setting forth the average total returns for the Companies. A Company’s past performance does not necessarily indicate how such Company will perform in the future.

Average Annual Total Returns as of November 30, 2017

 

     Based on Net Asset Value(1)     Based on Market Price(2)  
   1 Year     3 Years     5 Years     10 Years     Inception(3)     1 Year     3 Years     5 Years     10 Years     Inception(3)  

KYN

     (8.0 )%      (15.5 )%      (2.2 )%      2.4     5.2     (13.8 )%      (17.6 )%      (4.6 )%      2.7     4.4

KED

     (7.1 )%      (13.1 )%      0.9     4.6     4.8     (14.4 )%      (16.5 )%      (2.2 )%      4.2     3.6

 

(1)

Total investment return based on net asset value is calculated assuming a purchase of common stock at the net asset value on the first day and a sale at the net asset value on the last day of the period reported. The

 

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  calculation also assumes the reinvestment of distributions at actual prices pursuant to each Company’s dividend reinvestment plan.

 

(2) Total investment return based on market value is calculated assuming a purchase of common stock at the closing market price on the first day and a sale at the closing market price on the last day of the period reported. The calculation also assumes reinvestment of distributions at actual prices pursuant to each Company’s dividend reinvestment plan.

 

(3) KYN and KED commenced investment operations on September 28, 2004 and September 21, 2006, respectively.

Net Asset Value

Calculation of Net Asset Value

Each Company determines its net asset value on a daily basis and such calculation is made available on the Companies’ website, www.kaynefunds.com. Net asset value is computed by dividing the value of all of the Company’s assets (including accrued interest and distributions and current and deferred income tax assets), less all of the Company’s liabilities (including accrued expenses, distributions payable, current and deferred accrued income taxes, and any Borrowings) and the liquidation value of any outstanding preferred stock, by the total number of common shares outstanding. Because each Company is a corporation that is obligated to pay income taxes, each accrues income tax liabilities and assets. As with any other asset or liability, each Company’s tax assets and liabilities increase or decrease its net asset value.

Each Company invests its assets primarily in MLPs, which generally are treated as partnerships for federal income tax purposes. As a limited partner in the MLPs, each Company includes its allocable share of the MLP’s taxable income or loss in computing our taxable income or loss. Each Company may rely to some extent on information provided by the MLPs, which may not necessarily be timely, to estimate taxable income allocable to the MLP units held in its portfolio and to estimate the associated deferred tax liability (or deferred tax asset). Such estimates will be made in good faith. From time to time each Company will modify its estimates and/or assumptions regarding its income tax rate used to derive our deferred tax liability (or deferred tax asset) as new information becomes available. To the extent a Company modifies its estimates and/or assumptions, its net asset value would likely fluctuate.

Deferred income taxes primarily reflect taxes on unrealized gains/(losses) which are attributable to the difference between the fair market value and tax basis of a Company’s investments and the tax benefit of accumulated capital or net operating losses. Each Company will accrue a net deferred tax liability if its future tax liability on its unrealized gains exceeds the tax benefit of its accumulated capital or net operating losses, if any. Each Company will accrue a net deferred tax asset if its future tax liability on its unrealized gains is less than the tax benefit of its accumulated capital or net operating losses or if it has net unrealized losses on its investments. To the extent a Company has a net deferred tax asset, consideration is given as to whether or not a valuation allowance is required. The need to establish a valuation allowance for deferred tax assets is assessed periodically based on the criterion established by the Statement of Financial Standards, Accounting for Income Taxes (ASC 740) that it is more likely than not that some portion or all of the deferred tax asset will not be realized. In a Company’s assessment for a valuation allowance, consideration is given to all positive and negative evidence related to the realization of the deferred tax asset. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability (which are highly dependent on future MLP cash distributions), the duration of statutory carryforward periods and the associated risk that capital or net operating loss carryforwards may expire unused. If a valuation allowance is required to reduce the deferred tax asset in the future, it could have a material impact on a Company’s net asset value and results of operations in the period it is recorded.

 

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Investment Valuation

Readily marketable portfolio securities listed on any exchange other than the NASDAQ Stock Market, Inc. (“NASDAQ”) are valued, except as indicated below, at the last sale price on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the most recent bid and ask prices on such day. Securities admitted to trade on the NASDAQ are valued at the NASDAQ official closing price. Portfolio securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities.

Equity securities traded in the over-the-counter market, but excluding securities admitted to trading on the NASDAQ, are valued at the closing bid prices. Debt securities that are considered bonds are valued by using the mean of the bid and ask prices provided by an independent pricing service or, if such prices are not available or in the judgment of KAFA such prices are stale or do not represent fair value, by an independent broker. For debt securities that are considered bank loans, the fair market value is determined by using the mean of the bid and ask prices provided by the agent or syndicate bank or principal market maker. When price quotes for securities are not available, or such prices are stale or do not represent fair value in the judgment of KAFA, fair market value will be determined using the Company’s valuation process for securities that are privately issued or otherwise restricted as to resale.

Exchange-traded options and futures contracts are valued at the last sales price at the close of trading in the market where such contracts are principally traded or, if there was no sale on the applicable exchange on such day, at the mean between the quoted bid and ask price as of the close of such exchange.

Each Company holds securities that are privately issued or otherwise restricted as to resale. For these securities, as well as any security for which (a) reliable market quotations are not available in the judgment of KAFA, or (b) the independent pricing service or independent broker does not provide prices or provides a price that in the judgment of KAFA is stale or does not represent fair value, shall each be valued in a manner that most fairly reflects fair value of the security on the valuation date. Unless otherwise determined by the Company’s Board of Directors, the following valuation process is used for such securities:

 

    Investment Team Valuation. The applicable investments are valued by senior professionals of KAFA who are responsible for the portfolio investments. The investments will be valued monthly with new investments valued at the time such investment was made.

 

    Investment Team Valuation Documentation. Preliminary valuation conclusions will be determined by senior management of KAFA. Such valuation and supporting documentation is submitted to the Valuation Committee (a committee of the Board of Directors) and the Board of Directors on a quarterly basis.

 

    Valuation Committee. The Valuation Committee meets to consider the valuations submitted by KAFA at the end of each quarter. Between meetings of the Valuation Committee, a senior officer of KAFA is authorized to make valuation determinations. All valuation determinations of the Valuation Committee are subject to ratification by the Board of Directors at its next regular meeting.

 

    Valuation Firm. Quarterly, a third-party valuation firm engaged by the Board of Directors reviews the valuation methodologies and calculations employed for these securities, unless the aggregate fair value of such security is less than 0.1% of total assets.

 

    Board of Directors Determination. The Board of Directors meets quarterly to consider the valuations provided by KAFA and the Valuation Committee and ratify valuations for the applicable securities. The Board of Directors considers the report provided by the third-party valuation firm in reviewing and determining in good faith the fair value of the applicable portfolio securities.

 

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Unless otherwise determined by the Board of Directors, each Company values its PIPE investments that are convertible into or otherwise will become publicly tradeable (e.g., through subsequent registration or expiration of a restriction on trading) based on the market value of the publicly traded security less a discount. The discount is initially equal to the discount negotiated at the time that the Company agrees to a purchase price. To the extent that such securities are convertible or otherwise become publicly traded within a time frame that may be reasonably determined, this discount will be amortized on a straight line basis over such estimated time frame.

Each Company values convertible preferred units in publicly traded MLPs using a convertible pricing model. This model takes into account the attributes of the convertible preferred units, including the preferred dividend, conversion ratio and call features, to determine the estimated value of such units. In using this model, each Company estimates (i) the credit spread for the convertible preferred units which is based on credit spreads for companies in a similar line of business as the publicly traded MLP and (ii) the expected volatility for the publicly traded MLP’s common units, which is based on the publicly traded MLP’s historical volatility. Each Company may then apply a discount to the value derived from the convertible pricing model to account for an expected discount in market prices for convertible securities relative to the values calculated using pricing models. If the valuation for the convertible preferred unit is less than the public market price for the publicly traded MLP’s common units at such time, the public market price for the publicly traded MLP’s common units will be used for the convertible preferred units.

Each Company’s investments in private companies are typically valued using one of or a combination of the following valuation techniques: (i) analysis of valuations for publicly traded companies in a similar line of business (“public company analysis”), (ii) analysis of valuations for comparable M&A transactions (“M&A analysis”) and (iii) discounted cash flow analysis. As of February 28, 2018, neither Company had any investments in private companies.

The public company analysis utilizes valuation ratios (commonly referred to as trading multiples) for publicly traded companies in a similar line of business as the portfolio company to estimate the fair value of such portfolio company. Typically, the analysis focuses on the ratio of enterprise value (“EV”) to earnings before interest expense, income tax expense, depreciation and amortization (“EBITDA”) which is referred to as an EV/EBITDA multiple and the ratio of equity market value (“EMV”) to distributable cash flow (“DCF”) which is referred to as a EMV/DCF multiple. For these analyses, each Company utilizes projections provided by external sources (i.e., third party equity research estimates) as well as internally developed estimates, and focuses on EBITDA and DCF projections for the current calendar year and next calendar year. Based on this data, each Company selects a range of multiples for each metric given the trading multiples of similar publicly traded companies and apply such multiples to the portfolio company’s EBITDA and DCF to estimate the portfolio company’s enterprise value and equity value. When calculating these values, each Company applies a discount to the portfolio company’s estimated equity value for the lack of marketability in the portfolio company’s securities.

The M&A analysis utilizes valuation multiples for historical M&A transactions for companies or assets in a similar line of business as the portfolio company to estimate the fair value of such portfolio company. Typically, the analysis focuses on EV/EBITDA multiples. Each Company selects a range of multiples based on EV/EBITDA multiples for similar M&A transactions and applies such ranges to the portfolio company’s EBITDA to estimate the portfolio company’s enterprise value. Each Company utilizes projections provided by external sources as well as internally developed estimates to calculate the valuation multiples of the comparable M&A transactions.

The discounted cash flow analysis is used to estimate the equity value for the portfolio company based on estimated cash flows of such portfolio company. Such cash flows include a terminal value for the portfolio company, which is typically based on an EV/EBITDA multiple. A present value of these cash flows is determined by using estimated discount rates (based on our estimate for required equity rate of return for such portfolio company).

 

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Under all of these valuation techniques, the Companies estimate operating results of their portfolio companies (including EBITDA and DCF). These estimates utilize unobservable inputs such as historical operating results, which may be unaudited, and projected operating results, which will be based on operating assumptions for such portfolio company. These estimates will be sensitive to changes in assumptions specific to such portfolio company as well as general assumptions for the industry. Other unobservable inputs utilized in the valuation techniques outlined above include: discounts for lack of marketability, selection of publicly traded companies, selection of similar M&A transactions, selected ranges for valuation multiples and expected required rates of return (discount rates).

Changes in EBITDA multiples, DCF multiples, or discount rates, each in isolation, may change the fair value of a Company’s portfolio investments. Generally, a decrease in EBITDA multiples or DCF multiples, or an increase in discount rates will result in a decrease in the fair value of such portfolio investments.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of investments may fluctuate from period to period. Additionally, the fair value of investments may differ from the values that would have been used had a ready market existed for such investments and may differ materially from the values that a Company may ultimately realize.

 

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Financial Highlights

KYN

The Financial Highlights set forth below are derived from KYN’s financial statements, the accompanying notes thereto, and the report of PricewaterhouseCoopers LLP thereon for the fiscal year ended November 30, 2017 which are incorporated by reference into the Statement of Additional Information. Copies of the Statement of Additional Information are available from KYN without charge upon request.

KYN FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

 

     For the Fiscal Year Ended November 30,  
     2017     2016     2015  

Per Share of Common Stock(1)

      

Net asset value, beginning of period

   $ 19.18     $ 19.20     $ 36.71  

Net investment income (loss)(2)

     (0.45     (0.61     (0.53

Net realized and unrealized gain (loss)

     (0.92     2.80       (14.39
  

 

 

   

 

 

   

 

 

 

Total income (loss) from operations

     (1.37     2.19       (14.92
  

 

 

   

 

 

   

 

 

 

Dividends and distributions — auction rate preferred(2)(3)

                  
  

 

 

   

 

 

   

 

 

 

Common dividends(3)

     (0.53           (2.15

Common distributions — return of capital(3)

     (1.37     (2.20     (0.48
  

 

 

   

 

 

   

 

 

 

Total dividends and distributions — common

     (1.90     (2.20     (2.63
  

 

 

   

 

 

   

 

 

 

Effect of issuance of common stock

                 0.03  

Effect of shares issued in reinvestment of distributions

     (0.01     (0.01     0.01  
  

 

 

   

 

 

   

 

 

 

Total capital stock transactions

     (0.01     (0.01     0.04  
  

 

 

   

 

 

   

 

 

 

Net asset value, end of period

   $ 15.90     $ 19.18     $ 19.20  
  

 

 

   

 

 

   

 

 

 

Market value per share of common stock, end of period

   $ 15.32     $ 19.72     $ 18.23  
  

 

 

   

 

 

   

 

 

 

Total investment return based on common stock market value(4)

     (13.8 )%      24.1     (47.7 )% 

Total investment return based on net asset value(5)

     (8.0 )%      14.6     (42.8 )% 

Supplemental Data and Ratios(6)

      

Net assets applicable to common stockholders, end of period

   $ 1,826,173     $ 2,180,781     $ 2,141,602  

Ratio of expenses to average net assets

      

Management fees (net of fee waiver)

     2.5     2.5     2.6

Other expenses

     0.1       0.2       0.1  
  

 

 

   

 

 

   

 

 

 

Subtotal

     2.6       2.7       2.7  

Interest expense and distributions on mandatory redeemable preferred stock(2)

     2.0       2.8       2.4  

Income tax expense(7)

           7.9        
  

 

 

   

 

 

   

 

 

 

Total expenses

     4.6     13.4     5.1
  

 

 

   

 

 

   

 

 

 

Ratio of net investment income (loss) to average net assets(2)

     (2.4 )%      (3.4 )%      (1.8 )% 

Net increase (decrease) in net assets to common stockholders resulting from operations to average net assets

     (7.5 )%      12.5     (51.7 )% 

Portfolio turnover rate

     17.6     14.5     17.1

Average net assets

   $ 2,128,965     $ 2,031,206     $ 3,195,445  

Notes outstanding, end of period(8)

   $ 747,000     $ 767,000     $ 1,031,000  

Credit facility outstanding, end of period(8)

   $     $     $  

Term loan outstanding, end of period(8)

   $     $ 43,000     $  

Auction rate preferred stock, end of period(8)

   $     $     $  

Mandatory redeemable preferred stock, end of period(8)

   $ 292,000     $ 300,000     $ 464,000  

Average shares of common stock outstanding

     114,292,056       112,967,480       110,809,350  

Asset coverage of total debt(9)

     383.6     406.3     352.7

Asset coverage of total leverage (debt and preferred stock)(10)

     275.8     296.5     243.3

Average amount of borrowings per share of common stock during the period(1)

   $ 7.03     $ 7.06     $ 11.95  

 

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KYN FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

 

    For the Fiscal Year Ended November 30,  
    2014     2013     2012     2011  

Per Share of Common Stock(1)

       

Net asset value, beginning of period

  $ 34.30     $ 28.51     $ 27.01     $ 26.67  

Net investment income (loss)(2)

    (0.76     (0.73     (0.71     (0.69

Net realized and unrealized gain (loss)

    5.64       8.72       4.27       2.91  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total income (loss) from operations

    4.88       7.99       3.56       2.22  
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividends and distributions — auction rate preferred(2)(3)

                       
 

 

 

   

 

 

   

 

 

   

 

 

 

Common dividends(3)

    (2.28     (1.54     (1.54     (1.26

Common distributions — return of capital(3)

    (0.25     (0.75     (0.55     (0.72
 

 

 

   

 

 

   

 

 

   

 

 

 

Total dividends and distributions — common

    (2.53     (2.29     (2.09     (1.98
 

 

 

   

 

 

   

 

 

   

 

 

 

Effect of issuance of common stock

    0.06       0.09       0.02       0.09  

Effect of shares issued in reinvestment of distributions

                0.01       0.01  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total capital stock transactions

    0.06       0.09       0.03       0.10  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value, end of period

  $ 36.71     $ 34.30     $ 28.51     $ 27.01  
 

 

 

   

 

 

   

 

 

   

 

 

 

Market value per share of common stock, end of period

  $ 38.14     $ 37.23     $ 31.13     $ 28.03  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment return based on common stock market value(4)

    9.9     28.2     19.3     5.6

Total investment return based on net asset value(5)

    14.8     29.0     13.4     8.7

Supplemental Data and Ratios(6)

       

Net assets applicable to common stockholders, end of period

  $ 4,026,822     $ 3,443,916     $ 2,520,821     $ 2,029,603  

Ratio of expenses to average net assets

       

Management fees (net of fee waiver)

    2.4     2.4     2.4     2.4

Other expenses

    0.1       0.1       0.2       0.2  
 

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    2.5       2.5       2.6       2.6  

Interest expense and distributions on mandatory redeemable preferred stock(2)

    1.8       2.1       2.4       2.3  

Income tax expense(7)

    8.3       14.4       7.2       4.8  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    12.6     19.0     12.2     9.7
 

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net investment income (loss) to average net assets(2)

    (2.0 )%      (2.3 )%      (2.5 )%      (2.5 )% 

Net increase (decrease) in net assets to common stockholders resulting from operations to average net assets

    13.2     24.3     11.6     7.7

Portfolio turnover rate

    17.6     21.2     20.4     22.3

Average net assets

  $ 3,967,458     $ 3,027,563     $ 2,346,249     $ 1,971,469  

Notes outstanding, end of period(8)

  $ 1,435,000     $ 1,175,000     $ 890,000     $ 775,000  

Credit facility outstanding, end of period(8)

  $     $ 69,000     $ 19,000     $  

Term loan outstanding, end of period(8)

  $ 51,000     $     $     $  

Auction rate preferred stock, end of period(8)

  $     $     $     $  

Mandatory redeemable preferred stock, end of period(8)

  $ 524,000     $ 449,000     $ 374,000     $ 260,000  

Average shares of common stock outstanding

    107,305,514       94,658,194       82,809,687       72,661,162  

Asset coverage of total debt(9)

    406.2     412.9     418.5     395.4

Asset coverage of total leverage (debt and preferred stock)(10)

    300.3     303.4     296.5     296.1

Average amount of borrowings per share of common stock during the period(1)

  $ 13.23     $ 11.70     $ 10.80     $ 10.09  

 

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KYN FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

 

     For the Fiscal Year Ended November 30,  
     2010     2009     2008  
                    

Per Share of Common Stock(1)

      

Net asset value, beginning of period

   $ 20.13     $ 14.74     $ 30.08  

Net investment income (loss)(2)

     (0.44     (0.33     (0.73

Net realized and unrealized gain (loss)

     8.72       7.50       (12.56
  

 

 

   

 

 

   

 

 

 

Total income (loss) from operations

     8.28       7.17       (13.29
  

 

 

   

 

 

   

 

 

 

Dividends and distributions — auction rate preferred(2)(3)

           (0.01     (0.10
  

 

 

   

 

 

   

 

 

 

Common dividends(3)

     (0.84            

Common distributions — return of capital(3)

     (1.08     (1.94     (1.99
  

 

 

   

 

 

   

 

 

 

Total dividends and distributions — common

     (1.92     (1.94     (1.99
  

 

 

   

 

 

   

 

 

 

Effect of issuance of common stock

     0.16       0.12        

Effect of shares issued in reinvestment of distributions

     0.02       0.05       0.04  
  

 

 

   

 

 

   

 

 

 

Total capital stock transactions

     0.18       0.17       0.04  
  

 

 

   

 

 

   

 

 

 

Net asset value, end of period

   $ 26.67     $ 20.13     $ 14.74  
  

 

 

   

 

 

   

 

 

 

Market value per share of common stock, end of period

   $ 28.49     $ 24.43     $ 13.37  
  

 

 

   

 

 

   

 

 

 

Total investment return based on common stock market value(4)

     26.0     103.0     (48.8 )% 

Total investment return based on net asset value(5)

     43.2     51.7     (46.9 )% 

Supplemental Data and Ratios(6)

      

Net assets applicable to common stockholders, end of period

   $ 1,825,891     $ 1,038,277     $ 651,156  

Ratio of expenses to average net assets

      

Management fees (net of fee waiver)

     2.1     2.1     2.2

Other expenses

     0.2       0.4       0.3  
  

 

 

   

 

 

   

 

 

 

Subtotal

     2.3       2.5       2.5  

Interest expense and distributions on mandatory redeemable preferred stock(2)

     1.9       2.5       3.4  

Income tax expense(7)

     20.5       25.4        
  

 

 

   

 

 

   

 

 

 

Total expenses

     24.7     30.4     5.9
  

 

 

   

 

 

   

 

 

 

Ratio of net investment income (loss) to average net assets(2)

     (1.8 )%      (2.0 )%      (2.8 )% 

Net increase (decrease) in net assets to common stockholders resulting from operations to average net assets

     34.6     43.2     (51.2 )% 

Portfolio turnover rate

     18.7     28.9     6.7

Average net assets

   $ 1,432,266     $ 774,999     $ 1,143,192  

Notes outstanding, end of period(8)

   $ 620,000     $ 370,000     $ 304,000  

Credit facility outstanding, end of period(8)

   $     $     $  

Term loan outstanding, end of period(8)

   $     $     $  

Auction rate preferred stock, end of period(8)

   $     $ 75,000     $ 75,000  

Mandatory redeemable preferred stock, end of period(8)

   $ 160,000     $     $  

Average shares of common stock outstanding

     60,762,952       46,894,632       43,671,666  

Asset coverage of total debt(9)

     420.3     400.9     338.9

Asset coverage of total leverage (debt and preferred stock)(10)

     334.1     333.3     271.8

Average amount of borrowings per share of common stock during the period(1)

   $ 7.70     $ 6.79     $ 11.52  

 

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KYN FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

 

 

(1) Based on average shares of common stock outstanding.

 

(2) Distributions on KYN’s MRP Shares are treated as an operating expense under GAAP and are included in the calculation of net investment income (loss).

 

(3) The information presented for each period is a characterization of the total distributions paid to preferred stockholders and common stockholders as either a dividend (eligible to be treated as qualified dividend income) or a distribution (return of capital) and is based on KYN’s earnings and profits.

 

(4) Total investment return based on market value is calculated assuming a purchase of common stock at the market price on the first day and a sale at the current market price on the last day of the period reported. The calculation also assumes reinvestment of distributions at actual prices pursuant to KYN’s dividend reinvestment plan.

 

(5) Total investment return based on net asset value is calculated assuming a purchase of common stock at the net asset value on the first day and a sale at the net asset value on the last day of the period reported. The calculation also assumes reinvestment of distributions at actual prices pursuant to KYN’s dividend reinvestment plan.

 

(6) Unless otherwise noted, ratios are annualized.

 

(7) For the fiscal years ended November 30, 2017, November 30, 2015 and November 30, 2008, KYN reported an income tax benefit of $86,746 (4.1% of average net assets), $980,647 (30.7% of average net assets) and $339,991 (29.7% of average net assets), respectively, primarily related to unrealized losses on investments. The income tax expense is assumed to be 0% because KYN reported a net deferred income tax benefit during the period.

 

(8) Principal/liquidation value.

 

(9) Calculated pursuant to section 18(a)(1)(A) of the 1940 Act. Represents the value of total assets less all liabilities not represented by Notes (principal value) or any other senior securities representing indebtedness and MRP Shares (liquidation value) divided by the aggregate amount of Notes and any other senior securities representing indebtedness. Under the 1940 Act, KYN may not declare or make any distribution on its common stock nor can it incur additional indebtedness if, at the time of such declaration or incurrence, its asset coverage with respect to senior securities representing indebtedness would be less than 300%. For purposes of this test, the Credit Facility and the Term Loan are considered senior securities representing indebtedness.

 

(10) Calculated pursuant to section 18(a)(2)(A) of the 1940 Act. Represents the value of total assets less all liabilities not represented by Notes (principal value), any other senior securities representing indebtedness and MRP Shares (liquidation value) divided by the aggregate amount of Notes, any other senior securities representing indebtedness and MRP Shares. Under the 1940 Act, KYN may not declare or make any distribution on its common stock nor can it issue additional preferred stock if at the time of such declaration or issuance, its asset coverage with respect to all senior securities would be less than 200%. In addition to the limitations under the 1940 Act, KYN, under the terms of its MRP Shares, would not be able to declare or pay any distributions on its common stock if such declaration would cause its asset coverage with respect to all senior securities to be less than 225%. For purposes of these tests, the Credit Facility and the Term Loan are considered senior securities representing indebtedness.

KED

The Financial Highlights set forth below are derived from KED’s financial statements, the accompanying notes thereto, and the report of PricewaterhouseCoopers LLP thereon for the fiscal year ended November 30, 2017 which are incorporated by reference into the Statement of Additional Information. Copies of the Statement of Additional Information are available from KYN without charge upon request.

 

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KED FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

 

     For the Fiscal Year Ended November 30,  
     2017     2016     2015  

Per Share of Common Stock(1)

      

Net asset value, beginning of period

   $ 19.14     $ 18.89     $ 33.14  

Net investment income (loss)(2)

     (0.40     (0.39     (0.20

Net realized and unrealized gain (loss) on investments

     (0.89     2.57       (11.94
  

 

 

   

 

 

   

 

 

 

Total income (loss) from investment operations

     (1.29     2.18       (12.14
  

 

 

   

 

 

   

 

 

 

Common dividends(3)

     (1.49     (0.19     (2.11

Common distributions — return of capital(3)

     (0.19     (1.73      
  

 

 

   

 

 

   

 

 

 

Total dividends and distributions — common

     (1.68     (1.92     (2.11
  

 

 

   

 

 

   

 

 

 

Effect of shares issued in reinvestment of distributions

     (0.01     (0.01      
  

 

 

   

 

 

   

 

 

 

Net asset value, end of period

   $ 16.16     $ 19.14     $ 18.89  
  

 

 

   

 

 

   

 

 

 

Market value per share of common stock, end of period

   $ 15.15     $ 19.48     $ 17.39  
  

 

 

   

 

 

   

 

 

 

Total investment return based on common stock market value(4)

     (14.4 )%      26.1     (46.1 )% 

Total investment return based on net asset value(5)

     (7.1 )%      14.1     (38.1 )% 

Supplemental Data and Ratios(6)

      

Net assets applicable to common stockholders, end of period

   $ 174,159     $ 204,835     $ 199,729  

Ratio of expenses to average net assets:

      

Management fees

     2.8     2.7     2.7

Other expenses

     0.6       0.6       0.4  
  

 

 

   

 

 

   

 

 

 

Subtotal

     3.4       3.3       3.1  

Interest expense and distributions on mandatory redeemable preferred stock(2)

     1.8       1.7       1.0  

Management fee waivers

     (0.8     (0.7     (0.7

Income tax expense(7)

           7.4        
  

 

 

   

 

 

   

 

 

 

Total expenses(8)

     4.4     11.7     3.4
  

 

 

   

 

 

   

 

 

 

Ratio of net investment income (loss) to average net assets(2)

     (2.1 )%      (2.2 )%      (0.8 )% 

Net increase (decrease) in net assets to common stockholders resulting from operations to average net assets

     (6.9 )%      12.2     (45.4 )% 

Portfolio turnover rate

     25.7     37.8     21.4

Average net assets

   $ 200,734     $ 192,333     $ 282,058  

Credit facility outstanding, end of period(9)

   $     $ 8,000     $ 1,000  

Term loan outstanding, end of period(9)

   $ 60,000     $ 70,000     $ 70,000  

Mandatory redeemable preferred stock, end of period(9)

   $ 25,000     $ 25,000     $ 25,000  

Average shares of common stock outstanding

     10,741,466       10,663,300       10,542,233  

Asset coverage of total debt(10)

     431.9     394.7     416.5

Asset coverage of total leverage (debt and preferred stock)(11)

     304.9     298.9     308.1

Average amount of borrowings outstanding per share of common stock during the period(1)

   $ 6.71     $ 6.86     $ 7.62  

 

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KED FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

 

     For the Fiscal Year Ended November 30,  
     2014     2013     2012     2011  
                          

Per Share of Common Stock(1)

        

Net asset value, beginning of period

   $ 29.96     $ 23.74     $ 23.01     $ 20.56  

Net investment income (loss)(2)

     (0.15     (0.14     0.08       0.25  

Net realized and unrealized gain (loss) on investments

     5.38       8.13       2.27       3.60  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized losses — conversion to taxable corporation

                        
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income (loss) from investment operations

     5.23       7.99       2.35       3.85  
  

 

 

   

 

 

   

 

 

   

 

 

 

Common dividends(3)

     (2.04     (1.76     (1.62     (1.37

Common distributions — return of capital(3)

                        
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividends and distributions — common

     (2.04     (1.76     (1.62     (1.37
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of shares issued in reinvestment of distributions

     (0.01     (0.01           (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value, end of period

   $ 33.14     $ 29.96     $ 23.74     $ 23.01  
  

 

 

   

 

 

   

 

 

   

 

 

 

Market value per share of common stock, end of period

   $ 34.99     $ 28.70     $ 26.01     $ 20.21  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment return based on common stock market value(4)

     30.2     18.1     37.8     19.3

Total investment return based on net asset value(5)

     18.1     35.1     10.5     20.3

Supplemental Data and Ratios(6)

        

Net assets applicable to common stockholders, end of period

   $ 348,496     $ 313,404     $ 247,017     $ 238,030  

Ratio of expenses to average net assets:

        

Management fees

     2.7     2.5     2.4     2.4

Other expenses

     0.4       0.5       0.6       0.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     3.1       3.0       3.0       3.1  

Interest expense and distributions on mandatory redeemable preferred stock(2)

     0.7       0.8       0.9       0.8  

Management fee waivers

     (0.4     (0.1            

Income tax expense(7)

     9.0       17.1       5.6       10.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses(8)

     12.4     20.8     9.5     13.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net investment income (loss) to average net assets(2)

     (0.4 )%      (0.5 )%      0.3     1.1

Net increase (decrease) in net assets to common stockholders resulting from operations to average net assets

     15.2     29.2     9.9     17.1

Portfolio turnover rate

     31.4     38.4     34.6     68.1

Average net assets

   $ 360,463     $ 284,880     $ 246,183     $ 231,455  

Credit facility outstanding, end of period(9)

   $ 44,000     $ 85,000     $ 72,000     $ 77,000  

Term loan outstanding, end of period(9)

   $ 70,000     $     $     $  

Mandatory redeemable preferred stock, end of period(9)

   $     $     $     $  

Average shares of common stock outstanding

     10,489,146       10,430,618       10,372,215       10,301,878  

Asset coverage of total debt(10)

     405.7     468.7     443.1     409.1

Asset coverage of total leverage (debt and preferred stock)(11)

     405.7     468.7     443.1     409.1

Average amount of borrowings per share of common stock during the period(1)

   $ 9.16     $ 7.46     $ 7.54     $ 6.07  

 

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KED FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

 

     For the Fiscal Year Ended November 30,  
     2010     2009     2008  
                    

Per Share of Common Stock(1)

      

Net asset value, beginning of period

   $ 16.58     $ 16.10     $ 23.95  

Net investment income (loss)(2)

     (0.18     0.10       0.09  

Net realized and unrealized gain (loss) on investments

     5.39       1.68       (5.89

Net change in unrealized losses — conversion to taxable corporation

                 (0.38
  

 

 

   

 

 

   

 

 

 

Total income (loss) from investment operations

     5.21       1.78       (6.18
  

 

 

   

 

 

   

 

 

 

Common dividends(3)

     (0.51            

Common distributions — return of capital(3)

     (0.69     (1.30     (1.67
  

 

 

   

 

 

   

 

 

 

Total dividends and distributions — common

     (1.20     (1.30     (1.67
  

 

 

   

 

 

   

 

 

 

Effect of shares issued in reinvestment of distributions

     (0.03            
  

 

 

   

 

 

   

 

 

 

Net asset value, end of period

   $ 20.56     $ 16.58     $ 16.10  
  

 

 

   

 

 

   

 

 

 

Market value per share of common stock, end of period

   $ 18.21     $ 13.53     $ 9.63  
  

 

 

   

 

 

   

 

 

 

Total investment return based on common stock market value(4)

     45.8     56.0     (54.8 )% 

Total investment return based on net asset value(5)

     34.3     14.4     (27.0 )% 

Supplemental Data and Ratios(6)

      

Net assets applicable to common stockholders, end of period

   $ 211,041     $ 168,539     $ 162,687  

Ratio of expenses to average net assets:

      

Management fees

     2.1     2.0     0.4

Other expenses

     1.0       1.3       1.1  
  

 

 

   

 

 

   

 

 

 

Subtotal

     3.1       3.3       1.5  

Interest expense and distributions on mandatory redeemable preferred stock(2)

     0.9       0.8       2.0  

Management fee waivers

                  

Income tax expense(7)

     16.3       6.9        
  

 

 

   

 

 

   

 

 

 

Total expenses(8)

     20.3     11.0     3.5
  

 

 

   

 

 

   

 

 

 

Ratio of net investment income (loss) to average net assets(2)

     (1.0 )%      0.7     0.4

Net increase (decrease) in net assets to common stockholders resulting from operations to average net assets

     28.3     11.3     (29.5 )% 

Portfolio turnover rate

     33.4     20.9     27.0

Average net assets

   $ 188,307     $ 160,847     $ 211,531  

Credit facility outstanding, end of period(9)

   $ 57,000     $ 56,000     $ 57,000  

Term loan outstanding, end of period(9)

   $     $     $  

Mandatory redeemable preferred stock, end of period(9)

   $     $     $  

Average shares of common stock outstanding

     10,212,289       10,116,071       10,073,398  

Asset coverage of total debt(10)

     470.2            

Asset coverage of total leverage (debt and preferred stock)(11)

     470.2            

Average amount of borrowings per share of common stock during the period(1)

   $ 5.38     $ 5.28     $ 7.50  

 

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KED FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

 

 

(1) Based on average shares of common stock outstanding.

 

(2) Distributions on the KED’s MRP Shares are treated as an operating expense under GAAP and are included in the calculation of net investment income (loss).

 

(3) The information presented for each period is a characterization of the total distributions paid to common stockholders as either a dividend (eligible to be treated as qualified dividend income) or a distribution (return of capital) and is based on the KED’s earnings and profits.

 

(4) Total investment return based on market value is calculated assuming a purchase of common stock at the market price on the first day and a sale at the current market price on the last day of the period reported. The calculation also assumes reinvestment of distributions, if any, at actual prices pursuant to the KED’s dividend reinvestment plan.

 

(5) Total investment return based on net asset value is calculated assuming a purchase of common stock at the net asset value on the first day and a sale at the net asset value on the last day of the period reported. The calculation also assumes reinvestment of distributions at actual prices pursuant to the KED’s dividend reinvestment plan.

 

(6) Unless otherwise noted, ratios are annualized.

 

(7) For the fiscal years ended November 30, 2017, 2015 and 2008, KED reported a net income tax benefit of $7,857 (3.9% of average net assets); $76,311 (27.1% of average net assets) and $33,264 (15.7% of average net assets), respectively, primarily related to unrealized losses on investments. Income tax expense is assumed to be 0% because KED reported a net income tax benefit during these years.

 

(8) For the fiscal year ended November 30, 2008, total expenses exclude 0.4% relating to bad debt expense for the ratio of expenses to average net assets.

 

(9) Principal / liquidation value.

 

(10) Calculated pursuant to section 18(a)(1)(A) of the 1940 Act. Represents the value of total assets less all liabilities not represented by senior securities representing indebtedness (principal value) and MRP Shares (liquidation value) divided by senior securities representing indebtedness (principal value). Under the 1940 Act, KED may not declare or make any distribution on its common stock nor can it incur additional indebtedness if at the time of such declaration or incurrence its asset coverage with respect to senior securities representing indebtedness would be less than 300%. For purposes of this test, the Credit Facility and Term Loan are considered senior securities representing indebtedness. Prior to July 7, 2010, KED was a business development company under the 1940 Act and not subject to the requirements of section 18(a)(1)(A) for the asset coverage of total debt disclosure.

 

(11) Calculated pursuant to section 18(a)(2)(A) of the 1940 Act. Represents the value of total assets less all liabilities not represented by any other senior securities representing indebtedness (principal value) and MRP Shares (liquidation value) divided by the aggregate amount of any other senior securities representing indebtedness (principal value) and MRP Shares (liquidation value). Under the 1940 Act, KED may not declare or make any distribution on its common stock nor can it issue additional preferred stock if at the time of such declaration or issuance, its asset coverage with respect to all senior securities would be less than 200%. In addition to the limitations under the 1940 Act, KED, under the terms of its MRP Shares, would not be able to declare or pay any distributions on its common stock if such declaration would cause its asset coverage with respect to all senior securities to be less than 225%. For purposes of these tests, the Credit Facility and the Term Loan are considered senior securities representing indebtedness. Prior to July 7, 2010, KED was a business development company under the 1940 Act and not subject to the requirements of section 18(a)(2)(A) for the asset coverage of total debt and preferred stock disclosure.

 

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Information about the Reorganization

The Board of Directors of KED, including the Independent Directors, has unanimously approved the Reorganization Agreement, declared the Reorganization advisable and directed that the Reorganization proposal be submitted to the KED stockholders for consideration. If the stockholders approve the Reorganization, KED would transfer substantially all of its assets to KYN, and KYN would assume substantially all of KED’s liabilities, in exchange solely for newly issued shares of common and preferred stock of KYN, which will be distributed by KED to its stockholders in the form of a liquidating distribution (although cash will be distributed in lieu of fractional common shares). KED will then cease its separate existence under Maryland law and terminate its registration under the 1940 Act. The aggregate NAV of KYN common shares received by KED common stockholders in the Reorganization will equal the aggregate NAV of KED common stock held on the business day prior to closing of the Reorganization, less the costs of the Reorganization attributable to their common shares. KYN will continue to operate after the Reorganization as a registered, non-diversified, closed-end management investment company with the investment objectives and policies described in this joint proxy statement/prospectus.

In connection with the Reorganization, each holder of KED MRP Shares will receive in a private placement an equivalent number of newly issued KYN Series K MRP Shares having identical terms as the KED MRP Shares. The KED MRP Shares were initially issued on a private placement basis to a single institutional holder. The aggregate liquidation preference of the KYN Series K MRP Shares received by the holder of KED MRP Shares in the Reorganization will equal the aggregate liquidation preference of the KED MRP Shares held immediately prior to the closing of the Reorganization. The KYN Series K MRP Shares to be issued in the Reorganization will have equal priority with KYN’s existing outstanding preferred shares as to the payment of dividends and the distribution of assets in the event of a liquidation of KYN. In addition, the preferred shares of KYN, including the KYN Series K MRP Shares to be issued in connection with the Reorganization, will be senior in priority to KYN common shares as to payment of dividends and the distribution of assets in the event of a liquidation of KYN.

The exchange rate for common shares will be determined based on each Company’s respective net asset value per share as of the business day prior to the closing of the Reorganization. The net asset value of a share of common stock of each Company will be calculated as follows:

The value of the total assets (the value of the securities held plus any cash or other assets, including interest, dividends or distributions accrued but not yet received and the value of any net current and deferred tax assets computed in accordance with U.S. Generally Accepted Accounting Principles)

Minus:

 

    all liabilities (including accrued expenses and accumulated and unpaid distributions and any net current and deferred tax liabilities)

 

    accumulated and unpaid distributions on and the aggregate liquidation preference amount of any outstanding preferred stock

 

    accrued and unpaid interest payments on and the aggregate principal amount of any outstanding indebtedness

 

    any distributions payable on the common stock

 

    the Company’s share of the Reorganization costs

Divided by:

 

    The total number of shares of common stock outstanding at such time.

 

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Since KYN common shares will be issued at NAV in exchange for the net assets of KED (less the expenses of the Reorganization attributed to KED) having a value equal to the aggregate NAV of those KYN common shares, the NAV per share of KYN common shares should remain virtually unchanged immediately following the Reorganization, except for its share of the costs of the Reorganization. Thus, the Reorganization should result in no dilution on the basis of NAV of KYN common shares, other than to reflect the costs of the Reorganization.

However, as a result of the Reorganization, a common stockholder of both Companies will hold a reduced percentage of ownership in the larger combined entity than he or she did in any of the separate Companies. No sales charge or fee of any kind will be charged to stockholders of KED in connection with their receipt of KYN common shares in the Reorganization. The price of KYN’s shares may fluctuate following the Reorganization as a result of market conditions or other factors.

The Reorganization is intended to qualify as a tax-free reorganization. As such, no gain or loss should be recognized by KED or its stockholders upon the closing of the Reorganization. However, KED stockholders generally will recognize gain or loss with respect to cash they receive pursuant to the Reorganization in lieu of fractional KYN shares.

If the Reorganization so qualifies, the aggregate tax basis of KYN common shares received by stockholders of KED should be the same as the aggregate tax basis of the common shares of KED surrendered in exchange therefore (reduced by any amount of tax basis allocable to a fractional share of common stock for which cash is received). See “—Terms of the Agreement and Plan of Reorganization” and “—Material U.S. Federal Income Tax Consequences of the Reorganization” for additional information.

 

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Terms of the Agreement and Plan of Reorganization

The following is a summary of the material terms and conditions of the Reorganization Agreement. This summary is qualified in its entirety by reference to the form of Reorganization Agreement attached as Appendix A hereto.

The Reorganization Agreement contemplates that KED would transfer substantially all of its assets to KYN, and KYN would assume substantially all of KED’s liabilities, in exchange solely for newly issued shares of common and preferred stock of KYN, which will be distributed by KED to its stockholders in the form of a liquidating distribution (although cash will be distributed in lieu of fractional common shares). KED will then be terminated and dissolved in accordance with its charter and Maryland law.

As a result of the Reorganization, KED will:

 

    deregister as an investment company under the 1940 Act;

 

    cease its separate existence under Maryland law;

 

    remove its common shares from listing on the NYSE; and

 

    withdraw from registration under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

After the closing of the Reorganization, shares of KYN common stock will be credited to holders of KED commons tock only on a book-entry basis. KYN shall not issue certificates representing shares in connection with the Reorganization, irrespective of whether KED stockholders hold their shares in certificated form and all outstanding certificates representing common stock of KED will be deemed cancelled.

The Reorganization Agreement provides the time for and method of determining the net value of KED’s assets (and therefore shares) and the NAV per share of KYN. The valuation will be done immediately after the close of business, as described in the Reorganization Agreement, on the business day immediately preceding the closing date. Any special stockholder selections (for example, automatic investment plans for current KED stockholder accounts) will NOT automatically transfer to the new accounts unless newly set up by the affected stockholder.

No sales charge or fee of any kind will be charged to holders of KED common shares in connection with their receipt of KYN common shares in the Reorganization.

From and after the closing date, KYN will possess all of the properties, assets, rights, privileges and powers and shall be subject to all of the restrictions, liabilities, obligations, disabilities and duties of KED, all as provided under Maryland law.

Under Maryland law, stockholders of KED are not entitled to dissenters’ rights in connection with the Reorganization. However, any holder of KED’s common stock may sell his or her shares on the NYSE at any time prior to the Reorganization.

The Reorganization Agreement may be terminated and the Reorganization may be abandoned, whether before or after approval by stockholders, at any time prior to the closing date by resolution of either applicable Company’s Board of Directors, if circumstances should develop that, in the opinion of that Board of Directors, make proceeding with the Reorganization inadvisable.

The Reorganization Agreement provides that either Company party thereto may waive compliance with any of the terms or conditions made therein for the benefit of that Company, other than the requirements that: (a) the

 

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Reorganization be approved by stockholders of KED; and (b) the Companies receive the opinion of Paul Hastings LLP that the transactions contemplated by the Reorganization Agreement will constitute a tax-free reorganization for federal income tax purposes, if, in the judgment of the Company’s Board of Directors, after consultation with Company counsel, such waiver will not have a material adverse effect on the benefits intended to be provided by the Reorganization to the stockholders of the Company.

Under the Reorganization Agreement, each Company, out of its assets and property, will indemnify and hold harmless the other Company party thereto and the members of the Board of Directors and officers of the other Company from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which the other Company and those board members and officers may become subject, insofar as such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on (a) any breach by the Company of any of its representations, warranties, covenants or agreements set forth in the Reorganization Agreement or (b) any act, error, omission, neglect, misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to be committed by the Company or the members of the Board of Directors or officers of the Company prior to the closing date, provided that such indemnification by the Company is not (i) in violation of any applicable law or (ii) otherwise prohibited as a result of any applicable order or decree issued by any governing regulatory authority or court of competent jurisdiction. In no event will a Company or the members of the Board of Directors or officers of a Company be indemnified for any losses, claims, damages, liabilities or expenses arising out of or based on conduct constituting willful misfeasance, bad faith, gross negligence or the reckless disregard of duties.

The Board of Directors of each Company, including the Independent Directors, has determined, with respect to its Company, that the interests of the holders of that Company’s common stock will not be diluted on the basis of NAV as a result of the Reorganization and that participation in the Reorganization is in the best interests of that Company. All costs of the Reorganization will be borne by the Companies on a pro rata basis based upon each Company’s relative NAV. Such expenses shall include, but not be limited to, all costs related to the preparation and distribution of this joint proxy statement/prospectus, proxy solicitation expenses, SEC registration fees and NYSE listing fees.

 

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Material U.S. Federal Income Tax Consequences of the Reorganization

The following is a general summary of the material anticipated U.S. federal income tax consequences of the Reorganization. The discussion is based upon the Code, Treasury regulations, court decisions, published positions of the Internal Revenue Service (“IRS”) and other applicable authorities, all as in effect on the date hereof and all of which are subject to change or differing interpretations (possibly with retroactive effect). The discussion is limited to U.S. persons who hold shares of common or preferred stock of KED as capital assets for U.S. federal income tax purposes (generally, assets held for investment). This summary does not address all of the U.S. federal income tax consequences that may be relevant to a particular stockholder or to stockholders who may be subject to special treatment under U.S. federal income tax laws. No ruling has been or will be obtained from the IRS regarding any matter relating to the Reorganization. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax aspects described below. Prospective investors must consult their own tax advisers as to the U.S. federal income tax consequences of the Reorganization, as well as the effects of state, local and non-U.S. tax laws.

The federal income tax consequences with respect to the Reorganization will be dependent upon the particular facts in existence prior to and at the time of the Reorganization. In addition, the application of certain aspects of the federal income tax law to the proposed Reorganization is unclear and subject to alternative interpretations.

The parties believe that the Reorganization will be characterized for federal income tax purposes as a tax-free reorganization under Section 368(a) of the Code. It may, however, be treated as a taxable transaction in which KYN or KED is deemed to have sold all of their respective assets for federal income tax purposes and the KYN or KED stockholders are deemed to have exchanged their respective stock in a taxable sale.

Requirements to Qualify as a Tax-Free Reorganization

Under Code Section 368(a)(1)(A), a statutory merger of one or more corporations into the acquiring corporation generally may qualify as a tax-free reorganization and, under Code Section 368(a)(1)(C), a transaction that results in an exchange of stock of an acquiring corporation for substantially all of the assets of another corporations similarly may qualify as a tax-free reorganization. In addition to the statutory requirements, the transaction needs to satisfy the continuity of proprietary interest, continuity of business enterprise, and business purpose requirements, all of which should be satisfied in the contemplated Reorganization.

Even if a transaction would satisfy the general requirements for a tax-free reorganization, the Code provides that an otherwise qualifying reorganization involving an investment company will not qualify as a tax-free reorganization with respect to any such investment company (and its shareholders) unless the investment company was immediately before the transaction a regulated investment company (“RIC”), a real estate investment trust (“REIT”), or a corporation that meets the diversified investment requirements of Code Section 368(a)(2)(F)(ii). For these purposes, an investment company is defined to include a RIC, a REIT and a corporation in which 50% or more of the value of its total assets are stock and securities and 80% or more of its total assets are held for investment. Under such test, KYN and KED are each an investment company. An investment company is treated as diversified if it is (i) a RIC, (ii) a REIT or (iii) an investment company in which not more than (y) 25% of its assets are in the stock or securities of one issuer and (z) 50% of its assets are invested in stock or securities of 5 or fewer issuers (the “asset diversification test”). Code Section 368(a)(2)(F)(iv) provides that “under Regulations as prescribed by the Secretary” assets acquired for purposes of satisfying the asset diversification test are excluded in applying the asset diversification test. However, the Treasury Department has never issued any final regulations, although proposed regulations were issued in 1981 and withdrawn in 1998. Conflicting case law exists as to whether statutory provisions such as Code Section 368(a)(2)(F)(iv) are self-executing in absence of required regulations.

Under the former proposed regulations, assets acquired for an “impermissible purpose” are excluded. The impermissible purpose need not be the sole purpose. The former proposed regulations generally presumed

 

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that assets acquired within one year of the investment company failing to be diversified were acquired for an impermissible purpose. This presumption could be overcome by clear and convincing evidence. The former proposed regulations provided for certain safe harbors, none of which would have any application to the proposed Reorganization. The legislative history underlying the enactment of this provision indicated that this rule is not intended to affect a situation in which a corporation purchases or acquires portfolio stock or securities in the ordinary course of its activities.

The current portfolio of each of KYN and KED satisfies the asset diversification test and it is anticipated that each such portfolios will continue to satisfy the asset diversification test (as interpreted by the IRS in the former proposed regulations) through the proposed Reorganization. Thus, although intended to qualify as a tax-free reorganization, the Reorganization may or may not qualify as such as to KYN or KED. The Companies will make their determination as of the time of the Reorganization, although that determination may be subject to challenge by the IRS.

Federal Income Tax Consequence if the Reorganization Qualifies as a Tax-Free Reorganization

If the Reorganization qualifies as tax-free reorganizations as to KYN and KED within the meaning of Section 368(a) of the Code, the U.S. federal income tax consequences of the Reorganization can be summarized as follows:

 

    No gain or loss will be recognized by KYN or KED upon the Reorganization.

 

    No gain or loss will be recognized by a stockholder of KED who receives KYN common shares or KYN MRP Shares pursuant to the Reorganization (except with respect to cash received in lieu of a fractional KYN common share, as discussed below).

 

    The aggregate tax basis of KYN common shares and KYN MRP Shares, received by a stockholder of KED pursuant to the Reorganization will be the same as the aggregate tax basis of the shares of common or preferred stock of KED surrendered in exchange therefor (reduced by any amount of tax basis allocable to a fractional share of common stock for which cash is received).

 

    The holding period of KYN common shares and KYN MRP Shares, received by a stockholder of KED pursuant to the Reorganization will include the holding period of KED shares of stock surrendered in exchange therefor.

 

    A stockholder of KED that receives cash in lieu of a fractional KYN common shares pursuant to the Reorganization will recognize capital gain or loss with respect to the fractional share of common stock in an amount equal to the difference between the amount of cash received for the fractional KYN common share and the portion of such stockholder’s tax basis in its KED shares of common stock that is allocable to the fractional share of common stock. The capital gain or loss will be long-term if the holding period for the KED shares of common stock is more than one year as of the date of the exchange.

 

    KYN’s tax basis in the KED assets received by KYN pursuant to the Reorganization will equal the tax basis of such assets in the hands of KED immediately prior to the Reorganization, and KYN’s holding period of such assets will, in each instance, include the period during which the assets were held by KED.

Federal Income Tax Consequence if the Reorganization Fails to Qualify as Tax-Free Reorganizations

If the Reorganization fails to qualify as a tax-free reorganization because KYN or KED fail to meet the asset diversification tests or for any other reason, the transaction will be taxable to the non-diversified investment

 

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company and its stockholders. For example, if KED is treated as a non-diversified investment company, KED will be deemed to have sold all of its assets to KYN in a taxable transaction, followed by a deemed liquidation of KED and a distribution of the sales proceeds (the KYN stock) to KED’s stockholders. Based upon current market values, KED anticipates that it would recognize a net gain for federal income tax purposes on such deemed sale. Each KED stockholder would recognize gain or loss on the liquidating distribution in an amount equal to the difference between the fair market value of the KYN stock received in the Reorganization and such stockholder’s basis in its KED stock. KYN’s basis in the assets of the combined entity would include (i) its historic basis in the assets previously held by KYN and (ii) the fair market value of the KED assets as of the date of the Reorganization. KYN, after the Reorganization, would not succeed to any net operating or capital loss carryforwards of KED.

If, alternatively, KYN is treated as a non-diversified investment company, KYN will be deemed to have sold all of its assets to KED in a taxable transaction with the attendant deemed liquidation. Based upon current market values, KYN anticipates it would recognize a net gain for federal income tax purposes. Each KYN stockholder would recognize capital gain or loss in an amount equal to the difference between the fair market value of the KYN stock held and the stockholder’s basis in such stock. KYN, after the Reorganization, would receive a fair market value basis in the assets historically held by KYN and will lose any of its pre-existing net operating loss and capital loss carryforwards.

Reporting Requirements

A KED stockholder who receives KYN common shares as a result of the Reorganization may be required to retain records pertaining to the Reorganization. Each KED stockholder who is required to file a federal income tax return and who is a “significant holder” that receives KYN common shares in the Reorganization will be required to file a statement with the holder’s federal income tax return setting forth, among other things, the holder’s basis in the KED shares surrendered and the fair market value of the KYN common shares and cash, if any, received in the Reorganization. A “significant holder” is a holder of KED shares who, immediately before the Reorganization, owned at least 5% of the outstanding KED shares.

 

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Certain Federal Income Tax Matters

This section relates to KYN and Certain Federal Income Tax Matters related to KYN (other parts of this document relate to both KYN and KED). Accordingly, references to “we” “us,” “our” or “the Company” in this section are references to KYN.

The following discussion of federal income tax matters is based on the advice of our counsel, Paul Hastings LLP.

This section and the discussion in the Statement of Additional Information summarize certain U.S. federal income tax consequences of owning our securities for U.S. taxpayers. This section is current as of the date of this joint proxy statement/prospectus. Tax laws and interpretations change frequently, possibly with retroactive effect, and this summary does not describe all of the tax consequences to all taxpayers. Except as otherwise provided, this summary generally does not describe your situation if you are a non-U.S. person, a broker-dealer, or other investor with special circumstances. In addition, this section does not describe any state, local or foreign tax consequences. Investors should consult their own tax advisors regarding the tax consequences of the Reorganization and investing in us.

Federal Income Taxation of Kayne Anderson MLP Investment Company

We are treated as a corporation for federal income tax purposes. Thus, we are obligated to pay federal income tax on our net taxable income. We are also obligated to pay state income tax on our net taxable income, either because the states follow the federal treatment or because the states separately impose a tax on us. We invest our assets principally in MLPs, which generally are treated as partnerships for federal income tax purposes. As a partner in the MLPs, we report our allocable share of the MLP’s taxable income, loss, deduction, and credits in computing our taxable income. Based upon our review of the historic results of the type of MLPs in which we invest, we expect that the cash flow received by us with respect to our MLP investments generally will exceed the taxable income allocated to us. There is no assurance that our expectation regarding the tax character of MLP distributions will be realized. If this expectation is not realized, there will be greater tax expense borne by us and less cash available to distribute to stockholders. In addition, we will take into account in our taxable income amounts of gain or loss recognized on the sale of MLP units. Currently, the maximum regular federal income tax rate for a corporation is 21%.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Bill”) was signed into law. The Tax Reform Bill repealed the corporate AMT for tax years beginning after December 31, 2017 and provides that existing AMT credit carryforwards will be refundable. KYN and KED will remain subject to corporate AMT for fiscal 2018 but expect to file for refunds of AMT credit carryforwards, if any, beginning in fiscal 2019. In addition, the Tax Reform Bill imposed limitations on the deductibility of net interest expense and limitations on the usage of net operating loss carryforwards (and elimination of carrybacks). These new limitations may impact certain deductions to taxable income and may result in an increased current tax liability to us. To the extent certain deductions are limited in any given year, we may not be able to utilize such deductions in future periods if we do not have sufficient taxable income.

Deferred income taxes reflect (1) taxes on unrealized gains which are attributable to the difference between the fair market value and tax basis of our investments and (2) the tax benefit of accumulated capital or net operating losses. We will accrue a net deferred tax liability if our future tax liability on our unrealized gains exceeds the tax benefit of our accumulated capital or net operating losses, if any. We will accrue a net deferred tax asset if our future tax liability on our unrealized gains is less than the tax benefit of our accumulated capital or net operating losses or if we have net unrealized losses on our investments.

To the extent we have a net deferred tax asset, consideration is given as to whether or not a valuation allowance is required. The need to establish a valuation allowance for deferred tax assets is assessed periodically

 

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based on the criteria established by the Statement of Financial Standards, Accounting for Income Taxes (ASC 740) that it is more likely than not that some portion or all of the deferred tax asset will not be realized. In our assessment for a valuation allowance, consideration is given to all positive and negative evidence related to the realization of the deferred tax asset. This assessment considers, among other matters, the nature, frequency and extent of current and cumulative losses, forecasts of future profitability (which are highly dependent on future MLP cash distributions), the duration of statutory carryforward periods and the associated risk that capital or net operating loss carryforwards may expire unused.

If a valuation allowance is required to reduce the deferred tax asset in the future, it could have a material impact on our net asset value and results of operations in the period it is recorded.

Our earnings and profits are calculated using accounting methods that may differ from tax accounting methods used by an entity in which we invest. For instance, to calculate our earnings and profits we will use the straight-line depreciation method rather than the accelerated depreciation method. This treatment may, for example, affect our earnings and profits if an MLP in which we invest calculates its income using the accelerated depreciation method. Our earnings and profits would not be increased solely by the income passed through from the MLP, but we would also have to include in our earnings and profits the amount by which the accelerated depreciation exceeded straight-line depreciation.

Because of the differences in the manner in which earnings and profits and taxable income are calculated, we may make distributions out of earnings and profits, treated as tax dividends, in years in which we have no taxable income.

We have not elected and have no current intention to elect to be treated as a regulated investment company under the Code because the extent of our investments in MLPs would generally prevent us from meeting the qualification requirements for regulated investment companies. The Code generally provides that a regulated investment company does not pay an entity level income tax, provided that it distributes all or substantially all of its income and satisfies certain source of income and asset diversification requirements. The regulated investment company taxation rules have no current application to us or to our stockholders.

Federal Income Taxation of Holders of Our Common Stock

Unlike a holder of a direct interest in MLPs, a stockholder will not include its allocable share of our gross income, gains, losses, deductions, or credits in computing its own taxable income. Our distributions are treated as a taxable dividend to the stockholder to the extent of our current or accumulated earnings and profits. If the distribution exceeds our current or accumulated earnings and profits, the distribution will be treated as a return of capital to our common stockholder to the extent of the stockholder’s basis in our common stock, and then the amount of a distribution in excess of a stockholder’s basis would be taxed as capital gain. Common stockholders will receive a Form 1099 from us (rather than a Schedule K-1 from each MLP if the stockholder had invested directly in the MLPs) and will recognize dividend income only to the extent of our current and accumulated earnings and profits.

Generally, a corporation’s earnings and profits are computed based upon taxable income, with certain specified adjustments. As explained above, based upon the historic performance of the MLPs, we anticipate that the distributed cash from an MLP will exceed our share of such MLP’s income during a portion of our expected investment holding period. Thus, we anticipate that only a portion of distributions of cash and other income from investments will be treated as dividend income to our common stockholders. As a corporation for tax purposes, our earnings and profits will be calculated using (i) straight-line depreciation rather than accelerated depreciation, and cost rather than a percentage depletion method, and (ii) intangible drilling costs and exploration and development costs amortized over a five-year and ten-year period, respectively. Because of the differences in the manner in which earnings and profits and taxable income are calculated, we may make distributions out of earnings and profits, treated as dividends, in years in which we have no taxable income.

 

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Our distributions that are treated as dividends generally will be taxable as ordinary income to holders, but (i) are expected to be eligible for treatment as “qualified dividend income” that is subject to reduced rates of federal income taxation for noncorporate stockholders, and (ii) may be eligible for the dividends received deduction available to corporate stockholders, in each case provided that certain holding period requirements are met. Under current law, qualified dividend income is taxable to noncorporate stockholders at a maximum federal income tax rate of 20%. In addition, currently the Tax Surcharge generally applies to dividend income and net capital gains for taxpayers whose adjusted gross income exceeds $200,000 for single filers or $250,000 for married joint filers.

If a distribution exceeds our current and accumulated earnings and profits, such distribution will be treated as a non-taxable reduction to the basis of the stock to the extent of such basis, and then as capital gain to the extent of the excess distribution. Such gain will be long-term capital gain if the holding period for the stock is more than one year. Individuals currently are subject to a maximum federal income tax rate of 20% on long-term capital gains (prior to the Tax Surcharge, if applicable). Corporations are taxed on capital gains at their ordinary graduated income tax rates.

If a holder of our common stock participates in our Dividend Reinvestment Plan, such stockholder will be taxed upon the amount of distributions as if such amount had been received by the participating stockholder in cash and the participating stockholder reinvested such amount in additional common stock, even though such holder has received no cash distribution from us with which to pay such tax.

Sale of Our Common Stock

The sale of our stock by holders will generally be a taxable transaction for federal income tax purposes. Holders of our stock who sell such shares will generally recognize gain or loss in an amount equal to the difference between the net proceeds of the sale and their adjusted tax basis in the shares sold. If such shares of stock are held as a capital asset at the time of the sale, the gain or loss will be a capital gain or loss, generally taxable as described above. A holder’s ability to deduct capital losses may be limited.

Investment by Tax-Exempt Investors and Regulated Investment Companies

Employee benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on unrelated business taxable income, or UBTI. Because we are a corporation for federal income tax purposes, an owner of our common stock will not report on its federal income tax return any of our items of income, gain, loss, deduction or credit. Therefore, a tax-exempt investor will not have UBTI attributable to its ownership or sale of our common stock unless its ownership of our common stock is debt financed. In general, common stock would be debt financed if the tax-exempt owner of common stock incurs debt to acquire common stock or otherwise incurs or maintains a debt that would not have been incurred or maintained if that common stock had not been acquired.

As stated above, an owner of our common stock will not report on its federal income tax return any of our items of gross income, gain, loss and deduction. Instead, the owner will report income with respect to our distributions or gain with respect to the sale of our common stock. Thus, distributions with respect to our common stock generally will result in income that is qualifying income for a regulated investment company. Furthermore, any gain from the sale or other disposition of our common stock will constitute gain from the sale of stock or securities and will also result in income that is qualifying income for a regulated investment company. In addition, our common stock will constitute qualifying assets to regulated investment companies, which generally must own at least 50% in qualifying assets and not more than 25% in certain non-qualifying assets at the end of each quarter, provided such regulated investment companies do not violate certain percentage ownership limitations with respect to our stock.

 

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Backup Withholding and Information Reporting

Backup withholding of U.S. federal income tax at the current rate of 24% may apply to the distributions on our common stock to be made by us if you fail to timely provide your taxpayer identification number or if we are so instructed by the Internal Revenue Service, or IRS. Backup withholding is not a separate tax and any amounts withheld from a payment to a U.S. holder under the backup withholding rules are allowable as a refund or credit against the holder’s U.S. federal income tax liability, provided that the required information is furnished to the IRS in a timely manner.

Other Taxation

Foreign stockholders, including stockholders who are nonresident alien individuals, may be subject to U.S. withholding tax on certain distributions at a rate of 30% or such lower rates as may be prescribed by any applicable treaty.

The Foreign Account Tax Compliance Act (“FATCA”)

A 30% withholding tax on your distributions and on gross proceeds from the sale or other disposition of our shares generally applies if paid to a foreign entity unless: (i) if the foreign entity is a “foreign financial institution,” it undertakes certain due diligence, reporting, withholding and certification obligations, (ii) if the foreign entity is not a “foreign financial institution,” it identifies certain of its U.S. investors or (iii) the foreign entity is otherwise excepted under FATCA. If applicable and subject to any applicable intergovernmental agreements, withholding under FATCA is required: (i) with respect to our distributions to you; and (ii) with respect to gross proceeds from a sale or disposition of our shares that occur on or after January 1, 2019. If withholding is required under FATCA on a payment related to your shares, investors that otherwise would not be subject to withholding (or that otherwise would be entitled to a reduced rate of withholding) on such payment generally will be required to seek a refund or credit from the IRS to obtain the benefits of such exemption or reduction. We will not pay any additional amounts in respect to amounts withheld under FATCA. You should consult your tax advisor regarding the effect of FATCA based on your individual circumstances.

State and Local Taxes

Payment and distributions with respect to our common stock and preferred stock also may be subject to state and local taxes.

Tax matters are very complicated, and the federal, state local and foreign tax consequences of an investment in and holding of our common stock and preferred stock will depend on the facts of each investor’s situation. Investors are encouraged to consult their own tax advisers regarding the specific tax consequences that may affect them.

Tax Risks

Investing in our securities involves certain tax risks, which are more fully described in “Risk Factors—Risks Related to Our Business and Structure—Tax Risks.”

 

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Required Vote

Stockholder approval of the Reorganization requires the affirmative vote of (i) the holders of a majority of the issued and outstanding KED common and preferred stock (voting as a class) and (ii) the holders of a majority of the issued and outstanding KED preferred stock (voting as a separate class). For purposes of this proposal, each share of KED common stock and each share of KED preferred stock is entitled to one vote. Abstentions and broker non-votes, if any, will have the same effect as votes against approving the Reorganization since approval is based on the affirmative vote of all votes entitled to be cast. Abstentions will be considered present for purposes of determining the presence of a quorum for KED at the Annual Meeting.

Board Recommendation

THE BOARD OF DIRECTORS OF KED, INCLUDING ALL OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY RECOMMENDS THAT KED STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE REORGANIZATION.

 

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PROPOSAL TWO: ELECTION OF DIRECTORS

The KYN Board of Directors unanimously nominated the following directors for the specified terms and until their successors have been duly elected and qualified:

 

    Albert L. Richey and James C. Baker until the 2019 Annual Meeting of Stockholders;

 

    William R. Cordes and Barry R. Pearl until the 2020 Annual Meeting of Stockholders; and

 

    Kevin S. McCarthy, William H. Shea, Jr. and William L. Thacker until the 2021 Annual Meeting of Stockholders.

Messrs. Cordes, Pearl, Thacker, Richey and Baker are currently directors of KED and have been nominated to the Board of Directors of KYN to serve whether or not the Reorganization is approved. Mr. Shea is currently a director of KYN and is moving from Class III to Class II. Mr. McCarthy is currently a director of KYN and KED, and his existing term as a KYN director is expiring at the Annual Meeting. Anne K. Costin and Steven C. Good are existing directors of KYN that are not up for election at the Meeting. Ms. Costin’s term expires in 2019. Mr. Good will retire as a director at the Meeting. Following the completion of the Reorganization, the KYN board (as modified) will govern the Combined Company.

Each director has consented to be named in this joint proxy statement/prospectus and has agreed to serve if elected. KYN has no reason to believe that any of the nominees will be unavailable to serve. The persons named on the accompanying proxy card intend to vote at the Meeting (unless otherwise directed) “FOR” the election of the nominees. If any of the nominees is unable to serve because of an event not now anticipated, the persons named as proxies may vote for another person designated by KYN’s Board of Directors.

In accordance with KYN’s charter, its Board of Directors is divided into three classes of approximately equal size. Including the directors nominated for election at the Meeting, KYN will have eight directors as follows:

 

Class

  

Term*

  

Directors

   Common
Stockholders
     Preferred
Stockholders
 

I

   Until 2020    William R. Cordes      X        X  
      Barry R. Pearl      X        X  

II

   Until 2021    Kevin S. McCarthy      X        X  
      William H. Shea, Jr.         X  
      William L. Thacker      X        X  

III

   Until 2019    Anne K. Costin      X        X  
      Albert L. Richey      X        X  
      James C. Baker         X  

 

* Each director serves a three-year term until the Annual Meeting of Stockholders for the designated year and until his or her successor has been duly elected and qualified.

Pursuant to the terms of KYN’s preferred stock, the holders of preferred stock are entitled as a class, to the exclusion of the holders of KYN’s common stock, to elect two directors of the Company (the “Preferred Directors”). The KYN Board of Directors has designated William H. Shea, Jr. and James C. Baker as the Preferred Directors. The terms of the preferred stock further provide that the remaining nominees shall be elected by holders of common stock and preferred stock voting together as a single class. In connection with his move from Class III to Class II, Mr. Shea’s current term as a Preferred Director is expiring at the Meeting.

 

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The following tables set forth the nominees’ and each remaining director’s name and year of birth; position(s) with KYN and length of time served; principal occupations during the past five years; and other directorships held during the past five years. The address for the nominees and directors is 811 Main Street, 14th Floor, Houston, TX 77002.

The term “Independent Director” is used to refer to a director who is not an “interested person,” as defined in the 1940 Act, of the Company, of Kayne Anderson or of KYN’s underwriters in offerings of its securities from time to time as defined in the 1940 Act. None of the Independent Directors nor any of their immediate family members, has ever been a director, officer or employee of Kayne Anderson or its affiliates. Each of Kevin S. McCarthy and James C. Baker is an “interested person” or “Interested Director” by virtue of his employment relationship with Kayne Anderson.

The KYN Board of Directors has adopted a mandatory retirement policy. No director may be nominated or stand for re-election if that director would have his or her 75th birthday before the stockholders’ meeting at which that director would be elected. Once elected, a director may complete his or her term even if that director turns 75 during such term. In accordance with that policy, Steven C. Good will retire as a director at the Meeting.

For information regarding KYN’s executive officers and their compensation, see “—Information About Executive Officers” and “—Compensation Discussion and Analysis.”

In addition to serving on the Board of Directors of KYN, each of the directors also serves on the Board of Directors of other Kayne Anderson affiliates, as set forth in the tables below. In addition, Mr. McCarthy also serves on the Board of Directors of KED, Kayne Anderson Midstream/Energy Fund, Inc. (“KMF”) and Kayne Anderson Energy Total Return Fund, Inc. (“KYE”). KYN, KYE, KMF and KED are all closed-end investment companies registered under the 1940 Act that are advised by KAFA. Contemporaneously with the Reorganization, KMF and KYE are pursuing a similar combination transaction (the “KMF Reorganization”) that, if approved, is expected to close at the same time as the Reorganization. As a result, if both transactions are approved, it is expected that each director will serve on the Board of Directors of two Kayne Anderson affiliates, KYN and KMF, and KED and KYE will cease to exist.

Directors and Director Nominees

Nominees for Director Who Are Independent

 

Name
(Year Born)

 

Position(s) Held
with the Company,
Term of Office/
Time of Service

 

Principal Occupations
During Past Five Years

 

Number of
Portfolios in
Fund Complex(1)
Overseen by
Director

 

Other
Directorships
Held by Director
During Past
Five Years

Albert L. Richey

(born 1949)

  Director nominee. New term as a director until the annual meeting of stockholders in the year 2019.   Retired from Anadarko Petroleum Corporation in August 2016 after serving as Senior Vice President Finance and Treasurer from January 2013 to August 2016; Vice President, Special Projects from January 2009 to December 2012; Vice President of Corporate Development from 2006 to December 2008; Vice President and Treasurer from 1995 to 2005; and Treasurer from 1987 to 1995.   2  

Current:

 

• KMF

 

• KED

 

Prior:

 

• Boys & Girls Clubs of Houston

 

• Boy Scouts of America

 

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William R. Cordes

(born 1948)

  Director nominee. New term as a director until the annual meeting of stockholders in the year 2020.   Retired from Northern Border Pipeline Company in March 2007 after serving as President from October 2000 to March 2007. Chief Executive Officer of Northern Border Partners, L.P. from October 2000 to April 2006. President of Northern Natural Gas Company from 1993 to 2000. President of Transwestern Pipeline Company from 1996 to 2000.   2  

Current:

 

• KMF