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Pimco High Income Fund Pimco Hi Message Board

  • bsiegs1 bsiegs1 Jan 30, 2009 9:59 AM Flag

    PHK delevered by 27% in December!

    PHK had to redeem Auction Rate Prefereds in December to the tune of $438MM - 27% of its capitalization. The ARPS were costing the fund .51%/mo (about 6% annually) at year end. With the fund yielding over 17% on market and some 29% on NAV - this delevering will substantially reduce the fund's income!

    If PIMCO doesn't fully explain this to investors, perhaps they should be explaining to the SEC.

    Further, PHK either sold off quality holdings to pay off the leverage (Morningstar suggests this with their 1/15/09 downgrade of PHK from medium quality to low quality), which reduces quality as we go further into the worst recession since the great depression, or sold lower quality holdings, which reduces income. Neither suggests holding a fund with a 61% premium to NAV.

    (full disclosure - I'm short after getting out at what I believe to be a reasonable premium)

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    • I don't agree with the premise that there are any number of investable funds with essentially the same assets as PHK. And therefore I do not agree that one can automatically recapture the 60% premium by taking the proceeds from a PHK sale and investing in "another fund".

      I looked at the EAD assets and the PHK assets and they are completely different. There's a whole lot of debt out there available for purchase, and a very wide range of quality and market pricing. It is beyond my resources to be able to decide on individual debt issuances and so I have chosen PHK because of Gross and the dividend. Because I understand the basic premise that cash flows ultimately dicate value, I know that the PHK dividend indicates that the NAV is incorrect.

      NAV will get to 8 before PHK gets to 5. We'll see who prevails.

    • Staying short myself. I made the mistake 15 years ago covering a short before checking if I could reshort it. Never available after the day I covered. Made $3, covered at 8, went to zero. That's why I will not buy back a share of PHK until it gets in a normal trading range. 5-6.50 If I could, I'd sell more on the news.

    • "Assuming the portfolio has mispriced securities, do you think Gross has cornered the market on mispriced securities? He does not run a concentrated fund- the holdings span 8 or 9 pages. No doubt, the positions in PHK are held by many other similar closed end funds that are not trading at such a ridiculous premium.

      You can get a years worth of dividends or more, by selling, capturing the NAV premium and reinvesting in a like fund not selling at an exorbitant premium. If it results in a capital loss that can be taken against other gains, all the better. "

      Good post! Don't expect the knuckleheads on this board to appreciate it though.

    • total net assets for phk are 1,073,200 with preferred shares inclusive of $462 million. preferred shares are down from $900
      million because of buy back.i'm no tecnical man so some one tell me whats wrong with this.
      good investing to all.
      tool

      • 1 Reply to upgradedtoolman
      • tool - nothing wrong with de-levering - just that with fewer assets, earnings will decline, so distributions will either decline or a greater portion will come from return of capital rather than earnings.

        For the year ended March 31, 2008, the fund net investment income was $1.71, it paid out .36 on ARPS, for a net of $1.35. Dividends were $1.46 (.11 cents above net income less ARP costs). For the 6 months ended Sept 30, 2008, the fund earned .77, paid out .12 on ARPS, for a net of .65. Dividends were .73 (.08 cents above net income less ARP costs).

        So dividends exceeded net income for the last year and 6 months, and now that net income should be lower on reduced assets, a greater portion of the dividends will be paid out of capital - not long term sustainable, and before giving consideration to the coming defaults.

    • Assuming the portfolio has mispriced securities, do you think Gross has cornered the market on mispriced securities? He does not run a concentrated fund- the holdings span 8 or 9 pages. No doubt, the positions in PHK are held by many other similar closed end funds that are not trading at such a ridiculous premium.

      You can get a years worth of dividends or more, by selling, capturing the NAV premium and reinvesting in a like fund not selling at an exorbitant premium. If it results in a capital loss that can be taken against other gains, all the better.

    • Good god, you probably think tax payers are going to make a bundle on AIG, FRE, FNM, TARP... etc.

      You're nuts if you think that Gross is going to outperform a junk bond index like HYG/JNK over the next year by 60%. It's a ridiculous concept.

      You can get exposure to junk bonds from other/cheaper funds priced near NAV. You can get access to Gross through other cheaper/closer to NAV pimpco funds. Although with his recent CNBC experiance other funds are jumping wildly again.

      Paying $1.6 for assets that the market is telling you is worth $1 is a fools game.

    • the $1 in assets may be worth more than the current price. ultimately the value of assets are a function of cash flow. if Gross has picked assets that are priced at 30 cents on the dollar but yielding the same as when they were priced at one dollar, then the NAV is mispriced, not the stock, and your simplistic argument is invalid.

      ultimately, NAV and the price of the stock will come together, but I do not beleive that they will utlimately come together at 5 or 6 dollars, but rather, closer to the historic average of 15. Again, you may be right in the short run, but the short run is not everyone's perspective.

    • "i guess that the point is that each of us has to figure out what he/she is good at. good luck in your trading, and try not to get so angry at us investors. "

      I'm not angry, I'm just really blunt. A lot of the people on this board are pretty clueless and should not be investing their own money actively.

      Anybody who can't understand why it's a bad idea to pay $1.6 for $1 worth of assets should not be investing, period.

    • look - PHK redeemed $438MM in ARPs in December, they were 50%+ leveraged before those redemptions, they were 42% (per PHK) levered at year end. These are facts. PHK's total assets in late 2008 were $1,594MM. They delevered, and if the leverage was working, the fund will earn less going forward.

      My view on premium is that 60% is unsustainable long term, and if you can get a similar yield and not have the risk of a reduced premium (and the default risk of a high yield fund at this time), run.

    • well, axjoke, i guess that you are a trader, and you certainly could be correct about both a cut in the dividend and a concurrent drop in the stock price. but what you don't get is that investors will see that as an opportunity to add to their positions because they believe that a year from now the fund will yield double digit and will trade double digit for a very nice long term return on investment from today's $8 price, even if it is back down to $6 two weeks from now.

      i guess that the point is that each of us has to figure out what he/she is good at. good luck in your trading, and try not to get so angry at us investors.

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