KBRA Assigns Ratings to Tortoise Energy Infrastructure Corp. Senior Notes and Mandatory Redeemable Preferred Shares
18 Dec 2024 | New York
KBRA assigns a rating of AAA to Tortoise Energy Infrastructure Corp.’s ("TYG" or the “Fund”) Senior Notes Series RR and an A+ rating to TYG’s Mandatory Redeemable Preferred Shares Series G. The Watch Placement is driven by the expected merger of TYG with Tortoise Midstream Energy Fund, Inc., as announced by Tortoise Capital Advisors ("Tortoise" or the "Manager").
The Fund is registered under the Investment Company Act of 1940 (the “40 Act”) and is a closed-end investment fund that is sponsored by Tortoise. The Fund had its Initial Public Offering in February 2004, and its shares are listed on the New York Stock Exchange under the symbol TYG. The primary objective of TYG is to invest in energy infrastructure companies, with a focus on equity securities of MLPs and midstream entities.
The ratings are driven primarily by TYG’s strong asset coverage, liquidity, and management experience. Furthermore, TYG has demonstrated its willingness and ability to remain in compliance with 40 Act leverage thresholds with a goal to consistently exceed these levels and maintain downside cushion.
Key Credit Considerations
- Asset Coverage: As a fund registered under the Investment Company Act of 1940, regulatory requirements 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 TYG to maintain the ability to issue additional debt or preferred shares and pay dividends. Tortoise Capital Advisors has demonstrated its ability and willingness to meet these asset coverage requirements with a goal to consistently exceed these levels and maintain downside cushion. Furthermore, distributions to common shareholders are only permitted so long as total asset coverage is greater than 225%. This coverage level as it relates to distributions highly incentivizes the Fund’s management team to maintain its asset coverage cushion.
- Liquidity: At least 90% of TYG’s total investments are invested in securities of energy infrastructure companies. TYG may also invest up to 30% of its total investments in restricted securities which are less liquid than securities trading in the open market because of statutory and contractual restrictions on resale. As the portfolio is primarily invested in publicly traded securities, the liquidity of the Fund’s assets is relatively strong. Despite the strong liquidity profile, the manager is largely reliant on sales into public markets, which may not always reflect the intrinsic value of the underlying companies.
- Non-diversified Investments: TYG is a non-diversified closed-end fund that focuses primarily on energy infrastructure companies. As a non-diversified fund in the energy infrastructure space, the Fund faces idiosyncratic risk that cannot be mitigated through industry diversification.
- Sponsor Experience: Tortoise was founded in 2002 and as of September 30, 2024, had approximately $8.2 billion AUM with circa 100 employees domiciled in Kansas City. Tortoise provides investors with access to active and passive investment solutions across the capital structure. The Firm offers a variety of investment vehicles including separately managed accounts, closed-end funds, open end funds, interval funds, private funds and exchange-traded products. Investments are focused on energy and power infrastructure, energy transition, sustainable infrastructure, water & environment and social impact.
Rating Sensitivities
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.
Investment Fund Debt Rating Determinants
Quantitative Factors
- Asset Quality: Asset quality was determined based on an assessment of the underlying collateral that supports the payment of interest and principal on the Senior Notes and MRPS. Based on an analysis of the current portfolio, the investments consist primarily of equity securities.
- Asset Coverage: As a fund registered under the Investment Company Act of 1940, TYG is subject to regulatory requirements which dictate minimum asset coverage ratios of 300% on senior debt and 200% on total leverage. Furthermore, distributions to common shareholders are not allowed unless asset coverage levels relative to total leverage exceeds 225%. This highly incentivizes TYG to maintain its asset coverage cushion. Following the stabilization of the fund’s leverage profile after enduring COVID-19 related market volatility, asset coverage for both the Senior Notes and the MRPS have consistently remained above these target thresholds. The new issuance of Senior Notes Series RR will be used to repay Series L Senior Notes as well as to reduce the outstanding balance on the credit facility. The MRPS Series G issuance proceeds will be used for repayment of the maturing Series E MRPS. As such, post issuance of the new series the asset coverage will remain unchanged.
- Liquidity: As the portfolio is invested mostly in publicly traded securities, the liquidity of Fund assets is relatively strong. With that said, the investment manager is largely reliant on sales into public markets, which may not always reflect intrinsic value of the underlying companies.
- Duration: Due to the ongoing nature of the Fund, its portfolio of assets and management, there is no meaningful duration measurement associated with the underlying collateral supporting this transaction.
- Cash Flow Analysis: Given the nature of the assets of the Fund, the risk of the Fund failing to meet interest and principal obligations on the preferred shares is already captured in the Asset Coverage and Liquidity determinants. As such, no weight is assigned to this determinant.
Qualitative Factors
- Manager Review: KBRA’s manager review considers the Manager’s capabilities, track record and policies and procedures.
- Other: KBRA qualitatively considers the Manager’s demonstrated ability and willingness to consistently exceed ꞌ40 Act asset coverage levels
ESG Considerations
KBRA typically analyzes Environmental, Social, and Governance (ESG) factors through the lens of how management teams plan for and manage relevant ESG risks and opportunities. More information on KBRA’s approach to ESG risk management when evaluating funds can be found here. Over the medium-term, funds and other financial institutions will need to prioritize ESG risk management and disclosure with the likelihood of expansions in ESG-related regulation and rising investor focus on ESG issues.
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