New York, April 01, 2021 -- Moody's Investors Service, ("Moody's") has
affirmed the ratings of Auction Rate Preferred Shares (ARPS) issued by
five PIMCO closed end funds.
A summary of the rating actions taken follows:
--PIMCO Corporate & Income Opportunity Fund (NYSE:
PTY), Series M, T, W, TH, and F Auction
Rate Preferred Securities shares, $212.7 million (8,506
shares with a liquidation preference of $25,000 per share)
affirmed at A2 (sf)
--PIMCO Corporate & Income Strategy Fund (NYSE:
PCN), Series M, T, W, TH, and F Auction
Rate Preferred Securities shares, $23.5 million (941
shares with a liquidation preference of $25,000 per share)
affirmed at Aa3 (sf)
--PIMCO High Income Fund (NYSE: PHK), Series
M, T, W, TH, and F Auction Rate Preferred Securities
shares, $58.1 million (2,322 shares with a liquidation
preference of $25,000 per share) affirmed at A2 (sf)
--PIMCO Income Strategy Fund (NYSE: PFL), Series
T, W, and TH Auction Rate Preferred Securities shares,
$45.2 million (1,808 shares with a liquidation preference
of $25,000 per share) affirmed at Aa3 (sf)
--PIMCO Income Strategy Fund II (NYSE: PFN),
Series M, T, W, TH, and F Auction Rate Preferred
Securities shares, $87.4 million (3,497 shares
with a liquidation preference of $25,000 per share) affirmed
at Aa3 (sf)
RATINGS RATIONALE
The ARPS ratings of the five funds are supported by their diverse portfolio
holdings, which include a range of assets classes such as corporate
bonds and notes, asset-backed securities, loan participations
and assignments, and non-agency mortgage-backed securities.
The difference in the funds' ARPS ratings reflect differences in
their investment styles and balance sheet management. The Aa3 (sf)
ratings of PCN, PFL, and PFN are consistent with these funds'
objectives of seeking high current income while preserving capital.
Estimated leverage is under 35%, and exposures are somewhat
more constrained with respect to investing in non-corporate credits
or higher risk sectors.
PTY's and PHK's A2 (sf) ratings are consistent with the funds'
investment objectives targeting total return, from income and capital
appreciation. PTY, the largest of the funds, with estimated
leverage exceeding 40%, is the most leveraged and is the
least constrained of the funds with respect to investment in non-corporate
credits, including greater exposure to asset backed securities.
PHK has had greater exposures to municipal bonds and notes and preferred
securities.
Generally, we expect the lower rated funds to take more aggressive
postures toward opportunistically holding weaker credits, and we
express this concern with a slightly weaker evaluation of their credit
profiles. While the funds have been compensated historically for
the risks they take, we nonetheless feel these exposures increase
risk to holders of their ARPS.
The funds' flexible approach to leverage, which prominently
features use of reverse repurchase agreements, as well as credit
default swaps, has generally enabled management to position the
funds opportunistically or to manage risk when required. However,
variability of leverage weighs on the funds' credit profiles,
as we consider the risk of leverage across the range of market environments.
Credit default swaps are used largely to assume exposure to credits that
might otherwise be less accessible in cash markets.
Currently, ARPS represent a small fraction of each of the funds'
leverage, partially as a result of their tender offers for ARPS
in 2019, which reduced the number of ARPS outstanding. As
such, under our approach to priority of claim notching, each
of the ARPS ratings are lowered two notches vis a vis the funds'
senior rating profiles.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ARPS ratings could be upgraded if there is 1) a sustained improvement
in any fund's risk-adjusted asset coverage ratio; 2) a strengthening
in the credit quality or liquidity of any fund's investment portfolio;
or 3) an increase in any fund's coverage of fixed charges.
The ARPS ratings could be downgraded if there is 1) a sustained decline
in any fund's risk-adjusted asset coverage ratio; 2) a deterioration
in the credit quality or liquidity of the fund's investment portfolio;
or 3) a compression of any fund's coverage of fixed charges.
PIMCO, located in Newport Beach, CA, serves as the investment
manager of the funds. Organized in 1971, PIMCO is a majority-owned
indirect subsidiary of Allianz SE. As of September 30, 2020,
PIMCO had approximately $2.03 trillion of assets under management.
The principal methodology used in these ratings was "Closed-End
Funds Methodology" published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1205925.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Moody's did not use any models, or loss or cash flow analysis,
in its analysis.
Moody's did not use any stress scenario simulations in its analysis.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Neal M. Epstein, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653