Pimco Pays Seven Dividends It Postponed Last Month

Pacific Investment Management Co. has unfrozen all but one of the eight dividends on municipal bond mutual funds it was forced to postpone last month.

The unlocked dividends are mostly a function of the investment adviser’s strategy to buy back debt and partly a benefit of a rally in the muni market.

The Newport Beach, Calif.-based fund adviser froze dividends on eight closed-end muni funds last month. The funds had breached the limit on coverage ratios, meaning the value of the funds’ assets were insufficient to cover their debt.

The funds had borrowed money through a type of security known as an auction-rate preferred share. Under the Investment Company Act of 1940, the funds are not permitted to pay a dividend unless the value of their assets is at least double the money owed on the ARPS.

The Municipal Income Fund, for example, owed $200 million on this type of debt. The violation of the coverage ratio implied the fund’s assets had slipped below $400 million.

Earlier this week, Pimco declared it would pay the dividend on the Pimco Municipal Income Fund. The fund’s assets had recovered to $401.4 million, according to the company.

Pimco freed up dividends on six other funds by buying back debt, thus decreasing the minimum assets required for coverage and enabling dividends to be paid on a less valuable portfolio.

On Tuesday, Pimco paid the November dividend of seven cents per share on the California Municipal Income Fund II. That dividend had been postponed Dec. 1.

The fund had $260 million in ARPS debt as of last month, meaning that it needed asset value of $520 million to pay a dividend.

Pimco redeemed some of the fund’s ARPS, paying the debt down to $171.8 million. While assets are now at $376 million, down substantially since the end of November, they now are more than double ARPS debt, sufficient to pay a dividend.

Last month, Pimco said it would redeem $407 million in ARPS from six of the funds with postponed dividends. Based on numbers reported this week, Pimco has so far redeemed $280.6 million.

On Wednesday, Pimco paid the 5.3-cent November dividend on the New York Municipal Income Fund III, which had also been postponed Dec. 1. The fund redeemed $15 million in ARPS, bringing debt to $32 million.

Thursday, Pimco unlocked the dividends on the Municipal Income Funds II and III, the California Municipal Income III, and the New York Municipal Income Fund.

The only fund whose November dividend remains unpaid is the New York Municipal Income Fund II. That fund last reported ARPS debt of $90 million, meaning its assets would have to be less than $180 million to violate the coverage ratio. It last reported assets of $184.9 million. 

 

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