Filed pursuant to Rule 497(c)

under the Securities Act of 1933,

as amended, File No. 333-165775

 

SUBJECT TO COMPLETION, DATED MAY 3, 2011.

 

PRELIMINARY PROSPECTUS SUPPLEMENT

(To Prospectus dated April 1, 2011)

 

$     

 

 

     % Series D Mandatory Redeemable Preferred Shares

Liquidation Preference $25.00 per share

Mandatorily Redeemable June 1, 2018

 

 

 

 

Kayne Anderson MLP Investment Company (the “Company,” “we,” “us” or “our”) is a non-diversified, closed-end management investment company. Our investment objective is to obtain a high after-tax total return by investing at least 85% of our total assets in energy-related partnerships and their affiliates (collectively, “MLPs”), and in 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 MLPs, “Midstream Energy Companies”).

 

We are offering      shares of our Series D Mandatory Redeemable Preferred Stock (referred to as “Series D Mandatory Redeemable Preferred Shares” or “Series D MRP Shares”) with an aggregate liquidation preference of $      in this prospectus supplement. This prospectus supplement, together with the accompanying prospectus dated April 1, 2011 (the “prospectus”), sets forth the information that you should know before investing.

 

Investors in Series D MRP Shares will be entitled to receive cash dividends at an annual rate of     % per annum. Dividends on the Series D MRP Shares will be payable on the first business day of each month, beginning on June 1, 2011 and upon redemption of the Series D MRP Shares. The initial dividend period for the Series D MRP Shares will commence on May   , 2011 and end on May 31, 2011. Each subsequent dividend period will be a calendar month (or the portion thereof occurring prior to the redemption of such Series D MRP Shares). Dividends with respect to any monthly dividend period will be declared and paid to holders of record of Series D MRP Shares as their names appear on our books and records at the close of business on the 15th day of such dividend period (or if such day is not a business day, the next preceding business day).

 

We are required to redeem the Series D MRP Shares on June 1, 2018. In addition, Series D MRP Shares are subject to optional and mandatory redemption by us in certain circumstances described in this prospectus supplement.

 

Application has been made to list the Series D MRP Shares on the New York Stock Exchange (the “NYSE”) under the symbol “KYN Pr D” so that trading on such exchange will begin within 30 days after the date of this prospectus supplement, subject to notice of issuance. Prior to the expected commencement of trading on the NYSE, the underwriters do not intend to make a market in the Series D MRP Shares and a market for the Series D MRP Shares is not expected to develop. Consequently, it is anticipated that, prior to the commencement of trading on the NYSE, an investment in Series D MRP Shares will be illiquid.

 

We intend to use the net proceeds from the sale of Series D MRP Shares to make investments in portfolio companies, to repay indebtedness and for general corporate purposes. See “Prospectus Supplement Summary—The Offering.”

 

The Series D MRP Shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

 

Investing in Series D MRP Shares involves risks. See “Risk Factors” beginning on page 15 of the prospectus and “Risks of Investing in Mandatory Redeemable Preferred Shares” beginning on page S-7 of this prospectus supplement.

 

 

The underwriters may also purchase up to an additional           Series D MRP Shares from us, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus supplement to cover overallotments, if any.

 

None of the Securities and Exchange Commission, any state securities commission or any other regulatory body has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The Series D MRP Shares will be ready for delivery on or about May   , 2011.

 

 

 

 

Joint Book-Running Managers

 

BofA Merrill Lynch  Citi  Wells Fargo Securities  RBC Capital Markets

 

 

 

 

May   , 2011.

 

TABLE OF CONTENTS

 

Prospectus Supplement

 

 

Prospectus

 

You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus. This prospectus supplement and the accompanying prospectus set forth certain information about us that a prospective investor should carefully consider before making an investment in our securities. This prospectus supplement, which describes the specific terms of this offering, also adds to and updates information contained in the accompanying prospectus and the documents incorporated by reference in the accompanying prospectus. The accompanying prospectus gives more general information, some of which may not apply to this offering. If the description of this offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in this prospectus supplement; provided that if any statement in one of these documents is inconsistent with a statement in another document having a later date and incorporated by reference into the accompanying prospectus or prospectus supplement, the statement in the incorporated document having the later date modifies or supersedes the earlier statement. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. The information contained in or incorporated by reference in this prospectus supplement and the accompanying prospectus is accurate only as of the respective dates on their front covers, regardless of the time of delivery of this prospectus supplement, the accompanying prospectus, or the sale of the Series D MRP Shares. Our business, financial condition, results of operations and prospects may have changed since that date.

 

You should read this prospectus supplement and the accompanying prospectus before deciding whether to invest and retain it for future reference. A statement of additional information, dated April 1, 2011 (“SAI”), as supplemented from time to time, containing additional information about us, has been filed with the Securities and Exchange Commission (“SEC”) and is incorporated by reference in its entirety into this prospectus supplement. You may request a free copy of our SAI by calling toll-free at (877) 657-3863, or by writing to us at 717 Texas Avenue, Suite 3100, Houston, Texas 77002. Electronic copies of the accompanying prospectus, our stockholder reports and our SAI are also available on our website (http://www.kaynefunds.com). You may also obtain copies of these documents (and other information regarding us) from the SEC’s web site (http://www.sec.gov).

 

Capitalized terms used but not defined in this prospectus supplement shall have the meanings given to such terms in the Articles Supplementary setting forth the rights and preferences of the Series D MRP Shares (the “Articles Supplementary”). The Articles Supplementary are available from us upon request.

 

This prospectus supplement, the accompanying prospectus and the SAI contain forward-looking statements. All statements other than statements of historical facts included in this prospectus that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements with words like “believe,” “may,” “could,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate” or “continue” and other words and terms of similar meaning and the negative of such terms. Such forward-looking statements may be contained in this prospectus supplement as well as in the accompanying prospectus. These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this prospectus, including the risks outlined under “Risk Factors,” will be important in determining future results. In addition, several factors that could materially affect our actual results are the ability of the MLPs and other Midstream Energy Companies in which we invest to achieve their objectives, our ability to source favorable private investments, the timing and amount of distributions and

dividends from the MLPs and other Midstream Energy Companies in which we intend to invest, the dependence of our future success on the general economy and its impact on the industries in which we invest and other factors discussed in our periodic filings with the SEC.

 

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. The factors identified above are believed to be important factors, but not necessarily all of the important factors, that could cause our actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material adverse effects on us. Since our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, we cannot give any assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. All forward-looking statements included in this prospectus supplement, the accompanying prospectus or the SAI, are expressly qualified in their entirety by the foregoing cautionary statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of such documents. We do not undertake any obligation to update, amend or clarify these forward-looking statements or the risk factors contained therein, whether as a result of new information, future events or otherwise, except as may be required under the federal securities laws. We acknowledge that, notwithstanding the foregoing statements, the Private Securities Litigation Reform Act of 1995 does not apply to investment companies such as us.

 

PROSPECTUS SUPPLEMENT SUMMARY

														Percent of
						Units				Amount				Long-Term
		Company		Sector		(in thousands)				($ millions)				Investments
1.		Enterprise Products Partners L.P.		Midstream MLP			6,438				$277.2				8.5	%
2.		Magellan Midstream Partners, L.P.		Midstream MLP			3,532				211.4				6.5
3.		Kinder Morgan Management, LLC		MLP Affiliate			3,099				203.3				6.2
4.		Plains All American Pipeline, L.P.		Midstream MLP			2,876				183.3				5.6
5.		MarkWest Energy Partners, LP		Midstream MLP			3,481				168.7				5.2
6.		Williams Partners L.P.		Midstream MLP			3,008				155.8				4.8
7.		Inergy, L.P.		Propane MLP			3,741				150.0				4.6
8.		Energy Transfer Equity, L.P. (1)		General Partner MLP			2,899				130.4				4.0
9.		Copano Energy, LLC		Midstream MLP			3,189				113.5				3.5
10.		Energy Transfer Partners, L.P. (1)		Midstream MLP			2,025				104.8				3.2

(1)		Energy Transfer Equity, L.P. is the general partner of Energy Transfer Partners, L.P.

Issuer		Kayne Anderson MLP Investment Company
Series D MRP Shares Offered		Series D MRP Shares, $25.00 liquidation preference per share ($      aggregate liquidation preference). The Series D MRP Shares are being offered by the underwriters (the “Underwriters”) listed under “Underwriting,” for which Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Wells Fargo Securities, LLC, and RBC Capital Markets, LLC are acting as representatives. We have granted the Underwriters the right to purchase up to an additional      Series D MRP Shares to cover overallotments. Unless otherwise specifically stated, the information throughout this prospectus supplement does not take into account the possible issuance to the Underwriters of additional Series D MRP Shares pursuant to their right to purchase additional Series D MRP Shares to cover overallotments.
Dividend Rate		Series D MRP Shares will pay a monthly cash dividend at a rate of     % per annum. The dividend rate is subject to adjustment (but will not in any event be lower than     %) in certain circumstances. See “Description of Mandatory Redeemable Preferred Shares—Dividends and Dividend Periods—Fixed Dividend Rate,” “Description of Mandatory Redeemable Preferred Shares—Dividends and Dividend Periods—Adjustment to Fixed Dividend Rate—Ratings” and “Description of Mandatory Redeemable Preferred Shares—Dividends and Dividend Periods—Default Rate—Default Period.”
Dividend Payments		The holders of Series D 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. Dividends on the Series D MRP Shares will be payable on the first business day of each month, beginning on June 1, 2011, and upon redemption of the Series D MRP Shares (each payment date a “Dividend Payment Date”). The initial dividend period for the Series D MRP Shares will commence on May   , 2011 and end on May 31, 2011. Each subsequent dividend period will be a calendar month (or the portion thereof occurring prior to the redemption of such Series D MRP Shares) (each dividend period a “Dividend Period”). Dividends with respect to any Dividend Period will be declared and paid to holders of record of the Series D MRP Shares as their names appear on our books and records at the close of business on the 15th day of such Dividend Period (or if such day is not a business day, the next preceding business day). See “Description of Mandatory Redeemable Preferred Shares—Dividends and Dividend Periods.”
Term Redemption		We are required to redeem all outstanding Series D MRP Shares on June 1, 2018 (the “Term Redemption Date”) at a redemption price equal to $25.00 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 Term Redemption Date (the “Redemption Price”). See “Description of

		Mandatory Redeemable Preferred Shares—Redemption—Term Redemption.”
Mandatory Redemption for Asset Coverage and Series D MRP Shares Basic Maintenance Amount		Asset Coverage.  If we fail to maintain asset coverage of at least 225% (the “Series D MRP Shares Asset Coverage”) as of the close of business on the last day of any month and such failure is not cured as of the close of business on the date that is 30 days following such day, the Series D MRP Shares will be subject to mandatory redemption at the Redemption Price. See “Asset Coverage Requirements” and “Description of Mandatory Redeemable Preferred Shares—Redemption—Mandatory Redemption.”
		Series D MRP Shares Basic Maintenance Amount.  If we fail to maintain assets in our portfolio that have a value equal to the Series D MRP Shares Basic Maintenance Amount (as defined below) as of the close of business on the last day of any week, and such failure is not cured as of the close of business on the date that is 30 days following such day, the Series D MRP Shares will be subject to mandatory redemption at the Redemption Price. See “Asset Coverage Requirements” and “Description of Mandatory Redeemable Preferred Shares—Redemption—Mandatory Redemption.”
		Mandatory Redemption of Series A MRP Shares.  To the extent that a redemption of the Series A MRP Shares is required as a result of our failure to maintain either (i) asset coverage of at least 225% or (ii) assets in our portfolio that have a value equal the basic maintenance amount required by the rating agency rating the Series A MRP Shares under its specific rating agency guideline at any time, the Series D MRP Shares will be subject to mandatory redemption at the Redemption Price. See “Asset Coverage Requirements” and “Description of Mandatory Redeemable Preferred Shares—Redemption—Mandatory Redemption.”
Optional Redemption		We may redeem the Series D MRP Shares at any time following the first anniversary of May   , 2011 (the “Original Issue Date”) at the Optional Redemption Price per share. On a limited basis, if at any time on or prior to May   , 2012, the Series D MRP Shares Asset Coverage is greater than 225% but less than or equal to 235% for any 5 business days within a 10 business day period, we may redeem the Series D MRP Shares at 102% of the liquidation preference per share, plus an amount equal to the then accumulated but unpaid dividends thereon. See “Description of Mandatory Redeemable Preferred Shares—Redemption—Optional Redemption.”
Use of Proceeds		We estimate that our net proceeds from this offering after deducting the underwriting discount and estimated offering expenses will be approximately $      million, or $      million if the Underwriters exercise the overallotment option in full. We intend to use all of the net proceeds of this offering to make investments in portfolio companies, to repay indebtedness and for general corporate purposes. See “Use of Proceeds.”
NYSE Listing		Application has been made to list the Series D MRP Shares on the NYSE under the symbol “KYN Pr D” so that trading on such exchange will begin within 30 days after the date of this prospectus

		supplement, subject to notice of issuance. Prior to the expected commencement of trading on the NYSE, the Underwriters do not intend to make a market in the Series D MRP Shares and a market for the Series D MRP Shares is not expected to develop. Consequently, it is anticipated that, prior to the commencement of trading on the NYSE, an investment in Series D MRP Shares will be illiquid.
Ratings		There can be no assurance that any rating obtained in connection with the offering of Series D MRP Shares will be maintained at the level originally assigned through the term of the Series D MRP Shares. The dividend rate payable on the Series D MRP Shares will be subject to an increase in the event that the rating of the Series D MRP Shares by Fitch (together with any nationally recognized statistical ratings agency rating the Series D MRP Shares, a “Rating Agency”) is downgraded below “A” (or the equivalent of such rating by another Rating Agency), or if no Rating Agency is then rating the Series D MRP Shares. See “Description of Mandatory Redeemable Preferred Shares—Dividends and Dividend Periods—Adjustment to Fixed Dividend Rate—Ratings.” The Board of Directors has the right to terminate the designation of Fitch or any other Rating Agency as a Rating Agency for purposes of the Series D MRP Shares. In such event, any rating of such terminated Rating Agency, to the extent it would have been taken into account in any of the provisions of the Series D MRP Shares which are described in this prospectus supplement or included in the Articles Supplementary, will be disregarded, and only the ratings of the then-designated Rating Agency will be taken into account.
Federal Income Tax Matters		Under present law, we believe that the Series D MRP Shares will constitute equity, and thus distributions with respect to the Series D MRP Shares will generally constitute dividends to the extent of our allocable current or accumulated earnings and profits, as calculated for federal income tax purposes. Such dividends generally will be taxable as ordinary income to holders but are expected to be treated as “qualified dividend income” that is generally subject to reduced rates of federal income taxation for noncorporate investors (for taxable years beginning on or before December 31, 2012) and are also expected to be eligible for the dividends received deduction available to corporate stockholders, in each case provided that certain holding period requirements are met. See “Federal Income Tax Matters.”
Redemption and Paying Agent		American Stock Transfer & Trust Company
Risk Factors		See “Risk Factors” and other information included in the accompanying prospectus, as well as “Risks of Investing in Mandatory Redeemable Preferred Shares” in this prospectus supplement, for a discussion of factors you should carefully consider before deciding to invest in Series D MRP Shares.

 

Investing in any of our securities involves risk, including the risk that you may receive little or no return on your investment or even that you may lose part or all of your investment. Therefore, before investing in the Series D MRP Share you should consider carefully the following risks, as well as the risk factors set forth under “Risk Factors” beginning on page 15 of the accompanying prospectus.

 

Interest Rate Risk

 

Our Series D MRP Shares pay dividends at a fixed dividend rate. Prices of fixed income investments vary inversely with changes in market yields. The market yields on intermediate term securities comparable to Series D MRP Shares may increase, which would likely result in a decline in the secondary market price of Series D MRP Shares prior to their term redemption.

 

Secondary Market and Delayed Listing Risk

 

Because we have no prior trading history for exchange-listed preferred shares, it is difficult to predict the trading patterns of Series D MRP Shares, including the effective costs of trading Series D MRP Shares. Moreover, the Series D MRP Shares will not be immediately tradeable on a stock exchange after the date of the offering and during this time period, an investment in Series D MRP Shares will be illiquid. Even after the Series D MRP Shares are listed on the NYSE as anticipated, there is a risk that the market for Series D MRP Shares may be thinly traded and relatively illiquid compared to the market for other types of securities, with the spread between the bid and asked prices considerably greater than the spreads of other securities with comparable terms and credit ratings.

 

Early Redemption Risk

 

We may voluntarily redeem Series D MRP Shares or may be forced to redeem Series D MRP Shares to meet regulatory requirements or asset coverage requirements. Such redemptions may be at a time that is unfavorable to holders of Series D MRP Shares. See “Asset Coverage Requirements” and “Description of Mandatory Redeemable Preferred Shares—Redemption.”

 

Reinvestment Risk

 

Given the multi-year term and potential for early redemption of Series D MRP Shares, holders of Series D MRP Shares may face an increased reinvestment risk, which is the risk that the return on an investment purchased with proceeds from the sale or redemption of Series D MRP Shares may be lower than the return previously obtained from an investment in Series D MRP Shares.

 

Credit Crisis and Liquidity Risk

 

General market uncertainty and extraordinary conditions in the credit markets may impact the liquidity of our investment portfolio, which in turn, during extraordinary circumstances, could impact our distributions and/or the liquidity of the Term Redemption Liquidity Account. Furthermore, there may be market imbalances of sellers and buyers of Series D MRP Shares during periods of extreme illiquidity and volatility. Such market conditions may lead to periods of thin trading in any secondary market for the Series D MRP Shares and may make valuation of the Series D MRP Shares uncertain. As a result, the spread between bid and asked prices is likely to increase significantly such that a Series D MRP Shares investor may have greater difficulty selling his or her MRP Shares. Less liquid and more volatile trading environments could result in sudden and significant valuation increases or declines in market price for MRP Shares.

 

We estimate that the net proceeds from the sale of the Series D MRP Shares that we are offering will be approximately $      million, after payment of the Underwriters’ discount and estimated offering expenses or $      million if the Underwriters exercise the overallotment option in full.

 

We intend to use the net proceeds of this offering to make investments in portfolio companies in accordance with our investment objective and policies, to repay indebtedness and for general corporate purposes.

 

At March 31, 2011, we had outstanding borrowings on the revolving credit facility of $58 million and the interest rate was 3.15%. Any borrowings under our revolving credit facility will be used to fund investments in portfolio companies and for general corporate purposes. Amounts repaid under our revolving credit facility will remain available for future borrowings. Affiliates of some of the underwriters are lenders under our revolving credit facility and will receive a pro rata portion of the net proceeds from this offering, if any, used to reduce amounts outstanding under our credit facility.

 

For the portion of the net proceeds from this offering that we intend to use to make investments in portfolio companies, pending such investments, we anticipate investing such proceeds either in short-term securities issued by the U.S. government or its agencies or instrumentalities or in high quality, short-term or long-term debt obligations or money market instruments. A delay in the anticipated use of proceeds could lower returns, reduce our distribution to common stockholders and reduce the amount of cash available to make dividend and interest payments on preferred stock and debt securities, respectively.

 

The following table sets forth our capitalization: (i) as of February 28, 2011, (ii) as adjusted to give effect to the issuance of 5,700,000 shares of common stock on April 8, 2011 and (ii) as adjusted for this offering to give effect to the issuance of the Series D MRP Shares offered hereby and the issuance of 5,700,000 shares of common stock on April 8, 2011. As indicated below, common stockholders will bear the offering costs associated with this offering.

 

 

 

The 1940 Act and the Rating Agency rating the Series D MRP Shares impose asset coverage requirements that may limit our ability to engage in certain types of transactions and may limit our ability to take certain actions without confirming with the Rating Agency that such action will not impair the ratings.

 

We are required to satisfy two separate asset maintenance requirements with respect to outstanding Series D MRP Shares: (1) we must maintain assets in our portfolio that have a value, discounted in accordance with guidelines set forth by the Rating Agency, at least equal to the aggregate liquidation preference of the Series D MRP Shares, plus specified liabilities, payment obligations and other amounts as set forth by the Rating Agency (the “Series D MRP Shares Basic Maintenance Amount”); and (2) we must satisfy the 1940 Act asset coverage requirements. Further details about the components of the Series D MRP Shares Basic Maintenance Amount can be found in the Articles Supplementary. The Rating Agency may amend its guidelines from time to time.

 

In order to meet the 1940 Act asset coverage requirements, we must maintain, with respect to our outstanding preferred stock, asset coverage of at least 200%. Notwithstanding the foregoing, we have agreed, while the Series D MRP Shares are outstanding, to maintain asset coverage of at least 225% (the “Series D MRP Shares Asset Coverage”). We estimate that based on the composition of our portfolio as of March 31, 2011, our asset coverage would be:

 

 

If the Underwriters exercise their over-allotment option in full, their Series D MRP Shares Asset Coverage would be     %.

 

A copy of the current Rating Agency Guidelines will be provided to any holder of Series D MRP Shares promptly upon written request by such holder to the Company at 717 Texas Avenue, Suite 3100, Houston, Texas 77002. See “Rating Agency Guidelines” in the accompanying prospectus for a more detailed description of our asset maintenance requirements.

 

The following is a brief description of the terms of the Series D MRP Shares. This description does not purport to be complete and is subject to and qualified in its entirety by reference to the more detailed description of the Mandatory Redeemable Preferred Shares in the Articles Supplementary, a copy of which is filed as an exhibit to our registration statement.

 

General

 

As of March 31, 2011, our authorized capital consisted of 195,590,000 shares of common stock, $0.001 par value per share; 4,400,000 shares of Series A Mandatory Redeemable Preferred Stock, par value, $0.001 par value per share (the “Series A MRP Shares”); 320,000 shares of Series B Mandatory Redeemable Preferred Stock, par value, $0.001 par value per share (the “Series B MRP Shares”); 1,680,000 shares of Series C Mandatory Redeemable Preferred Stock, par value, $0.001 par value per share (the “Series C MRP Shares”); 7,000 shares of Series D Auction Rate Preferred Stock, $0.001 par value per share (the “ARP Shares”); and 3,000 shares of undesignated preferred stock, $0.001 par value per share. In addition, the Articles Supplementary provide that (i) 3,990,000 shares of common stock, (ii) 7,000 ARP Shares and (iii) 3,000 shares of undesignated preferred stock shall be classified and designated as an aggregate of 4,000,000 shares of Series D Mandatory Redeemable Preferred Stock (the “Series D MRP Shares”) with the rights, preferences, conversions or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption as set forth in the Articles Supplementary.

 

As of March 31, 2011, there were no outstanding options or warrants to purchase our stock. In connection with the April 8, 2011 common stock offering, we granted the underwriters for such offering an option exercisable through May 19, 2011 to purchase up to an additional 855,000 shares of common stock to cover over-allotments, if any. As of May 2, 2011, the underwriters have not exercised this option. No stock has been authorized for issuance under any equity compensation plans.

 

Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.

 

Under our Charter, our Board of Directors is authorized to classify and reclassify any unissued shares of stock into other classes or series of stock and authorize the issuance of shares of stock on a parity with the Series A MRP Shares, Series B MRP Shares, Series C MRP Shares and the Series D MRP Shares with preferences, rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption as determined by the Board of Directors without obtaining stockholder approval. As permitted by the Maryland General Corporation Law, our Charter provides that the Board of Directors, without any action by our stockholders, may amend the Charter from time to time to increase or decrease the aggregate number of shares or stock or the number of shares of stock of any class or series that we have authority to issue.

 

The Series D MRP Shares have a liquidation preference of $25.00 per share, plus all accumulated but unpaid dividends (whether or not earned or declared) to the date of final distribution. The Series D MRP Shares when issued and sold through this offering (1) will be fully paid and non-assessable, (2) will not be convertible into shares of our common stock or any other security and (3) will have no preemptive rights. The Series D MRP Shares will be subject to optional and mandatory redemption as described below under “— Redemption.”

 

Holders of Series D MRP Shares will not receive certificates representing their ownership interest in such shares. The Depository Trust Company (“DTC”) will initially act as Securities Depository with respect to the Series D MRP Shares.

 

American Stock Transfer & Trust Company will act as the transfer agent, registrar and paying agent (“paying agent”) for the Series D MRP Shares. Furthermore, the paying agent will send notices to holders of

Series D MRP Shares of any meeting at which holders of Series D MRP Shares have the right to vote. See “Description of Capital Stock—Preferred Stock—Voting Rights” in the accompanying prospectus. However, the paying agent generally will serve merely as our agent, acting in accordance with our instructions.

 

We will have the right (to the extent permitted by applicable law) to purchase or otherwise acquire any Series D MRP Shares, so long as we are current in the payment of dividends on the Series D MRP Shares and on any of our other preferred shares.

 

Dividends and Dividend Periods

 

General.  Holders of Series D 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 consisting of twelve 30 day months. 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 distribution declared and payable on our common stock. For a description of the tax treatment of distributions paid on the Series D MRP Shares, see “Federal Income Tax Matters” in this prospectus supplement.

 

Fixed Dividend Rate.  The Applicable Rate is an annual rate of     % for Series D MRP Shares and may be adjusted upon a change in the credit rating of the Series D MRP Shares.

 

Payment of Dividends and Dividend Periods.  Dividends on the Series D MRP Shares will be payable on the first business day of each month, beginning June 1, 2011 and upon redemption of the Series D MRP Shares. The initial Dividend Period for the Series D MRP Shares will commence on May   , 2011 and end on May 31, 2011 and each subsequent Dividend Period will be a one month period (or the portion thereof occurring prior to the redemption of such Series D MRP Shares). Dividends with respect to any monthly Dividend Period will be declared and paid to holders of record of Series D MRP Shares as their names shall appear on our books and records, at the close of business on the 15th day of such Dividend Period (or if such day is not a business day, the next preceding business day) (each, a “Record Date”). Dividends payable on any Series D MRP Shares for any period of less than a full monthly Dividend Period, including in connection with the first Dividend Period for such shares or upon any redemption of such shares on any redemption date other than on a Dividend Payment Date, will be computed on the basis of the actual number of days elapsed for any period divided by 360.

 

Adjustment to Fixed Dividend Rate—Ratings.  So long as the Series D MRP Shares are rated on any date no less than “A” by Fitch (or no less than the equivalent of such rating by another Rating Agency), then the Dividend Rate for such series of shares will be equal to the Applicable Rate. If the highest credit rating assigned by Fitch (or any other rating agency) on any date to the then outstanding Series D MRP Shares is equal to one of the ratings set forth in the table below, the Dividend Rate applicable to such outstanding 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.

 

Dividend Rate Adjustment Schedule

 

 

We will at all times use our reasonable best efforts to cause at least one Rating Agency to maintain a current rating on the outstanding Series D MRP Shares. If no Rating Agency is rating the outstanding Series D MRP Shares, the Dividend Rate applicable to the Series D MRP Shares for such date shall be a rate equal to the Applicable Rate plus 4.00%, unless the Dividend Rate is the Default Rate, in which case the Dividend Rate shall remain the Default Rate.

 

The Board of Directors has the right to terminate the designation of Fitch or any other Rating Agency as a Rating Agency for purposes of the Series D MRP Shares. In such event, any rating of such terminated Rating Agency, to the extent it would have been taken into account in any of the provisions of the Series D MRP Shares which are described in this prospectus supplement or included in the Articles Supplementary, will be disregarded, and only the rating of the then-designated Rating Agency will be taken into account. If a Rating Agency replaces any credit rating used in the determination of the Dividend Rate with a replacement credit rating, references to the replaced credit rating shall thereafter refer to the replacement credit rating. No adjustment to the Dividend Rate shall result in the Dividend Rate being less than the Applicable Rate.

 

Default Rate—Default 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 Series D MRP Shares will commence on a date we fail to deposit irrevocably in trust in same-day funds, with the paying agent by 3:00 p.m., New York City time, (i) the full amount of any dividends on the Series D MRP Shares payable on the Dividend Payment Date (a “Dividend Default”) or (ii) the full amount of any redemption price payable on such redemption date (a “Redemption Default” and, together with a Dividend Default, hereinafter referred to as a “Default”). Subject to the cure provisions in the next paragraph below, a Default Period with respect to a Default shall end on the business day on which, by 3:00 p.m., New York City time, an amount equal to all unpaid dividends and any unpaid redemption price shall have been deposited irrevocably in trust in same-day funds with the paying agent. 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 plus five percent (5.00%) per annum.

 

No Default Period with respect to a Dividend Default or Redemption Default will be deemed to commence if the amount of any dividend or any redemption price due (if such default is not solely due to our willful failure) is deposited irrevocably in trust, in same-day funds with the paying agent by 12:00 noon, New York City time, within three business days after the applicable Dividend Payment Date or redemption date, together with an amount equal to the Default Rate applied to the amount and period of such non-payment based on the number of days comprising such period divided by 360.

 

Mechanics of Payment of Dividends.  Not later than 3:00 p.m., New York City time, on the business day next preceding each Dividend Payment Date, we are required to deposit with the paying agent sufficient funds for the payment of dividends. We do not intend to establish any reserves for the payment of dividends. All amounts paid to the paying agent for the payment of dividends will be held in trust for the payment of such dividends to the holders of Series D MRP Shares. Dividends will be paid by the paying agent to the holders of Series D MRP Shares as their names appear on our books and records on the Record Date. Dividends that are in arrears for any past Dividend Period may be declared and paid at any time, without

reference to any regular Dividend Payment Date. Such payments are made to holders of Series D MRP Shares as their names appear on our books and records at the close of business on the 15th day of such Dividend Period (or if such day is not a business day, the next preceding business day) prior to such payment. Any payment of dividends in arrears will first be credited against the earliest accumulated but unpaid dividends. No interest or sum of money in lieu of interest will be payable in respect of any dividend payment or payments on any Series D MRP Shares which may be in arrears. See “— Default Rate—Default Period” above.

 

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

 

Redemption

 

Term Redemption.  We are required to redeem all of the Series D MRP Shares on the Term Redemption Date, at the Redemption Price.

 

Optional Redemption.  To the extent permitted under the 1940 Act and Maryland law, we may, at our option, redeem Series D MRP Shares, in whole or in part, out of funds legally available therefor, at any time and from time to time, upon not more than 40 calendar days’ prior notice. This optional redemption is limited during the first year the Series D MRP Shares are outstanding to situations in which the Series D MRP Shares Asset Coverage is greater than 225%, but less than 235% for any five business days within a 10 business day period. The amount of Series D MRP Shares that may be redeemed during the first year may not exceed an amount that results in a Series D MRP Share Asset Coverage of more than 250% pro forma for such redemption. At any time on or prior to May   , 2012, subject to the foregoing conditions, we may redeem Series D MRP Shares at a price per share equal to 102% of 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. After May   , 2012, subject to the foregoing conditions, we may redeem the Series D MRP Shares at the Optional Redemption Price per share. The “Optional Redemption Price” shall equal the product of the percentage provided below, as applicable, and 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 D MRP Shares 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 Series D 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 with a maturity date not later than one day preceding the applicable redemption date, or any combination thereof, and having an aggregate value not less than the amount, including any applicable premium, due to holders of the Series D MRP Shares by reason of the redemption of the Series D MRP Shares on such date fixed for the redemption and (ii) we would satisfy the Series D MRP Shares Basic Maintenance Amount.

 

We also reserve the right to repurchase Series D MRP Shares in market or other transactions from time to time in accordance with applicable law and at a price that may be more or less than the liquidation preference of the Series D MRP Shares, but we are under no obligation to do so.

 

Mandatory Redemption.  If, while any Series D MRP Shares are outstanding, we fail to satisfy the Series D MRP Shares Asset Coverage as of the last day of any month or the Series D MRP Shares Basic Maintenance Amount as of any valuation date (any such day, an “Asset Coverage Cure Date”), and such failure is not cured as of the date that is 30 days from such Asset Coverage Cure Date (any such day, a “Cure Date”), the Series D MRP Shares will be subject to mandatory redemption out of funds legally available therefor at the Redemption Price; provided, however, that if a redemption of the Series A MRP Shares is required as a result of our failure to maintain either (i) asset coverage of at least 225% or (ii) the basic maintenance amount required by the rating agency rating the Series A MRP Shares under its specific rating agency guideline in effect at such time, a pro rata redemption of the Series D MRP Shares shall also be required. See “Rating Agency Guidelines—1940 Act Asset Coverage” in the accompanying prospectus, but note that we have agreed, while the Series D MRP Shares are outstanding, to maintain asset coverage of at least 225% instead of 200%.

 

The number of Series D MRP Shares to be redeemed under these circumstances will be equal to the product of (1) the quotient of the number of outstanding Series D MRP Shares divided by the aggregate number of our outstanding Preferred Shares, including the Series D MRP Shares, and (2) the minimum number of Preferred Shares the redemption of which, if deemed to have occurred immediately prior to the Cure Date, would result in our satisfying the Series D MRP Shares Asset Coverage or Series D MRP Shares Basic Maintenance Amount, as the case may be, in each case as of the relevant Cure Date (provided that, if there is no such minimum number of shares the redemption of which would have such result, all Series D MRP Shares then outstanding will be redeemed).

 

We shall allocate the number of shares required to be redeemed to satisfy the Series D MRP Shares Asset Coverage or Series D MRP Shares Basic Maintenance Amount, as the case may be, pro rata among the holders of Series D 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, subject to any mandatory redemption provisions.

 

We are required to effect such a mandatory redemption not later than 40 days after the Cure Date, (the “Mandatory Redemption Date”), except that if we (1) do not have funds legally available for the redemption of, (2) are not permitted under any agreement instrument relating to or evidencing indebtedness of the Company to redeem, or (3) are not otherwise legally permitted to redeem, all of the required number of Series D Preferred Stock and any other Preferred Stock that are subject to mandatory redemption (we refer to clauses (1), (2) and (3) of this sentence as the “Special Proviso”), or we otherwise are unable to effect such redemption on or prior to such Mandatory Redemption Date; then we shall redeem those Series D MRP Shares and any other Preferred Stock on the earliest practical date on which we will have such funds available and is not otherwise prohibited from redeeming pursuant to any agreements or instruments or applicable law, upon notice to record holders of the Preferred Stock that are subject to mandatory redemption and the paying agent. Our ability to make a mandatory redemption may be limited by the provisions of the 1940 Act or Maryland law.

 

Redemption Procedure.  In the event of a redemption, we will file a notice of our intention to redeem any Series D MRP Shares with the SEC under Rule 23c-2 under the 1940 Act or any successor provision.

 

We also shall deliver a notice of redemption to the paying agent and the holders of Series D MRP Shares to be redeemed not more than 40 days prior to the applicable redemption date (“Notice of Redemption”). The Notice of Redemption will be addressed to the registered owners of the Series D MRP Shares at their addresses appearing on our books or records. Such notice will set forth (1) the redemption date, (2) the number and identity of Series D MRP Shares to be redeemed, (3) the redemption price (specifying the

amount of accumulated dividends to be included therein and the amount of the redemption premium, if any), (4) that dividends on the shares to be redeemed will cease to accumulate on such redemption date, and (5) the provision under the Articles Supplementary by which redemption shall be made. No defect in the Notice of Redemption or in the transmittal or mailing thereof will affect the validity of the redemption proceedings, except as required by applicable law.

 

If less than all of the Series D MRP Shares are redeemed on any date, the shares per holder to be redeemed on such date will be selected by us on a pro rata basis in proportion to the number of shares held by such holder, by lot or by such other method as is determined by us to be fair and equitable.

 

If Notice of Redemption has been given, then upon the deposit with the paying agent of funds 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. Upon written request, we shall be entitled to receive from the paying agent, promptly after the date fixed for redemption, any cash deposited with the paying agent in excess of (1) the aggregate redemption price of the Series D MRP Shares called for redemption on such date and (2) such other amounts, if any, to which holders of Series D MRP Shares called for redemption may be entitled. Any funds so deposited that are unclaimed two years after such redemption date will be paid, to the extent permitted by law, by the paying agent to us upon our request. Subsequent to such payment, holders of Series D MRP Shares called for redemption may look only to us for payment.

 

To the extent that any redemption for which a Notice of Redemption has been given is not made by reason of the Special Proviso, such redemption shall be made as soon as practicable to the extent such funds become legally available or such redemption is no longer otherwise prohibited. Failure to redeem Series D MRP Shares shall be deemed to exist when we shall have failed, for any reason whatsoever, to deposit with the Paying Agent on or prior to the date fixed for redemption the redemption price with respect to any shares for which such Notice of Redemption has been given in accordance with the Articles Supplementary. Notwithstanding the fact that we may not have redeemed Series D MRP Shares for which a Notice of Redemption has been given, dividends may be declared and paid on Series D MRP Shares and shall include those Series D MRP Shares for which Notice of Redemption has been given but for which deposit of funds has not been made.

 

So long as any Series D MRP Shares are held of record by the nominee of the Securities Depository, the redemption price for such shares will be paid on the redemption date to the nominee of the Securities Depository. The Securities Depository’s normal procedures provide for it to distribute the amount of the redemption price to its agent members who, in turn, are expected to distribute such funds to the persons for whom they are acting as agent.

 

Notwithstanding the provisions for redemption described above, no Series D MRP Shares may be redeemed unless all dividends in arrears on the outstanding Series D MRP Shares, and any of our shares ranking on a parity with the Series D MRP Shares with respect to the payment of dividends or upon liquidation, have been or are being contemporaneously paid or set aside for payment, except in connection with our liquidation, in which case all Series D MRP Shares and all shares ranking in parity with the Series D MRP Shares must receive proportionate amounts. At any time we may purchase or acquire all the outstanding Series D 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 Series D MRP Shares.

 

Except for the provisions described above, nothing contained in the Articles Supplementary limits any legal right of ours to purchase or otherwise acquire any Series D 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, there is no arrearage in the payment of dividends on, or the mandatory or optional redemption price with respect to, any Series D MRP Shares for which Notice of Redemption has been

given and we are in compliance with the Series D MRP Shares Asset Coverage and the Series D MRP Shares Basic Maintenance Amount after giving effect to such purchase or acquisition on the date thereof. Any shares purchased, redeemed or otherwise acquired by us shall be returned to the status of authorized but unissued shares of common stock. If less than all outstanding Series D MRP Shares are redeemed or otherwise acquired by us, we shall give notice of such transaction to the paying agent, in accordance with the procedures agreed upon by the Board of Directors.

 

Term Redemption Liquidity Account

 

On or prior to four months prior to maturity of the Series D MRP Shares ( the “Liquidity Account Initial Date”), we will cause the 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 Market Value equal to at least 110% of the Term Redemption Amount (as defined below) with respect to such Series D MRP Shares.

 

The “Term Redemption Amount” for Series D MRP Shares is equal to the Redemption Price to be paid on the Term Redemption Date, based on the number of Series D 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 Deposit Liquidity Account Investments included in the Term Redemption Liquidity Account for Series D 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 D 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. The Series D 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 Paying Agent of Liquidity Account Investments having an initial combined Market Value sufficient to effect the redemption of the Series D 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.

 

The following is a general summary of certain federal income tax considerations regarding the ownership and disposition of Series D MRP Shares. This discussion is based on the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), the applicable Treasury regulations promulgated thereunder, judicial authority and current administrative rulings and practice, all of which are subject to change, possibly on a retroactive basis. There can be no assurance that the Internal Revenue Service (the “IRS”) will not challenge one or more of the tax consequences described herein, and we have not obtained, nor do we intend to obtain, a ruling from the IRS with respect to such consequences. This discussion does not purport to be complete or to deal with all aspects of federal income taxation that may be relevant to holders in light of their particular circumstances or who are subject to special rules, such as banks, thrift institutions and certain other financial institutions, real estate investment trusts, regulated investment companies, insurance companies, brokers and dealers in securities or currencies, certain securities traders, tax-exempt investors, individual retirement accounts, certain tax-deferred accounts, and foreign investors. Tax matters are very complicated, and the tax consequences of an investment in and holding of Series D MRP Shares will depend on the particular facts of each investor’s situation. Investors are urged to consult their own tax advisors with respect to the application to their own circumstances of the general federal income taxation rules described below and with respect to other federal, state, local or foreign tax consequences to them before making an investment in Series D MRP Shares. Unless otherwise noted, this discussion assumes that investors are U.S. persons for federal income tax purposes and hold Series D MRP Shares as capital assets. For more detailed information regarding the federal income tax consequences of investing in our securities see “Tax Matters” in the accompanying prospectus.

 

If an entity that is classified as a partnership for federal income tax purposes is a beneficial owner of Series D MRP Shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Partnerships and other entities that are classified as partnerships for federal income tax purposes and persons holding Series D MRP Shares through a partnership or other entity classified as a partnership for federal income tax purposes are urged to consult their own tax advisors.

 

Federal Income Tax Treatment of Holders of Series D MRP Shares

 

Under present law, we believe that the Series D MRP Shares will constitute equity, and thus distributions with respect to the Series D MRP Shares (other than distributions in redemption of Series D MRP Shares subject to Section 302(b) of the Code) will generally constitute dividends to the extent of our allocable current or accumulated earnings and profits, as calculated for federal income tax purposes. Such dividends generally will be taxable as ordinary income to holders but are expected to be treated as “qualified dividend income” that is generally subject to reduced rates of federal income taxation for noncorporate investors (for taxable years ending on or before December 31, 2012) and are also expected to be eligible for the dividends received deduction available to corporate stockholders under Section 243 of the Code. Under federal income tax law, qualified dividend income received by individual and other noncorporate stockholders is taxed at long-term capital gain rates, which currently reach a maximum of 15%. Qualified dividend income generally includes dividends from domestic corporations and dividends from non-U.S. corporations that meet certain criteria. To be treated as qualified dividend income, the stockholder must hold the Series D MRP Shares paying otherwise qualifying dividend income more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. A stockholder’s holding period may be reduced for purposes of this rule if the stockholder engages in certain risk reduction transactions with respect to the Series D MRP Shares. The provisions of the Internal Revenue Code applicable to qualified dividend income are effective through 2012. Thereafter, higher federal income tax rates will apply unless further legislative action is taken.

 

Corporate holders should be aware that certain limitations apply to the availability of the dividends received deduction, including limitations on the aggregate amount of the deduction that may be claimed and limitations based on the holding period of the Series D MRP Shares on which the dividend is paid, which holding period may be reduced if the holder engages in risk reduction transactions with respect to its shares. Corporate holders are urged to consult their own tax advisors regarding the application of these limitations to their particular situation.

 

Generally, a corporation’s earnings and profits are computed based upon taxable income, with certain specified adjustments. We anticipate that the cash distributions received from MLPs in our portfolio will exceed the earnings and profits associated with owning such MLPs.

 

Earnings and profits are generally treated, for federal income tax purposes, as first being used to pay distributions on Series D MRP Shares, and then to the extent remaining, if any, to pay distributions on the common stock. Distributions in excess of our earnings and profits, if any, will first reduce a stockholder’s adjusted tax basis in his or her Series D MRP Shares and, after the adjusted tax basis is reduced to zero, will constitute capital gains to a stockholder.

 

Sale, Exchange or Redemption of Series D MRP Shares.  The sale or exchange of Series D MRP Shares by holders will generally be a taxable transaction for federal income tax purposes. Holders of shares of stock who sell or exchange such shares will generally recognize gain or loss in an amount equal to the difference between the net proceeds of the sale or exchange and their adjusted tax basis in the shares sold or exchanged. The gain or loss from the sale or exchange of Series D MRP Shares will generally be capital gain or loss. Similarly, a redemption by us (including a redemption resulting from our liquidation), if any, of all the shares actually and constructively held by a stockholder generally will give rise to capital gain or loss under Section 302(b) of the Internal Revenue Code, except to the extent that the redemption proceeds represent declared but unpaid dividends. Other redemptions may also give rise to capital gain or loss, but certain conditions imposed by Section 302(b) of the Internal Revenue Code must be satisfied as to the redeeming stockholder to achieve such treatment. If a redemption by us does not satisfy the conditions imposed by Section 302(b) of the Internal Revenue Code for a redeeming stockholder, the redemption will constitute a distribution on the Series D MRP Shares to the stockholder subject to the rules set forth in the paragraphs above.

 

Capital gain or loss will generally be long-term capital gain or loss if the shares were held for more than one year and will be short-term capital gain or loss if the disposed shares were held for one year or less. Net long-term capital gain recognized by a noncorporate holder generally will be subject to federal income tax at a lower rate (currently a maximum rate of 15%) than net short-term capital gain or ordinary income (currently a maximum rate of 35%). Under current law, the maximum federal income tax rate on long-term capital gain for noncorporate holders is scheduled to increase to 20% for taxable years after 2012. For corporate holders, capital gain is generally taxed at the same rate as ordinary income, that is, currently at a maximum rate of 35%. A holder’s ability to deduct capital losses may be limited.

 

Backup Withholding.  We may be required to withhold, for federal income tax purposes, a portion of all distributions (including redemption proceeds) payable to stockholders who fail to provide us with their correct taxpayer identification number, who fail to make required certifications or who have been notified by the IRS that they are subject to backup withholding (or if we have been so notified). Certain corporate and other stockholders specified in the Internal Revenue Code and the applicable Treasury regulations are exempt from backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the stockholder’s federal income tax liability provided the appropriate 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. In addition, recently enacted legislation may impose additional U.S. reporting and withholding requirements on certain foreign financial institutions and other foreign entities with respect to distributions on and proceeds from the sale or disposition of our stock. This legislation will generally be effective for payments made on or after January 1, 2013. Foreign stockholders should consult their tax advisors regarding the possible implications of this legislation as well as the other U.S. federal, state, local and foreign tax consequences of an investment in our stock.

 

Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus supplement, the Underwriters named below, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Wells Fargo Securities, LLC and RBC Capital Markets, LLC are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of Series D MRP Shares indicated below:

 

 

The Underwriters are offering the Series D MRP Shares subject to their acceptance of the Series D MRP Shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Series D MRP Shares offered by this prospectus supplement are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the Series D MRP Shares offered by this prospectus supplement if any such Series D MRP Shares are taken.

 

The Underwriters initially propose to offer part of the Series D MRP Shares directly to the public at the public offering price listed on the cover page of this prospectus supplement and to certain dealers at that price less a concession not in excess of $      per Series D MRP Share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $      per Series D MRP Share to other Underwriters or to certain dealers. After the initial offering of the Series D MRP Shares, the offering price and other selling terms may from time to time be varied by the representative. The underwriting discount of $      per Series D MRP Share is equal to     % of the public offering price. Investors must pay for any Series D MRP Shares purchased on or before May   , 2011.

 

We have granted the Underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to an aggregate of           additional Series D MRP Shares at the public offering price listed on the cover page of this prospectus supplement, less the underwriting discount. The Underwriters may exercise this option solely for the purpose of covering overallotments, if any, made in connection with the offering of the Series D MRP Shares offered by this prospectus supplement. To the extent the option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase the same percentage of the additional Series D MRP Shares as the number listed next to the Underwriter’s name in the preceding table bears to the total number of Series D MRP Shares listed in the preceding table. If the Underwriters’ option is exercised in full, the total price to the public would be $      , the total underwriting discount would be $      and total proceeds to us would be $     .

 

The following table shows the per share and total underwriting discount we will pay to the Underwriters assuming both no exercise and full exercise of the Underwriters’ option to purchase up to an additional           shares of Series D MRP Shares.

 

We estimate that the total expenses of this offering payable by us, not including the underwriting discount, will be approximately $300,000.

 

Application has been made to list the Series D MRP Shares, subject to official notice of issuance, on the New York Stock Exchange under the symbol “KYN Pr D”. Prior to this offering, there has been no public market for Series D MRP Shares. It is anticipated that trading on the New York Stock Exchange will begin within 30 days from the date of this prospectus supplement. During such period, the Underwriters do not intend to make a market in Series D MRP Shares. Consequently, it is anticipated that, prior to the commencement of trading on the New York Stock Exchange, an investment in Series D MRP Shares will be illiquid and holders of Series D MRP Shares may not be able to sell such shares as it is unlikely that a secondary market for Series D MRP Shares will develop. If a secondary market does develop prior to the commencement of trading on the New York Stock Exchange, holders of Series D MRP Shares may be able to sell such shares only at substantial discounts from liquidation preference.

 

We and our Adviser have each agreed that, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, we will not, during the period ending 90 days after the date of this prospectus supplement:

 

 

whether any such transaction described above is to be settled by delivery of Series D MRP Shares or such other securities, in cash or otherwise; or file any registration statement with the SEC relating to the offering of any Series D MRP Shares or any securities convertible into or exercisable or exchangeable for Series D MRP Shares.

 

In order to facilitate the offering of the Series D MRP Shares, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Series D MRP Shares. Specifically, the Underwriters may over-allot in connection with the offering, creating a short position in the Series D MRP Shares for their own account. In addition, to cover over-allotments or to stabilize the price of the Series D MRP Shares, the Underwriters may bid for, and purchase, Series D MRP Shares in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Series D MRP Shares in the offering, if the syndicate repurchases previously distributed Series D MRP Shares in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Series D MRP Shares above independent market levels. The Underwriters are not required to engage in these activities and may end any of these activities at any time.

 

We anticipate that the representative and certain other Underwriters may from time to time act as brokers and dealers in connection with the execution of its portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as such brokers while they are Underwriters. From time to time, certain Underwriters have provided, and may continue to provide, investment banking services to us, the Adviser and its affiliates for which they have received, and may receive, customary fees and expenses. The Underwriters may, from time to time, engage in transactions with or perform services for us, the Adviser and its affiliates in the ordinary course of business.

 

We and the Adviser have agreed to indemnify the Underwriters against certain liabilities relating to this offering, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments

that the Underwriters may be required to make for those liabilities; provided that such indemnification shall not extend to any liability or action resulting directly from the gross negligence, willful misconduct or bad faith of the Underwriters.

 

It is expected that delivery of the Series D MRP Shares will be made against payment therefor on or about the date specified on the cover of this prospectus supplement, which is the fifth business day following the date of pricing of the Series D MRP Shares (such settlement cycle being referred to as “T+5”). Under rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), trades in the secondary market are required to settle in three business days (such settlement being referred to as “T+3”), unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade Series D MRP Shares on the date of this prospectus supplement or the next succeeding business day will be required, by virtue of the fact that the Series D MRP Shares initially will settle in T+5, to specify an alternate settlement arrangement at the time of any such trade to prevent a failed settlement. Purchasers of the Series D MRP Shares who wish to trade the Series D MRP Shares on the date of this prospectus supplement or the next succeeding business day should consult their advisors.

 

Affiliations

 

Some of the underwriters and their affiliates may from time to time in the future engage in transactions with us and perform services for us in the ordinary course of their business.

 

Affiliates of some of the underwriters are lenders under our revolving credit facility and will receive a pro rata portion of the net proceeds from this offering, if any, used to reduce amounts outstanding thereunder. See “Use of Proceeds.”

 

KA Associates, Inc., an affiliate of ours and Kayne Anderson, is a member of the selling group for this offering.

 

The respective addresses of the representatives are Merrill Lynch, Pierce, Fenner & Smith Incorporated, One Bryant Park, New York, New York 10036; Citigroup Global Markets Inc., 388 Greenwich Street, New York, New York 10013; Wells Fargo Securities, LLC, 301 S. College Street, Charlotte, North Carolina 28288; and RBC Capital Markets, LLC, Three World Financial Center, 200 Vessy Street, New York, New York 10281.

 

Certain legal matters in connection with the securities offered hereby will be passed upon for us by Paul, Hastings, Janofsky & Walker LLP, or Paul Hastings, Costa Mesa, California. Paul Hastings may rely as to certain matters of Maryland law on the opinion of Venable LLP, Baltimore, Maryland. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Sidley Austin LLP, New York, New York.

 

We are subject to the informational requirements of the Exchange Act and the 1940 Act and are required to file reports (including our annual and semi-annual reports), proxy statements and other information with the SEC. We voluntarily file quarterly shareholder reports. Our most recent shareholder report filed with the SEC is for the period ended November 30, 2011. These documents are available on the SEC’s EDGAR system and can be inspected and copied for a fee at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Additional information about the operation of the public reference room facilities may be obtained by calling the SEC at (202) 551-5850.

 

This prospectus supplement and the accompanying prospectus do not contain all of the information in our registration statement, including amendments, exhibits, and schedules. Statements in this prospectus supplement and the accompanying prospectus about the contents of any contract or other document are not necessarily complete and in each instance reference is made to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by this reference. Additional information about us can be found in our registration statement (including amendments, exhibits, and schedules) on Form N-2 filed with the SEC. The SEC maintains a web site (http://www.sec.gov) that contains our registration statement, other documents incorporated by reference, and other information we have filed electronically with the SEC, including proxy statements and reports filed under the Exchange Act.

 

KAYNE ANDERSON MLP INVESTMENT COMPANY
PORTFOLIO SUMMARY
(UNAUDITED)

 

Portfolio Investments by Category *

 

 

* As a percentage of total investments.

 

Top 10 Holdings by Issuer

 

KAYNE ANDERSON MLP INVESTMENT COMPANY
MANAGEMENT DISCUSSION
(UNAUDITED)

 

Company Overview

 

Kayne Anderson MLP Investment Company is a non-diversified, closed-end fund formed in September 2004. Our investment objective is to obtain a high after-tax total return by investing at least 85% of our total assets in energy-related master limited partnerships and their affiliates (“MLPs”) and in other companies that 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 MLPs, “Midstream Energy Companies”).

 

As of November 30, 2010, we had total assets of $3.0 billion, net assets applicable to our common stock of $1.8 billion (net asset value per share of $26.67), and 68.5 million shares of common stock outstanding.

 

Our investments are principally in equity securities issued by MLPs, but we may also invest in debt securities of MLPs and debt/equity securities of Midstream Energy Companies. As of November 30, 2010, we held $2.9 billion in equity investments and $90.4 million in debt investments.

 

Results of Operations—For the Three Months Ended November 30, 2010

 

Investment Income.  Investment income totaled $4.7 million and consisted primarily of net dividends and distributions and interest income on our investments. Interest income was $1.4 million and we received $38.8 million of cash dividends and distributions, of which $35.5 million was treated as return of capital during the period. Return of capital was increased by $1.5 million during the quarter. This increase was related to 2009 tax reporting information that we received in 2010 from the portfolio companies in which we invest. During the quarter, we received $4.3 million of paid-in-kind dividends, which is not included in investment income, but is reflected as an unrealized gain.

 

Operating Expenses.  Operating expenses totaled $18.5 million, including $9.4 million of investment management fees, $6.5 million of interest expense (including non-cash amortization of debt issuance costs of $0.3 million), and $0.8 million of other operating expenses. Management fees are calculated based on the average total assets under management. Preferred stock distributions for the fourth quarter were $1.7 million (including non-cash amortization of $0.06 million).

 

Net Investment Loss.  Our net investment loss totaled $7.9 million and included a deferred income tax benefit of $5.9 million.

 

Net Realized Losses.  We had net realized losses from our investments of $9.2 million, net of $5.3 million of tax benefit. The net loss for the quarter was primarily the result of the disposition of our investments in Clearwater Natural Resources, L.P.

 

Net Change in Unrealized Gains.  We had net unrealized gains of $234.2 million. The net unrealized gain consisted of $373.9 million of unrealized gains from investments and a deferred tax expense of $139.7 million.

 

Net Increase in Net Assets Resulting from Operations.  We had an increase in net assets resulting from operations of $217.1 million. This increase is composed of a net investment loss of $7.9 million; net realized losses of $9.2 million; and net unrealized gains of $234.2 million, as noted above.

 

KAYNE ANDERSON MLP INVESTMENT COMPANY
MANAGEMENT DISCUSSION
(UNAUDITED)

 

Results of Operations—For the Year Ended November 30, 2010

 

Investment Income.  Investment income totaled $19.1 million and consisted primarily of net dividends and distributions and interest income on our investments. Interest income was $4.2 million and we received $137.7 million of cash dividends and distributions, of which $122.8 million was treated as return of capital during the period. Return of capital was increased by $1.5 million related to 2009 tax reporting information that we received in 2010 from the portfolio companies in which we invest. During the year we received $14.5 million of paid-in-kind dividends, which is not included in investment income but is reflected as an unrealized gain.

 

Operating Expenses.  Operating expenses totaled $61.0 million, including $30.1 million of investment management fees, $23.8 million of interest expense (including non-cash amortization of debt issuance costs of $1.2 million), and $3.3 million of other operating expenses. Management fees are calculated based on the average total assets under management. Preferred stock distributions for the year were $3.8 million (including non-cash amortization of $0.1 million).

 

Net Investment Loss.  Our net investment loss totaled $26.3 million and included a deferred income tax benefit of $15.6 million.

 

Net Realized Gains.  We had net realized gains from our investments of $34.3 million, net of $20.3 million of tax expense.

 

Net Change in Unrealized Gains.  We had net unrealized gains of $487.2 million. The net unrealized gain consisted of $775.4 million of unrealized gains from investments and a deferred tax expense of $288.2 million.

 

Net Increase in Net Assets Resulting from Operations.  We had an increase in net assets resulting from operations of $495.2 million. This increase is composed of a net investment loss of $26.3 million; net realized gains of $34.3 million; and net unrealized gains of $487.2 million, as noted above.

 

Distributions to Common Stockholders

 

We pay quarterly distributions to our common stockholders, funded in part by net distributable income (“NDI”) generated from our portfolio investments. NDI is the amount of income received by us from our portfolio investments less operating expenses, subject to certain adjustments as described below. NDI is not a financial measure under the accounting principles generally accepted in the United States of America (“GAAP”). Refer to the “Reconciliation of NDI to GAAP” section below for a reconciliation of this measure to our results reported under GAAP.

 

Income from portfolio investments includes (a) cash distributions paid by MLPs, (b) paid-in-kind dividends received from MLPs and MLP affiliates (in particular, the two MLP i-shares), (c) interest income from debt securities and (d) net premiums received from the sale of covered calls.

 

Operating expenses include (a) management fees paid to our investment adviser, (b) other expenses (mostly attributable to fees paid to other service providers), (c) leverage costs, including interest expense and preferred stock distributions and (d) deferred income tax expense/benefit on net investment income/loss.

 

KAYNE ANDERSON MLP INVESTMENT COMPANY
MANAGEMENT DISCUSSION
(UNAUDITED)

 

Net Distributable Income (NDI)
(amounts in millions, except for per share amounts)

 

 

Payment of future distributions is subject to Board of Directors approval, as well as meeting the covenants of our debt agreements and terms of our preferred stock. In determining our quarterly distribution to common stockholders, our Board of Directors considers a number of factors that include, but are not limited to:

 

 

On December 15, 2010, we declared our quarterly distribution of $0.485 per common share for the period September 1, 2010 through November 30, 2010 for a total of $33.2 million. The distribution was paid on January 14, 2011 to stockholders of record on January 5, 2011. During the fiscal year we paid distributions of $1.92 per common share for a total of $114.1 million to our common stockholders.

 

KAYNE ANDERSON MLP INVESTMENT COMPANY
MANAGEMENT DISCUSSION
(UNAUDITED)

 

Reconciliation of NDI to GAAP

 

The difference between distributions and other income from investments in the NDI calculation and total investment income as reported in our Statement of Operations is reconciled as follows:

 

 

The treatment of expenses included in NDI also differs from what is reported in the Statement of Operations as follows:

 

 

Liquidity and Capital Resources

 

Total leverage outstanding at November 30, 2010 of $780 million is comprised of $620 million in senior unsecured notes and $160 million in mandatory redeemable preferred stock. At November 30, 2010, we

 

KAYNE ANDERSON MLP INVESTMENT COMPANY
MANAGEMENT DISCUSSION
(UNAUDITED)

 

did not have any borrowings outstanding under our senior unsecured revolving credit facility (“the Credit Facility”). Total leverage represented 26% of total assets at November 30, 2010. As of January 27, 2011, we had $85 million borrowed under our Credit Facility.

 

The Credit Facility has a $100 million commitment maturing on June 11, 2013. The interest rate may vary between LIBOR plus 1.75% and LIBOR plus 3.00%, depending on our asset coverage ratios. Outstanding loan balances accrue interest daily at a rate equal to one-month LIBOR plus 1.75% based on current asset coverage ratios. We pay a commitment fee of 0.40% per annum on any unused amounts of the Credit Facility. A full copy of our Credit Facility is available on our website, www.kaynefunds.com.

 

At November 30, 2010, our asset coverage ratios under the Investment Company Act of 1940, as amended (“the 1940 Act”), were 420% and 334% for debt and total leverage (debt plus preferred stock), respectively. We currently target an asset coverage ratio with respect to our debt of 375%, but at times may be above or below our target depending on market conditions.

 

During fiscal 2010, we completed private placements with institutional investors of $250 million of senior unsecured notes and $160 million of mandatory redeemable preferred stock. During the year, we also completed the redemption of our series D auction rate preferred stock ($75 million).

 

At November 30, 2010, we had $620 million of senior unsecured notes outstanding with the following maturity dates: $75 million matures in 2011; $60 million matures in 2012; $125 million matures in 2013; $110 million matures in 2014; $125 million matures in 2015; $25 million matures in 2017; $60 million matures in 2020; and $40 million matures in 2022. At November 30, 2010 we had $160 million of mandatory redeemable preferred stock with the following redemption dates: $118 million redeemable in 2017 and $42 million redeemable in 2020.

 

As of November 30, 2010, our leverage consisted of both fixed rate (88%) and floating rate (12%) obligations. At such date, the weighted average interest rate on our leverage was 4.29%.

KAYNE ANDERSON MLP INVESTMENT COMPANY
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 2010
(amounts in 000’s, except number of option contracts)

 

 

 

See accompanying notes to financial statements.

 

KAYNE ANDERSON MLP INVESTMENT COMPANY
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 2010
(amounts in 000’s, except number of option contracts)

 

 

 

See accompanying notes to financial statements.

 

KAYNE ANDERSON MLP INVESTMENT COMPANY
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 2010
(amounts in 000’s, except number of option contracts)

 

 

 

 

 

See accompanying notes to financial statements.

 

KAYNE ANDERSON MLP INVESTMENT COMPANY
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 2010
(amounts in 000’s, except number of option contracts)

 

 

 

 

See accompanying notes to financial statements.

KAYNE ANDERSON MLP INVESTMENT COMPANY
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2010
(amounts in 000’s, except share and per share amounts)

 

 

 

See accompanying notes to financial statements.

KAYNE ANDERSON MLP INVESTMENT COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2010
(amounts in 000’s)

 

 

 

See accompanying notes to financial statements.

KAYNE ANDERSON MLP INVESTMENT COMPANY

 

 

 

 

 

See accompanying notes to financial statements.

KAYNE ANDERSON MLP INVESTMENT COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2010
(amounts in 000’s)

 

 

Supplemental disclosure of cash flow information:

Non-cash financing activities not included herein consist of reinvestment of distributions of $25,689 pursuant to the Company’s dividend reinvestment plan. During the fiscal year ended November 30, 2010, the Company received federal and state income tax refunds of $76 and interest paid was $21,642.

The Company received $14,489 paid-in-kind dividends during the fiscal year ended November 30, 2010. See Note 2—Significant Accounting Policies.

 

See accompanying notes to financial statements.

KAYNE ANDERSON MLP INVESTMENT COMPANY
FINANCIAL HIGHLIGHTS
(amounts in 000’s, except share and per share amounts)