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Rating Action:

Moody's changes the ratings on preferred shares issued by two PIMCO funds

29 May 2014

New York, May 29, 2014 -- Moody's Investors Service has changed the ratings on preferred shares issued by two PIMCO closed end funds. The following ratings were affected:

- PIMCO Corporate & Income Opportunity Fund (PTY) - Series M, T, W, TH and F for $325 million of auction rate preferred shares (ARPS)— Ratings upgraded to A2 (sf) from A3 (sf)

- PIMCO High Income Fund (PHK) - Series M, T, W, TH and F for $292 million of auction rate preferred shares -- Ratings downgraded to A2 (sf) from A1 (sf)

These actions reflect the respective changes in the funds' asset coverage ratios and economic leverage, resulting from changes in the funds' level of derivative exposures. The implicit subordination of preferred shares to contingent liabilities arising from derivative transactions has evolved over the last 12 months, respectively improving PTY's and weakening PHK's ability to meet a mandatory or optional redemption of the ARPS at a time of market stress. The funds' outstanding amounts of ARPS have not changed, and represent a relatively low degree of leverage before consideration of the portfolio-leveraging effect of derivatives.

RATINGS RATIONALE

PTY and PHK invest in multiple asset classes including corporate bonds, municipal bonds, leverage loans, equities, preferred securities, mortgage and asset-backed securities. While the explicit leverage of these funds is relatively low, at 22% and 23% respectively, they use derivatives and other portfolio leveraging techniques (including credit default swaps ("CDS") and reverse repurchase agreements) to amplify their investible asset base.

The funds tend to have strong portfolio diversity, with the asset quality metric ranging between above average and weak, depending on the portfolio mix at any time. Their fixed charge ratios tend to be very strong, benefitting from the variable cost of leverage and the higher yielding nature of their portfolios.

The upgrade to A2 (sf) of PTY's preferred shares reflects improvement in the fund's key asset coverage metrics, due to a decrease in the fund's leverage. In the past, PTY was a heavy seller of credit default swaps, which had the effect of increasing the fund's effective leverage. PTY's notional exposure to CDS decreased from $753 million in May 2012 to $288 million as of 30 April 2014. In addition, the fund has reduced its use of reverse repurchase agreements, which have declined to zero from $205 million on 31 May 2012. Total leverage (including CDS and reverse repurchase agreements) has declined to 36% (as of 30 April) compared to 55% at the earlier period.

The downgrade to A2 (sf) of the PHK's preferred shares reflects the overall increase of the fund's credit risk, due to the increasingly active use of off-balance sheet leveraging investment techniques, such as interest rate swaps and currency forwards, in combination with a rising leverage trend. PHK is an aggressively managed fund, with the objective of paying a high dividend rate to its common shareholders. To meet its objectives, the portfolio manager uses a range of techniques that have the effect of increasing the fund's portfolio duration and the volatility of its net asset value relative to other income-oriented multiple asset-class funds. In addition, over the recent quarters there was a trend of increased use of leverage, in the form of reverse repurchase agreements, which have tripled since September 2013, to $394 million. Total leverage (as calculated by Moody's, including CDS and reverse repurchase agreements) has risen to 42% (as of 30 April) compared to 28% at 31 March 2012.

Because these two funds are managed on a highly opportunistic basis, Moody's evaluates them over time relative to the potential risks they may assume during an investment cycle. A point in time review of these funds is less telling of their potential risk, since at any time shifts in credit quality may alter the risk-adjusted asset coverage of the funds' liabilities, or derivative transactions may change the contingent liabilities that subordinate the preferred shares. For example, we have observed sharp movements in exposures to credit risk, involving significant changes in sector exposures and in the average credit ratings of the securities held. Both funds currently are using interest rate swaps to increase their portfolio durations, whereas two years ago they carried little if any such exposure. Conversely, currency forward agreements, which positioned both funds in the past to benefit from a stronger dollar have been reduced.

The A2 (sf) ratings of the funds may come under pressure (i) if the funds' risk complexion changes, (ii) if their use of leverage (including portfolio leverage) changes or (iii) if they increase off-balance sheet use of derivatives such as interest rate swaps or currency forward contracts, without a commensurate, offsetting change in portfolio quality. In particular, PHK, given its income objective, will be monitored in connection with the recent trend of increasing leverage and risk.

Allianz Global Investors Fund Management LLC ("AGIFM"), an indirect, wholly-owned subsidiary of Allianz Global Investors of America L.P., serves as the Funds' investment manager and is a member of Munich-based Allianz Group. Pacific Investment Management Company LLC, an AGIFM affiliate, serves as the Funds' sub-adviser.

The principal methodology used in these ratings was "Moody's Methodology for Rating Securities Issued by U.S. Closed-End Funds" published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of these transactions in the past six months.

Moody's did not use any models, or loss or cash flow analysis, in its analysis.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Yaron Ernst
MD - Managed Investments
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes the ratings on preferred shares issued by two PIMCO funds
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