Archive for the “Pimco” Category

Deteriorating market conditions and a legal conundrum have caused Pacific Investment Management Co. (PIMCO) to do an about-face regarding some of the auction-rate preferred securities (ARPS) issued by its closed-end bond funds. On Feb. 27, the company announced it would redeem $342 million of the securities. 

The change in strategy is in stark contrast to PIMCO’s previous stance on preferred ARS. Ever since the auction-rate market shut down in February 2008, the Newport Beach-based money manager has resisted any type of redemption plan for auction-rate preferred bond holders. The reason reportedly was based on PIMCO’s belief that such a plan would reduce leverage in the funds and thereby lessen income for closed-end common shareholders.

As reported March 1 in the Wall Street Journal, it now appears PIMCO has no choice but to work with preferred ARS holders. Under federal law, closed-end funds are not allowed to announce or distribute dividends if their auction-rate leverage is more than 50% of total assets. Currently, five PIMCO funds and two funds of affiliate company Nicholas-Applegate fall under that criterion due to underlying investments that have plummeted in value.

The funds include: the Pimco Corporate Income Fund, Pimco Corporate Opportunity Fund, Pimco High Income Fund, Pimco Floating Rate Income Fund, Pimco Floating Rate Strategy, Nicholas-Applegate Convertible & Income Fund and Nicholas-Applegate Convertible & Income Fund II. 

In 2008, all seven funds failed to meet their leverage ratios, with some forced to postpone dividend payments for two months. Eventually, about $1.7 billion, or a third of the total outstanding, was redeemed.

The seven funds in question are supposed to pay or declare dividends this week; on Feb. 25, however, several of the funds, including the PIMCO Corporate Income Fund, PIMCO Corporate Opportunity Fund and PIMCO High Income Fund, issued statements suggesting the possibility of yet another delay.

Two days later, five Pimco funds said they would redeem some of their auction-rate securities in order to pay or declare dividends.

Pimco and affiliate Nicholas-Applegate Capital Management are owned by Allianz SE. Earlier this year, the two companies were said to have about $5.3 billion in auction-rate securities outstanding.

PIMCO isn’t the only closed-end fund to delay dividend payments to shareholders during the past year. Unlike PIMCO, however, most of these funds avoided repeat incidents by taking measures to reduce their leverage. Moreover, as the Wall Street Journal article points out, they didn’t wait until just before dividend payments were due to announce there was a problem.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

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.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Closed-end funds often seem to be a prime investment haven for retirees. The funds, which invest in various securities, provide monthly dividends that are often higher than yields in the bond market. On the downside, the share prices of a closed-end fund can quickly rise or fall depending on market forces, as well as the changing values of the underlying securities in a fund.

In recent months, many closed-end funds, including those of Pacific Investment Management Co. (Pimco), are selling at huge discounts to the net asset values of their holdings. As of September, the average discount was 16%, nearly double the 12-month average, according to Lipper, Inc.

According to a Nov. 9 article in the Chicago Tribune, there were 668 closed-end funds at the end of 2007, with assets totaling more than $300 billion. As of the end of September 2008, only 53 were trading at a premium to their net asset values.

Some of the problems hitting closed-end funds have to do with the use of leverage, or gearing, to boost yields. One of the ways closed-end funds raise additional investment capital is by issuing auction-rate securities. When the auction-rate market collapsed in February, it essentially wiped out a major source of financing for closed-end funds.

As a result of volatile market conditions, many closed-end funds are suspending their monthly dividend payments to investors. Last month, the Pimco High Income Fund did just that, postponing its November dividend payment because the value of the securities in the fund’s portfolio had fallen below a key threshold. The fund suspended the declaration of its next dividend payment, as well, which would have been paid this month.

Pimco later announced that several other Pimco funds also would postpone scheduled payments of previously declared dividends on the funds’ common shares for Dec. 1 and Dec. 31. Those funds include the Pimco New York Municipal Income Fund, Pimco Municipal Income Fund II, Pimco California Municipal Income Fund II, Pimco Municipal Income Fund III, Pimco California Municipal Income Fund III and Pimco New York Municipal Income Fund III.

If shares in the Pimco funds fail to recover, the company could be forced to liquidate a portion of them to meet the required 200-percent asset coverage criteria.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

A November 2008 posting on a Yahoo message board may be the best description yet of the Pimco High Income Fund: “A fund soon to be a member of the grateful dead.”

This year has not been kind for investors of Pacific Investment Management Company’s High Income Fund (NYSE: PHK). Between Sept. 10 and Nov. 25, the fund saw its value fall from $11.49 a share to $3.44. On Nov. 3, Pimco’s parent company, Germany-based Allianz SE, announced that the Pimco High Income Fund would suspend a November payment of dividends to common shareholders, as well as a scheduled payment in December, because the value of securities in the fund had fallen below the required 200% asset-coverage ratio.

On Nov. 19,  an announcement was issued that three Pimco funds - the Pimco High Income Fund, the Pimco Floating Rate Income Fund and the Pimco Floating Strategy Fund - would each redeem, at par, a portion of their auction-rate preferred shares (ARPS) beginning Dec. 8, 2008, and concluding on Dec. 12, 2008.

A number of investors who purchased these closed-end funds are retirees.  They relied on the dividends from their investments to pay daily living expenses. Some investors are now coming forth with claims that they were unaware of the risks associated with the funds and, as a result, have suffered significant financial losses.

Several other Pimco-managed funds, including the PIMCO Corporate Opportunity Fund, PIMCO Corporate Opportunity Fund, PIMCO Floating Rate Income Fund and the PIMCO Municipal Advantage Fund also are experiencing steep losses this year. Now it’s a question of exactly how underwater they may be.

So far, Pimco isn’t saying.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

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.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The year of 2008 has ushered in its share of bad news for closed-end fund investors. The latest fund to join that bandwagon: Pacific Investment Management Company’s High Income Fund. The fund, which invests in corporate debt rated below investment grade, has plummeted in value recently, falling to $5.10 on Nov. 6 in mid-day trading from a high of nearly $15 in June 2007.

Now because the value of the securities in the Pimco High Income Fund’s portfolio has fallen below what is required by law, the fund says it plans to suspend the declaration of its next dividend payment to shareholders, which is scheduled for December. On Oct. 11, the fund postponed a payment of 12.1875 cents per share to shareholders because of adverse market conditions.

Allianz Global Investors Fund Management LLC serves as the investment manager of the Pimco High Income Fund.

On Oct. 17, 2008, Fitch Ratings, one of the three big credit-rating agencies, placed a negative ratings watch on the auction-rate preferred shares of three Pimco closed-end funds, including the Pimco High Income Fund. The other two Pimco funds were the Pimco Floating Rate Strategy Fund (PFN) and the PIMCO Floating Rate Income Fund (PFL).

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.