Pimco Suspends Dividends For Six Closed-End Funds
Newport Beach-based Pacific Investment Management Company (Pimco) is seeing anything but sunny days when it comes to several of its closed-end funds. Six of Pimco’s municipal funds are delaying payment of common-share dividends, as well as the declaration of their next dividends.
Problems for Pimco stem to current market conditions, which have wreaked havoc on the funds’ net asset values. In addition, the collapse of the auction-rate securities market in February has all but eliminated a critical source of financing for closed-end funds, which previously issued auction-rate preferred shares as a way to raise capital.
The Pimco funds currently facing dividend suspensions include the Pimco Municipal Income Fund II (PML), Municipal Income Fund III (PMX), New York Municipal Income Fund (PNF), New York Municipal Income Fund III (PYN), California Municipal Income Fund II (PCK) and California Municipal Income Fund III (PZC).
As reported Dec. 1 in the Wall Street Journal, the Investment Company Act of 1940 requires closed-end funds to maintain an asset-coverage ratio of at least 200%. That means for each $1 of preferred stock issued, a fund must have at least $2 in assets. If a fund fails to meet the mandatory 200% asset-coverage, it is prohibited from declaring or paying a dividend to shareholders.
The asset-coverage ratios for all of Pimco’s six funds have fallen below the required 200% level.
According to the Wall Street Journal article, two other Pimco closed-end funds - the Corporate Income Fund (PCN) and the Corporate Opportunity Fund (PTY) - could be looking at potential funding issues, as well. Although both funds will pay common share dividends set for Dec. 1, they will postpone the declaration of their next dividends. Moreover, last month Pimco announced that both funds would redeem a portion of their auction-rate preferred shares outstanding by Dec. 19 as a way to increase and maintain an asset coverage ratio above 200%.
Some analysts believe Pimco’s problems could have been averted. When the auction-rate market seized up in February, a number of closed-end funds immediately took action to shed their auction-rate-preferred-share leverage through tender option bond programs or new auction-rate preferred shares with put options. Pimco, however, did neither.
Now it seems Pimco investors are paying for that inaction.
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