6 PIMCO muni funds cancel divs declared 11/3/08

[djw]

Pacific Investment Management Company Inc. [PIMCO] on Monday canceled announced dividend payments for six of its funds, saying the weak market has pushed the value of those funds below legal thresholds.

The dividends declared Nov. 3 that were scheduled for payment Monday will not be paid for 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.

http://www.businessweek.com/ap/financia ... PVRJ81.htm

[stratton]

Those are leveraged closed end funds.

The funds intend to resume paying and declaring dividends as soon as possible, Pimco said. The company said it may consider options including redemption of a portion of its auction rate preferred shares in order to resume dividends in the future.

Leveraged CEFs typically sell auction rate preferred shares for leverage.

Liberally reworded from a Kayne Funds press release for KYN:

Asset coverage ratios as required by the Investment Company Act of 1940 (the "1940 Act") asset coverage ratio under the 1940 Act with respect to senior securities representing indebtedness has a minimum 300%, and the asset coverage ratio under the 1940 Act with respect to total leverage (debt and preferred stock) has a minimum 200%.

So they have to conserve cash to meet those ratios. The question is are the dividends suspended and payed out later or stopped and resumed with no makeup.

Paul

[btenny]

I own some PFL (it is a very high risk bond fund similar to junk bond funds) that has had the dividend suspended since last month by Pimco.

The note on PFL said they would most likely make up the dividends in the future when the credit markets thaw. This fund is a floating rate bond fund and it is tangled up in the stranded Auction Rate Preferreds. Each of these leveraged funds has all kinds of covenents on the overall funds to prevent a downward spiral of selling bonds at below costs to pay dividends that then drives down the NAV of the fund and then being forced to sell more when the stock price falls due to the NAV decrease thus reinforcing the downward spiral. Or at least this is how it was explained to me by someone else.

But it is unclear to me what happens to the money collected each month by the fund for the various bonds that the fund holds. Are they paying the Preferred share holders dividends? I was told the preferred holders were getting interest but could not redeem their shares while the regular shareholders are not getting interest but we can sell our shares. Is this correct?

How much interest are they paying those preferred holders? Once upon a time they were paid a small amount above prime, say 2% or so for 30 day money. What now? Maybe someone here can explain it more.

Some mess, huh?

Bill

[cato]

Actually it's much more interesting than just leverage and ARPS.

These funds actually had substantial SHORT positions in 30 year treasury bonds. Presumably this was to protect against a rise in overall LT yields. Ooops!

[btenny]

The PIMCO site says they are reducing the leverage on all these funds starting in December by buying back some of the Auction Rate Prefered Shares. This should improve the dividend coverage and then allow them to reinstate dividend payments. According to the site they will do all this in mid December along with announcing the next dividend.

Having a fixed leverage is one of the major gotchas with these funds. They should do variable leverage so they can reduce it when problems come up.

Bill

[Still Learning]

btenny wrote

The PIMCO site says they are reducing the leverage on all these funds starting in December by buying back some of the Auction Rate Prefered Shares.

I own a leveraged CEF in another family and recently researched the prospectus about the doomsday scenario when asset coverage falls below the 200% legal minimum.

Actions my fund has to take include:

- Suspension of the dividend until the coverage is restored

- Timely redemption of enough preferreds (debt) to raise coverage above the legal limit. I believe there was also mention that if remedy was not timely that complete redemption could be required.

I couldn't find any definition of "timely"

Not sure about the PIMCO funds, but from what you describe seems like they have similar provisions.

S L

[Valuethinker]

btenny wrote

The PIMCO site says they are reducing the leverage on all these funds starting in December by buying back some of the Auction Rate Prefered Shares.

I own a leveraged CEF in another family and recently researched the prospectus about the doomsday scenario when asset coverage falls below the 200% legal minimum.

Actions my fund has to take include:

- Suspension of the dividend until the coverage is restored

- Timely redemption of enough preferreds (debt) to raise coverage above the legal limit. I believe there was also mention that if remedy was not timely that complete redemption could be required.

I couldn't find any definition of "timely"

Not sure about the PIMCO funds, but from what you describe seems like they have similar provisions.

S L

'timely' is typical lawyer's language, like 'reasonable' or 'material adverse change'

What it means in essence is that if they did this liquidation, and someone sued them, they would go before the judge and argue they had warned investors about 'timely' liquidations.

The judge would then have to take a view whether liquidations were 'timely' based on previous case law.

[btenny]

Cato or others,

Where did you find your data on the short position you described? What fund is it applicable too?

Bill

[cato]

Cato or others,

Where did you find your data on the short position you described? What fund is it applicable too?

Bill

Go to this page:

http://www.allianzinvestors.com/closedE ... rmance.jsp

Then click on the "complete portfolio" link:

http://www.allianzinvestors.com/documen ... _cefph.pdf

You'll see 3rd line from the top:

FIN FUT US 30YR CBT 12/19/08

[Still Learning]

btenny wrote

The PIMCO site says they are reducing the leverage on all these funds starting in December by buying back some of the Auction Rate Prefered Shares. This should improve the dividend coverage and then allow them to reinstate dividend payments. According to the site they will do all this in mid December along with announcing the next dividend.

Delevering means that income will be less and the common stock dividend will go down.

Also, assets have to be sold to redeem the preferreds. So if sale price drops from what's on the books, NAV will be dinged.

There appear to be a fair number of levered Closed End Funds that are close or in violation of the coverage requirements.

An increased risk that's showing up as larger discounts to NAV.

S L

[btenny]

SL

I am pretty sure that the current NAV of PFL and most leveraged CEFs are marked to market at least once a week. This is shown on the PIMCO and other web sites. In PFLs case the symbol is XPFLX and similarly for other CEFs. If this is true then the price of each bond that is sold should be near the NAV calculated price.

So unless I am missing something I think the sale of leverage is almost a wash. Yes they will have a few less bonds in the fund but they will have less preferred interest to pay as well. So a 15-20% reduction in leverage (down from 1.33x TO 1.25x) may reduce the fund size some but not cause a lot of reduction in yield as they were not making that much on the leverage at the recent higher preferred rates. So almost a wash I thought.

Correct?

Bill

[Still Learning]

Bill

Deleveraging will reduce the income available for dividends. Worst case, if they refunded all the preferreds, then income available for common dividends would drop 15 to 20%. (Assumes 6% yield on bonds, 2% cost of leverage, 1% expense ratio). My understanding is they are doing only a partial redemption for now, so the impact is less.

Muni bonds are not very liquid, so sales needed to delever could move prices lower. Selling pressure would be greater if other funds face the same problem. Also the state specific funds in NY and CA are struggling with falling and volatile muni prices.

Yeah the NAV is reported daily (I use etfconnect.com).
Spreads for munis can be pretty wide and with motivated sellers and no buyers, prices would drop.

S L

[btenny]

They are paying way more than 2% for Auction Preferred today. Some more fine print in the prospectus about uncompleted auctions tells the real rate. I read other places that the new rate for Preferreds was Treasury plus 2-4% depending. Something about when the auction fails the payer is obligated to increase the return to a bigger spread. The risk premium has gone up a lot. I could not get a complete answer on the exact number. So for Munis I get 5-6% less 4-5% less the 1% ER makes a zero or negative add to the profit line currently. And maybe they actually improve the profit if they sell bonds that only yield 5% that were financed with 5-6% money. Or at least this is my math. So if they sell 20% of the leverage the fund dividends should not change much as I said previously.

Oh yea they are taking a salary cut if they cut the leverage because the ER is on less money. I guess this is why they did not do this leverage cut back sooner.

Correct?

Bill

[cato]

You might consider switching to some of the Nuveen funds. These are trading at 20%+ discounts to NAV, pay good distributions and have ample coverage under the 1940 law.

Here are some CA examples with Yield, Avg. grade, % pre-refunded, 1940 law coverage:

NPC, 6.9% AAA, 29%, 290%
NCL, 7.1% AAA, 15%, 289%
NVC, 8.1%, AA, 25%, 264%

The leverage for these is around 30%. Incidentally, most of these are paying an additional distribution of 1.5-2% with an ex date of 12/11/08.

[Electron]

The PIMCO site says they are reducing the leverage on all these funds starting in December by buying back some of the Auction Rate Prefered Shares. This should improve the dividend coverage and then allow them to reinstate dividend payments. According to the site they will do all this in mid December along with announcing the next dividend.

Having a fixed leverage is one of the major gotchas with these funds. They should do variable leverage so they can reduce it when problems come up.

Bill

I see the information on the PIMCO website about reducing leverage in mid December for two Corporate Income Funds but not the Municipal Bond Funds.

However, the next news release mentions that as a possibility.

http://www.allianzinvestors.com/closedE ... /services/

[Still Learning]

btenny said:

They are paying way more than 2% for Auction Preferred today.

That was awhile ago

Latest preferred rates are about 1.5%

You can get these from the Pimco/Allianz site daily

http://tinyurl.com/5hx8oh

BTW, I think the negative implications of deleveraging mentioned in an earlier post are being reflected in the discounts for these funds.

It's not just Pimco but any levered fund experiencing severe drops in NAV could be having coverage problems too.

Etfconnect is a great website for researching and comparing ETFs and CEFs. Each fund has a page with most information and links to the sponsors site for other details.

S L