A Bad Year Getting Worse For Pimco Closed-End Funds
Bill Gross, chief investment manager at bond-fund giant Pacific Investment Management Company, has been grossly off lately when it comes to Pimco’s closed-end funds. Several of the funds, including the Pimco High Income Fund, the Pimco Corporate Opportunity Fund, the Pimco Floating Rate Strategy Fund, the Pimco Global Stocksplus Income Fund and others are down in value by 50% or more this year.
The Pimco High Income Fund in particular continues to be squeezed by plunging asset values. The $623.8 million fund has fallen 77% in value so far this year. In January, its share value was $14; as of Nov. 25, it is $3.32. In November, market conditions forced the fund to postpone a dividend payment for that month, as well as one scheduled for December, because the value of its portfolio securities had fallen below the required 200% asset- coverage ratio.
Pimco, a unit of Munich-based Allianz SE, has about $800 billion in assets under management.
Some of the problems for investors in Pimco’s closed-end funds can be traced to the collapse of the auction-rate securities market in February, which overnight eliminated a key source of financing and left preferred share holders unable to sell their aution bonds. In the months following the auction market’s demise, falling debt prices have increased the cost of borrowing and further pushed down already-battered asset values.
Pimco also is dealing with collateral damage from its overexposure to credit default swaps with Lehman Brothers and American Insurance Corporation (AIG).
A credit default swap is similar to an insurance contract between two parties. One party buys protection against the threat of default by a company, a municipality or, in some instances, pools of debt. The other party pays the seller a premium over a set period of time and then pays out if a default occurs.
According to Bloomberg, Pimco has sold credit default swaps that guarantee $760 million of debt issued by AIG. Should AIG, which continues to have financial troubles despite two bailouts from the federal government, ultimately go bankrupt, Pimco is on the fence to pay on those swaps.
As for Lehman, which filed bankruptcy on Sept. 15, sellers of credit-default protection on it will have to pay 91.375 cents on the dollar to settle their contracts. It will be the biggest payout yet in the $55 trillion credit default swap market. Pimco’s Total Return Fund, with some $130 billion under management, has written protection on a face amount of $105.4 million of Lehman debt as of June 30, according to regulatory filings.
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