A rally in the municipal bond market to close out 2008 enabled Pacific Investment Management Co. last week to pay a previously postponed dividend on a closed-end muni fund.
The Newport Beach, Calif.-based investment manager on Dec. 31 froze the 8.1-cent monthly dividend declared Dec. 1 for the Pimco Municipal Income Fund.
The fund had breached a limit known as the "coverage ratio."
When the fund launched in June 2001, Pimco supplemented the $351.1 million raised from selling common shares by borrowing $200 million through a type of loan called auction-rate preferred shares.
The borrowed money - which like the money raised from common shares was invested in muni debt - was intended to enhance the dividends paid to common shareholders.
Under the Investment Company Act of 1940, the fund is not permitted to pay dividends unless its coverage ratio is at least 200%.
That means the fund's assets must total $400 million or more, or at least double the money raised from ARPS.
The Municipal Income Fund's assets totaled $590.6 million at the end of October 2007.
At the end of the third quarter of 2008, the fund had $480.7 million in assets.
Then, wracked by what the fund later called "severe market dislocations" and "erosions in the municipal bond market," assets by the end of November had been further squeezed to $425.9 million.
Many of the fund's holdings have been ravaged by the financial crisis, which chased buyers from most types of bonds into the safety of cash or Treasury debt.
By the end of December, Pimco announced the value of its assets was below the required minimum of $400 million and therefore postponed the dividend. Two days later, the fund said the value of its assets had picked up and it was now in compliance with the coverage ratio, enabling the dividend.
The muni market staged a rally at the end of last year. The three major Bond Buyer weekly indexes show munis carrying their lowest yields in weeks. The Bond Buyer Municipal Bond Index is at 99-09, up from 93-12 a month ago.
Shares in the fund, which trade on the New York Stock Exchange, leaped 11% Friday and an additional 6% Monday. The shares fell 47% in 2008.
Allianz Global Investors Fund Management LLC is the fund's investment manager. Pimco, an Allianz affiliate, is the fund's subadviser.
Pimco suspended dividends for at least seven closed-end muni funds in December. The investment manager has been redeeming some funds' ARPS to make meeting the coverage ratio easier.
On Dec. 31, Pimco also postponed the dividend for the New York Municipal Income Fund II. The investment manager has not reinstated the dividend for that fund.
