KBRA Affirms Ratings on Senior Notes and MRPS Issued by ClearBridge Energy Midstream Opportunity Fund Inc.
10 Sep 2025 | New York
KBRA affirms the ‘AAA’ rating assigned to the Senior Notes and affirms the 'A' rating assigned to Mandatory Redeemable Preferred Shares ("MRPS") issued by ClearBridge Energy Midstream Opportunity Fund Inc. (“EMO” or the “Fund”). The Outlook on all ratings is Stable.
The ratings continue to be supported by the asset coverage, the credit quality and liquidity of the underlying assets, and the management experience of the Fund's investment adviser, Franklin Templeton Fund Adviser LLC. As of June 30, 2025, senior asset coverage was 620% and total asset coverage was 457%. The Fund is registered under the Investment Company Act of 1940 and is a non-diversified closed-end investment fund. The Fund had its Initial Public Offering June 10, 2011, and its shares are listed on the New York Stock Exchange under the symbol EMO. The Fund invests primarily in equity securities of energy midstream entities structured as both partnerships and corporations.
Key Credit Considerations
- Asset Coverage: Regulatory requirements under the Investment Company Act of 1940 (the “'40 Act”), dictate minimum asset coverage ratios of 300% on senior debt and 200% on total leverage (with respect to senior debt and preferred stock) in order for EMO to maintain the ability to issue additional debt or preferred shares and pay dividends. Furthermore, EMO is not permitted to make distributions to common shareholders as per the financial covenants in its relevant purchase agreements, unless total asset coverage exceeds 225%, which highly incentivizes the Fund’s management to maintain its asset coverage cushion. Management has demonstrated its ability and willingness to meet these requirements with a goal to consistently exceed these levels and maintain downside cushion, and these requirements are reflected in the governing documents for the Notes and MRPS. As of June 30, 2025, '40 Act senior debt asset coverage and total leverage asset coverage ratios were 620% and 457% respectively (440% and 353% as of August 2024). The table above provides additional detail on the senior debt asset coverage and total leverage asset coverage for EMO.
- Asset Liquidity: The Fund’s governing documents require at least 80% of managed assets to be invested in energy midstream entities, structured both as partnerships and corporations and up to 20% of EMO’s managed assets may be invested in securities of issuers that are not energy midstream companies. As the portfolio is invested mostly in publicly traded securities, the liquidity of the Fund’s assets is relatively strong.
- Valuation: EMO may invest up to 30% of its managed assets in unregistered or otherwise restricted securities, including up to 15% in non-public holdings. As these securities are not publicly traded, they require a more involved valuation process, which KBRA views as robust. However, the eventual exit price could differ meaningfully from EMO’s valuation. As of September 2025, the Fund held no restricted or non-public securities and going forward such investments are expected to be minimal and only on an opportunistic basis.
- Non-Diversified Investments: EMO is a non-diversified closed-end mutual fund which focuses primarily on energy midstream entities. As such, the Fund faces idiosyncratic risk which cannot be mitigated through industry diversification.
- Volatility of Underlying Portfolio: The Fund faces systematic risks which can have a direct impact on the valuations of the underlying portfolio. For example, the valuation of EMO’s portfolio decreased due to the market dislocations and volatility caused by the COVID-19 pandemic and the precipitous decline in oil prices. Although movements in underlying commodity prices affect midstream energy companies less than their upstream counterparts, midstream companies are not immune to these fluctuations.
- Manager Experience: ClearBridge Investments is a global equity asset manager that is focused on active management. As of June 30, 2025, ClearBridge had approximately $195.5 billion in assets under management. Compared to managers of a similar scale and strategy, ClearBridge demonstrates similarly strong capabilities, familiarity, and investment experience in the energy midstream sector. However, in KBRA’s view, the experience and skill set of the investment team is concentrated and thus more reliant on key personnel for execution. ClearBridge Investments is a wholly owned subsidiary of Franklin Resources.
Rating Sensitivities
- Asset Coverage: A deterioration in asset coverage levels below '40 Act requirements and the Fund manager’s inability to liquidate assets and demonstrate intention to cure within the 30-day time period could result in a negative rating change. Conversely, a trend of stable asset performance coupled with improvements to asset coverage could result in positive rating changes.
- Industry Concentration: Further consolidation within the energy midstream industry resulting in more limited investment opportunities and a greater probability for performance correlations could result in negative rating changes.
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