Fitch Ratings has affirmed the 'AAA' ratings assigned to the
auction-rate preferred shares (ARPS) issued by the following four
closed-end funds managed by Pacific Investment Management Company LLC
(PIMCO):
PIMCO High Income Fund (NYSE: PHK), total $292 Million in ARPS:
- $58.4 million of Series M perpetual ARPS, $25,000 per share, 2,336
shares;
--$58.4 million of Series T perpetual ARPS, $25,000 per share, 2,336
shares;
--$58.4 million of Series W perpetual ARPS, $25,000 per share, 2,336
shares;
--$58.4 million of Series TH perpetual ARPS, $25,000 per share, 2,336
shares; and
--$58.4 million of Series F perpetual ARPS, $25,000 per share, 2,336
shares.
PIMCO Corporate & Income Strategy Fund (NYSE: PCN), total $169 Million
ARPS:
--$33.8 million of Series M perpetual ARPS, $25,000 per share, 1,352
shares;
--$33.8 million of Series T perpetual ARPS, $25,000 per share, 1,352
shares;
--$33.8 million of Series W perpetual ARPS, $25,000 per share, 1,352
shares;
--$33.8 million of Series TH perpetual ARPS, $25,000 per share, 1,352
shares; and
--$33.8 million of Series F perpetual ARPS, $25,000 per share, 1,352
shares.
PIMCO Income Strategy Fund (NYSE: PFL), total $78.975 Million ARPS:
--$26.325 million of Series T perpetual ARPS, $25,000 per share, 1,053
shares;
--$26.325 million of Series W perpetual ARPS, $25,000 per share, 1,053
shares; and
--$26.325 million of Series TH perpetual ARPS, $25,000 per share, 1,053
shares.
PIMCO Income Strategy Fund II (NYSE: PFN), total $161 Million ARPS:
--$32.2 million of Series M perpetual ARPS, $25,000 per share, 1,288
shares;
--$32.2 million of Series T perpetual ARPS, $25,000 per share, 1,288
shares;
--$32.2 million of Series W perpetual ARPS, $25,000 per share, 1,288
shares;
--$32.2 million of Series TH perpetual ARPS, $25,000 per share, 1,288
shares; and
--$32.2 million of Series F perpetual ARPS, $25,000 per share, 1,288
shares.
KEY RATING DRIVERS
The affirmations follow Fitch's annual reviews of the funds. The 'AAA'
ratings are based on the following:
--Sufficient asset coverage provided to the ARPS as calculated per the
fund's governing documents;
--The structural protections afforded by mandatory cure and
de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the funds' operations;
--And the capabilities of PIMCO.
Fitch's ratings assigned to the ARPS speak only to timely repayment of
interest and principal in accordance with the governing documents and
not to potential liquidity in the secondary market.
FUND PROFILES
As of Jan. 31, 2014, the portfolios consisted mainly of high-yield and
investment grade corporate securities, structured finance securities,
preferred stock, municipal bonds issued by U.S. domiciled issuers and
interest rate swap trades.
FUND LEVERAGE
As of Jan. 31, 2014, the funds had the following assets, leverage and
derivative profiles:
--PHK: total portfolio assets of approximately $1.829 billion, current
liabilities of $16 million and cash leverage of $825 million (45% of net
portfolio assets). Cash leverage consisted of approximately $533 million
of reverse repurchase agreements and $292 million of rated ARPS.
Fitch's criteria also consider the fund's use of economic leverage in
the form of derivatives. The fund utilized $1.166 billion in notional of
interest rate swaps (long) for current income, and $0.50 million in
excess (unhedged) forward currency exposures. The interest rate swaps
shortened the fund's duration.
--PCN: total portfolio assets of approximately $762 million, current
liabilities of $5 million and cash leverage of $169 million, or 22% of
net portfolio assets. Cash leverage consisted entirely of rated ARPS.
The fund also utilized $1.070 billion in notional of interest rate swaps
(long) for current income, and $0.30 million in excess (unhedged)
forward currency exposures. The interest rate swaps extended the fund's
duration.
--PFL: total portfolio assets of approximately $391 million, current
liabilities of $10 million and cash leverage of $84 million or 21% of
net portfolio assets. Cash leverage consisted of approximately $5
million of reverse repurchase agreements and $79 million of rated ARPS.
The fund also utilized $834 million in notional of interest rate swaps
(long) for current income, and $0.12 million in excess (unhedged)
forward currency exposures. The interest rate swaps extended the fund's
duration.
--PFN: total portfolio assets of approximately $805 million, current
liabilities of $33 million and cash leverage of $161 million, or 20% of
net portfolio assets. Cash leverage consisted entirely of $161 million
of rated ARPS.
The fund also utilized $2.193 billion in notional of interest rate swaps
(long) for current income and $0.20 million in excess (unhedged) forward
currency exposures. The interest rate swaps extended the fund's duration.
ASSET COVERAGE
As of Jan. 31, 2014, the funds' asset coverage ratios, as calculated in
accordance with the Fitch total and net overcollateralization tests
(Fitch OC tests) per the 'AAA' rating guidelines outlined in Fitch's
closed-end fund criteria, were in excess of 100%. These tests
incorporate fund's use of non-traditional leverage and derivatives per
Fitch's rating criteria. These are the minimum asset coverage guidelines
required by the fund's governing documents, and evaluated as such by
Fitch to arrive at the assigned 'AAA' rating levels.
Additionally, as of the same date, the funds' asset coverage ratios for
total outstanding ARPS, as calculated by PIMCO in accordance with the
Investment Company Act of 1940, were in excess of 200%. This is also a
minimum asset coverage required by the funds' governing documents.
ARPS STRUCTURAL PROTECTIONS
The fund manager is required to cure a breach in the fund's asset
coverage tests by altering the composition of the portfolio toward
assets with lower discount factors (for Fitch OC Tests breaches), or by
reducing leverage in a sufficient amount (for both the Fitch OC Tests
and Asset Coverage Test breaches) within a pre-specified time period (a
maximum of 38 calendar days).
THE ADVISOR
PIMCO acts as the sub-adviser to the funds, performing all investment
management functions. As of Dec. 31, 2013, PIMCO had $1.920 billion in
assets under management. Allianz Global Investors Fund Management, LLC
(AGIFM) acts as the advisor to the fund, performing all legal,
operations and compliance functions. PIMCO and AGIFM are indirect,
majority owned subsidiaries of Allianz SE.
RATING SENSITIVITIES
The ratings may be sensitive to material changes in the credit quality
or market risk profiles of the fund, including the risk exposure assumed
by the funds' use of interest rate swaps. A material adverse deviation
from Fitch guidelines for any key rating driver could cause Fitch to
downgrade the rating.
Additional information is available at www.fitchratings.com.
The sources of information used to assess this rating were the public
domain, PIMCO and AGIFM.
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug 14, 2013).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716220
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822118
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