Pacific Investment Management Co. may freeze the dividend on the Pimco California Municipal Income Fund II because the value of its investments are insufficient to cover its debt.

The fund said Wednesday unless its portfolio improves by Dec. 1, it will have to delay declaring a dividend for December and postpone the dividend already declared for November.

Launched in June 2002, the fund invests in high-quality California municipal bonds and pays a monthly dividend to common shareholders.

The fund supplemented the capital raised from selling common shares at its inception by selling $260 million of a special class of stock known as auction-rate preferred shares.

Pimco, which sold the so-called ARPS for $25,000 each, pays an interest rate on these securities that is reset at an auction every seven days.

This design is intended to enhance the dividends paid to common shareholders by leveraging the investments with money borrowed through issuance of preferred stock.

Under the Investment Company Act of 1940, the fund’s assets must equal double the liquidation value of the preferred shares.

“Continued severe market dislocations” have rocked the value of the fund’s bonds, and the fund’s asset value has slipped below the required coverage ratio, the fund said.

Double the liquidation value of the preferred shares is $520 million. The fund reported net assets of $547 million at the end of October.

By law, the fund cannot pay dividends as long as the coverage ratio remains below 200%.

The fund previously declared a dividend of seven cents for November, payable Dec. 1.

The fund is managed by Allianz Global Investors Fund Management LLC. Pimco, an Allianz affiliate, is subadviser to the fund.

The fund’s common shares tumbled 22% to $6.36 Wednesday. The shares are down 39% since the end of October and have surrendered more than half their value in the past six months.

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