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Fitch Affirms 'AAA' Preferred Ratings of 4 PIMCO Corporate Closed End Funds

PCN, PHK, PFL, PFN

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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