Fitch Affirms Preferred Share Ratings of 4 PIMCO Closed End Funds at 'AAA'

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the 'AAA' ratings assigned to the auction rate preferred shares (ARPS) issued by the following four closed-end funds sub-advised by Pacific Investment Management Company LLC (PIMCO):

PIMCO High Income Fund (NYSE: PHK)

--$292,000,000 of ARPS consisting of Series M, T, W, TH and F, each with a liquidation preference of $25,000 per share, affirmed at 'AAA';

PIMCO Corporate Income Fund (NYSE: PCN)

--$169,000,000 of ARPS consisting of Series M, T, W, TH and F, each with a liquidation preference of $25,000 per share, affirmed at 'AAA';

PIMCO Income Strategy Fund (NYSE: PFL)

--$78,975,000 of ARPS consisting of Series T, W and TH, each with a liquidation preference of $25,000 per share, affirmed at 'AAA';

PIMCO Income Strategy Fund II (NYSE: PFN)

--$161,000,000 of ARPS consisting of Series M, T, W, TH and F, each with a liquidation preference of $25,000 per share, affirmed at 'AAA'.

The affirmations follow Fitch's annual reviews of the funds. The 'AAA' ratings are based on sufficient asset coverage provided to the ARPS by the funds' underlying portfolios of assets, the structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines, the legal and regulatory parameters that govern the funds' operations and the capabilities of PIMCO as the sub-advisor. Fitch's ratings assigned to the ARPS speak only to timely repayment of interest and principal in accordance with the governing documents and not to potential liquidity in the secondary market.

As of Feb. 28, 2011, the funds had the following assets and cash leverage outstanding:

--PHK: assets of approximately $1,635 million and cash leverage of $457 million or 28% of assets. Cash leverage consisted of approximately $21 million in current liabilities, $144 million of reverse repurchase agreements and $292 million of rated ARPS. Fitch's criteria also consider the fund's use of economic leverage in the form of derivatives, which amounted to $1,001 million in notional related to short-term money market contracts and $320 million in notional related to other risk exposures including corporate credit default swaps.

--PCN: assets of approximately $927 million and cash leverage of $347 million or 37% of assets. Cash leverage consisted of approximately $6 million in current liabilities, $172 million of reverse repurchase agreements and $169 million of rated ARPS. Fitch's criteria also consider the fund's use of economic leverage in the form of derivatives, which amounted to $530 million in notional related to short-term money market contracts and $40 million in notional related to other risk exposures including corporate and sovereign credit default swaps.

--PFL: assets of approximately $421 million and cash leverage of $141 million or 33% of assets. Cash leverage consisted of approximately $9 million in current liabilities, $53 million of reverse repurchase agreements and $79 million of rated ARPS. Fitch's criteria also consider the fund's use of economic leverage in the form of derivatives, which amounted to $256 million in notional related to short-term money market contracts and $64 million in notional related to other risk exposures including corporate and sovereign credit default swaps.

--PFN: assets of approximately $829 million and cash leverage of $241 million or 29% of assets. Cash leverage consisted of approximately $18 million in current liabilities, $62 million of reverse repurchase agreements and $161 million of rated ARPS. Fitch's criteria also consider the fund's use of economic leverage in the form of derivatives, which amounted to $532 million in notional related to short-term money market contracts and $181 million in notional related to other risk exposures including corporate and sovereign credit default swaps.

As of the same date, the funds' asset coverage ratios, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AAA' rating guidelines outlined in Fitch's applicable criteria, were in excess of 100%, which is the minimum asset coverage amount deemed consistent with an 'AAA' rating. The funds' governing documents require that asset coverage for the ARPS, as calculated in accordance with the Fitch OC tests, be maintained in excess of 100%. As such, should the asset coverage decline below 100%, the governing documents require the funds to alter the composition of their portfolio toward assets with lower discount factors, or to reduce leverage in a sufficient amount to restore compliance within a 38 business day period.

Additionally, as of the same date, the funds' asset coverage ratios for total outstanding ARPS, as calculated in accordance with PIMCO's interpretation of the Investment Company Act of 1940, were in excess of 200%, which is also a minimum asset coverage required by the funds' governing documents.

As of Feb. 28, 2011, the portfolios consisted mainly of high-yield and investment grade corporate securities, structured finance securities and senior loans issued by U.S. domiciled issuers. The PCN fund had a higher allocation of investment grade corporate securities while the other three funds had a higher allocation to high-yield corporate securities The top sector concentration for each fund was in 'Banking, Finance and Insurance', exceeding the 25% guideline per Fitch's criteria in each fund. Exposure in excess of Fitch's industry concentration guidelines received an additional discount factor multiple of 1.5 times for purposes of calculating the Fitch OC tests. Top issuer concentration for each fund was in line with Fitch's criteria and no additional haircuts were applied for the purposes of calculating the Fitch OC tests.

All funds also utilized euro dollar futures, interest rate swaps and credit default swaps, which Fitch considers as leveraged positions given the economic effects that such derivatives introduce. The Fitch OC tests, therefore, explicitly capture these positions by increasing the liabilities of the funds to reflect the full notional exposures of each position. The effect of capturing these positions as economic leverage for these funds was a decrease in the Fitch total OC test, although the tests all remained in excess of 100%.

The funds are non-diversified, closed-end management investment companies, registered under the Investment Company Act of 1940, as amended. PIMCO acts as the sub-adviser to the funds, performing all investment management and distribution functions. Allianz Global Investors Fund Management, LLC (AGIFM) acts as the advisor to the fund, performing all legal, operations and compliance functions. PIMCO and AGIFM are indirect, majority owned subsidiaries of Allianz SE. As of Dec. 31, 2010, Allianz SE had over $1.7 trillion in assets under management.

The ratings may be sensitive to material changes in the credit quality or market risk profiles of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch. For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.

Additional information is available at '[ www.fitchratings.com ]'.

The sources of information used to assess this rating were the public domain and Eaton Vance Management.

Applicable Criteria and Related Research:

--'Closed-End Fund Debt and Preferred Stock Rating Criteria' (Aug. 17, 2009);

--'Fitch Launches 'CEF Updates' for Closed-End Fund's (Nov. 8, 2010);

--'Closed-End Fund: Evolving Use of Leverage and Derivatives' (Sept. 27, 2010);

--'Closed-End Fund: Redemptions Provide Some Liquidity to Illiquid ARPS Market' (Aug. 31, 2010);

--'Closed-End Fund: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations' (March 18, 2010).

Applicable Criteria and Related Research:

Closed-End Fund Debt and Preferred Stock Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462492 ]

Closed-End Funds: Evolving Use of Leverage and Derivatives

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=559525 ]

Closed-End Funds: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504986 ]

Closed-End Funds: Redemptions Provide Some Liquidity to Illiquid ARPS Market

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=552106 ]

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ WWW.FITCHRATINGS.COM ]'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contributing Sources

Market Wire

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Fitch Affirms Preferred Share Ratings of 4 PIMCO Closed End Funds at 'AAA'