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Pimco High Income Fund Pimco Hi Message Board

  • excapnal excapnal Oct 24, 2008 4:43 PM Flag

    Dividend Postponement

    Hang on to your hats, boys and girls!!
    http://biz.yahoo.com/pz/081024/152966.html

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    • today's fake head and the downward spirial this stock has been doing the past several months leads me to believe that we will see the mid 3's by next thursday. I'm beliving now that this is a dead stock!...

      comments?

    • Does anyone think there will be a lawsuit of some kind?

    • cyberwoodie@sbcglobal.net cyberwoodie Oct 29, 2008 12:51 AM Flag

      <Cyber
      The ARPS are not assets, they are liabilities, you can't sell them, you must redeem them. So in order to reduce leverage you must sell income producing assets and send the proceeds to the ARPS holders. You will be selling assets paying 15% and redeeming the ARPS that for which you are paying 2% . This will greatly reduce the income to the common shareholders. The dividend would have to be cut and the potential recovery of NAV will be severely diminished. This is my understanding, but I'm not an expert. Perhaps Dave could weigh in. Looks bleak to me. >

      You are exactly correct, and they will likely have to sell more than $300 million of their current assets of $1,265 million (about 25%) just to get the leverage down to about 47%. This is not a good situation if the markets don't come back soon.

    • Cyber
      The ARPS are not assets, they are liabilities, you can't sell them, you must redeem them. So in order to reduce leverage you must sell income producing assets and send the proceeds to the ARPS holders. You will be selling assets paying 15% and redeeming the ARPS that for which you are paying 2% . This will greatly reduce the income to the common shareholders. The dividend would have to be cut and the potential recovery of NAV will be severely diminished. This is my understanding, but I'm not an expert. Perhaps Dave could weigh in. Looks bleak to me.

    • cyberwoodie@sbcglobal.net cyberwoodie Oct 29, 2008 12:24 AM Flag

      I am not that familiar with BMA but it appears to rest on how Fitch defines "eligible assets on a discounted basis". If eligible assets discounted are defined as the market value of net assets, then todays BMA is aprox:

      $665 M/$900 M = 74%

      and then they are definately below 115%. In fact, the tipping point of 115% would have been hit when the NAV went below $8.85 (Note that I am assuming accrued dividends and expenses, which would add to the denominator are insignificant relative to $900 million).

      If, on the other had, eligible assets discounted are defined as total assets, including the borrowed assets, then today's BMA is approx:

      ($665+$900)/$900 = 174%

      and the tipping point in this case would be when the NAV hits $1.15.

      Of course it could be something else, but I suspect it is more likely to be the former definition which would have been when the leverage ratio was at 46.5% which is close to the 50% required to maintain the AAA rating on the preferreds.

    • Cyberwoodie,

      Thanks for the excellent explanation. You're an asset to this thread, big time.

      I have a question for you. Has PHK breached Fitch's BMA level? Fitch describes the BMA as follows:

      "Fitch Basic Maintenance Amount (BMA)is calculated by dividing the amount of the fund's eligible assets on a discounted basis by the par value of outstanding APS plus accrued dividends and certain projected expenses."

      "Fitch typically monitors closed-end fund portfolios on a monthly basis, although the frequency is increased to at least a weekly basis upon a failure to maintain the 1940 Act asset coverage or a reduction in Fitch BMA ratio below 115%. In the event that the funds are unable to reduce leverage sufficiently (through redemption of APS and/or asset price improvement) to keep coverage ratios above levels mandated by applicable offering documents and regulatory requirements, rating downgrades may be warranted."

      If they breached Fitch's BMA, when did it happen? The prospectus says they have 6 business days to cure BMA.

    • I suspected I was messed up somewhere, just couldn't figure out where; now I know (and feel better).
      So why don't they just sell the Fannie Mae stuff and get on with our dividend?

    • cyberwoodie@sbcglobal.net cyberwoodie Oct 28, 2008 8:20 PM Flag

      What you are missing is that NAV stands for, "Net Asset Value" which is the value of the price per share without the leverage (i.e., leverage netted out). Common shareholders don't own the securities purchased with the leverage, they only own the net assets, the rest are on loan.

      Therefore, for every dollar of leverage I remove, I also remove a dollar of total assets, not net assets. All else equal, removing the leverage will not change the NAV.

      Example, as of today's close:

      PHK's net assets: $665 Million (5.68 NAV x 117M shares out)
      PHK's leverage: $900 Million (borrowed assets)
      PHK's total assets (net assets + leverage): $1,565 Million

      Current Leverage = 900 / 1565 = 57.5%

      Now if I sell off, say, $300 million in assets to pay down the leverage, this gives me the following:

      PHK's net assets: $665 Million (5.68 NAV x 117M shares out)
      PHK's leverage: $900 - 300 = 600 Million (borrowed assets)
      PHK's total assets (net assets + leverage): $1265 Million

      New Leverage = 600 / 1265 = 47.4%

      Where I think you are confused is that you assume to reduce leverage the manager has to sell off common assets. That is not the case. Rather, the manager sells off the borrowed assets to pay down the loan. The common assets belong to the common shareholders and are not the assets that are being sold. Your leverage may be greater than your common assets, but it is not greater than your total assets. Hope that helps.

    • Yo Cyberwoodie - I don't get something. How can you get the leverage ratio down by selling assets. If those assets are on the books at market price, and I sell them for market price and then retire some ARPS with the money, I have reduced my common assets by the same amount as my leverage was reduced. Since my leverage is greater than my assets, I can't get it below 50%, and in fact, every time I do this, the leverage ratio goes UP, not down. Seems to me that this logic says that market price of securities is the only way to get there...so what am I missing??

    • the place for year end information:

      http://www.allianzinvestors.com/mutualFunds/services/2008MutualFundTaxInformation.jsp

      PIMCO data available in Nov.

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PHK
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