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Kayne Cuts, Blames Kinder

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On Friday, Kayne Anderson held a conference call to address recent market events and the impact on their funds.  Kayne announced reduced distributions across all their CEF funds in order to achieve 1.0x coverage, the percentage cuts were as follows:

 

KYN    -16%

KYE     -32%

KMF    -12%

KED     - 9%

 

Kayne outlined the following factors and observations for the dividend cuts:

 

  • M&A which reduced portfolio weighted yield and income
  • Reduced Leverage from MLP unit declines
  • Kayne reduced Kinder Morgan’s holdings by $723MM over the past year, but still held a very large position
  • DO NOT EXPECT to see any additional distribution cuts in their portfolios, but they have projected a cut in one of their holdings
  • Expect Many Unit to stop or slow growth in 2016

 

Below is the latest holdings for KYN as of 10/31, and the names in yellow are midstream units which have elevated yield levels, which Kayne is expecting not to cut distributions IF their current portfolio is similar to what has been reported as per below.  


 

 

In a move to show their support, Kayne Management will invest $14MM of their after tax management fees back into the funds, at the higher of the NAV or Closing price.  Since June, the management team has invested $42MM in their funds. 

 

Kayne pointed out that they did not agree with Kinder’s actions, and thought they had better options.  The Moody’s negative outlook change came as a shock to Kinder’s management.  Kayne believes that the damage was self-inflicted, and Kinder could have either sold assets or issued additional preferred shares, and should kept their dividend flat. 

 

Kayne points out that they properly understood the risks of their KMI holdings and they exercised their judgment of what the management should do.  They need to rely on Management’s comments, and in the case of Kinder, they communicated a growth plan just prior to the cut. 

 

So will other management teams follow Kinder’s cut?  Those who have have realized a negative incentive for management teams to do so.  Teekay also followed the path of Kinder this past week, and have realized the same results when they chose to reduce the distribution to fund new capex growth.

 

Kayne believes the MLP model will survive and thrive.  Over the past few years, MLP’s have expected capital markets to be available for long term funding, and some management teams committed to multi year growth plans.   This crisis will force management teams to define projects with a 12-18 month outlook using their balance sheets.

 

Kayne expects prices to rebound in the second half and could end the year between $55 and $60.  Gas will have a difficult time trading about $3 in the near future.  What if the forecast is wrong?  Only 4 basins in the US have a breakeven price of below $60 bbl, which means that the issue is not IF but WHEN.   If prices stay in their current range of $40, US production could fall to 8.2MM bpd (vs 9.1MM current), so the portfolio strategy is to be defensive in case the rebound process takes longer and focus on assets where production cuts may be less significant.  Kayne suggests a lower for longer scenario will not cripple MLP midstream assets.  Historically, it was easier to model MLP cash flows and the expected distribution growth rates.  But it has become more difficult to assess how management teams will address their balance sheets.   Kayne finds it unbelievable that MLP’s have been hit harder than Oil Field Services companies.  

 

On the final note, Kayne noted that this has been one of their best years for raising Institutional capital for MLP's.

 

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