PIMCO High Income Fund

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Investment Company Act file number: 811-21311

PIMCO High Income Fund

(Exact name of registrant as specified in charter)

1633 Broadway, New York, NY 10019

(Address of principal executive offices)

William G. Galipeau

Treasurer (Principal Financial & Accounting Officer)

650 Newport Center Drive

Newport Beach, CA 92660

(Name and address of agent for service)

Copies to:

David C. Sullivan

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

Registrant’s telephone number, including area code: (844) 337-4626

Date of fiscal year end: July 31

Date of reporting period: July 31, 2017

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.


Item 1. Reports to Shareholders.

The following is a copy of the report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30e-1).


LOGO

 

PIMCO Closed-End Funds

 

LOGO      LOGO      LOGO

 

LOGO      LOGO     

 

 

Annual Report

 

July 31, 2017

 

LOGO

 

PIMCO Corporate & Income Opportunity Fund

PIMCO Corporate & Income Strategy Fund

PIMCO High Income Fund

PIMCO Income Strategy Fund

PIMCO Income Strategy Fund II

 

LOGO


Table of Contents

 

            Page  
     

Letter from the Chairman of the Board & President

        2  

Important Information About the Funds

        4  

Financial Highlights

        16  

Statements of Assets and Liabilities

        18  

Statements of Operations

        19  

Statements of Changes in Net Assets

        20  

Statements of Cash Flows

        22  

Notes to Financial Statements

        73  

Report of Independent Registered Public Accounting Firm

        95  

Glossary

        96  

Federal Income Tax Information

        97  

Shareholder Meeting Results

        98  

Changes to Boards of Trustees

        99  

Dividend Reinvestment Plan

        100  

Management of the Funds

        102  

Approval of Investment Management Agreement

        105  

Privacy Policy

        111  
     
Fund    Fund
Summary
     Schedule of
Investments
 
     

PIMCO Corporate & Income Opportunity Fund

     10        23  

PIMCO Corporate & Income Strategy Fund

     11        35  

PIMCO High Income Fund

     12        45  

PIMCO Income Strategy Fund

     13        55  

PIMCO Income Strategy Fund II

     14        64  


Letter from the Chairman of the Board & President

 

Dear Shareholder,

 

The global equity markets generated strong results during the reporting period against a backdrop of solid corporate profits and signs of improving global growth. Meanwhile, the global fixed income markets generated weak results, as U.S. monetary policy tightened, whereas many international central banks maintained accommodative monetary policies.

 

For the 12-month reporting period ended July 31, 2017

 

The U.S. economy continued to expand at a relatively modest pace during the reporting period. U.S. gross domestic product (“GDP”), which represents the value of goods and services produced in the country, and is the broadest measure of economic activity and the principal indicator of economic performance, expanded at a revised pace of 2.8% on an annual basis during the third quarter of 2016 — the strongest reading since the first quarter of 2015. GDP growth then moderated, growing at a revised annual pace of 1.8% during the fourth quarter of 2016, and 1.2% during the first quarter of 2017. Finally, the Commerce Department’s second reading — released after the reporting period had ended — showed that second quarter 2017 GDP grew at an annual pace of 3.0%.

 

The Federal Reserve (“Fed”) continued to normalize monetary policy, with three interest rate hikes during the reporting period. The first occurrence was in December 2016, followed by rate hikes at its meetings in March and June 2017. The second move put the federal funds rate between 1.00% and 1.25%. In its official statement following the Fed’s June meeting, the Fed said, “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” The Fed also indicated that it expects to begin reducing its balance sheet later this year.

 

Economic activity outside the U.S. generally improved during the reporting period. Nevertheless, a number of central banks, including the European Central Bank, Bank of England and Bank of Japan, maintained their highly accommodative monetary policies during the reporting period. However, toward the end of the reporting period, several central banks indicated that they may pare back their quantitative easing programs should growth improve and inflation increase.

 

Commodity prices fluctuated during the 12 months ended July 31, 2017. When the reporting period began, crude oil was approximately $42 a barrel, and was roughly $54 a barrel at the end of 2016. Prices then generally declined on elevated supplies and crude oil was roughly $43 a barrel in mid-June 2017, before rising to nearly $50 at the end of July 2017. Finally, there were gyrations in foreign exchange markets, possibly due, at least in part, to changing expectations for global growth, decoupling central bank policy, Brexit, the surprise outcome from the November U.S. elections, and a number of geopolitical events.

 

Outlook

 

PIMCO’s baseline secular outlook is that the U.S. economy is likely to grow at about 2% per year, with inflation running close to the Fed’s target of 2%. PIMCO’s forecast for the federal funds rate at the end of its secular horizon is anchored in a “New Neutral” range of 2% to 3%, but with the risks skewed to the downside on rates. In PIMCO’s view, of real concern for the U.S. outlook, as well as the global outlook, is the “driving-without-a-spare-tire risk” at this late stage of the business cycle. In the next recession, whenever it occurs, PIMCO believes the Fed and other central banks will have less room to cut rates than in past cycles. Some countries — for example, the U.S., China, Germany — will likely have some “fiscal space” to deploy in the next downturn, but with sovereign debt levels already elevated, fiscal policy is unlikely to fully offset the constraints on monetary policy in the next global downturn.

 

 

2   PIMCO CLOSED-END FUNDS     


For the eurozone, under PIMCO’s baseline secular scenario, there would be trend growth of 1.25% on average over the next five years, with inflation hovering between 1% and 2%. PIMCO sees risk to its outlook as roughly balanced for the eurozone in the near term, but with risk increasing and tilting to the downside toward the end of the eurozone’s secular horizon. For Japan, PIMCO’s baseline secular outlook is for 0% to 1% inflation, with the Bank of Japan only gradually being able to raise the 10-year yield target. Finally, for China, PIMCO’s baseline secular outlook is that growth slows gradually to about 5.5%.

 

In the following pages of this PIMCO Closed-End Funds Annual Report, please find specific details regarding investment performance and a discussion of factors that most affected the Funds’ performance over the 12 months ended July 31, 2017.

 

Thank you for investing with us. We value your trust and will continue to work diligently to meet your investment needs. If you have questions regarding any of your PIMCO Closed-End Funds investments, please contact your financial advisor or call the Funds’ shareholder servicing agent at (844) 33-PIMCO, or (844) 337-4626. We also invite you to visit our website at www.pimco.com to learn more about our views.

 

Sincerely,

 

LOGO   LOGO
LOGO   LOGO
Hans W. Kertess   Peter G. Strelow
Chairman of the Board of Trustees   President

 

  ANNUAL REPORT   JULY 31, 2017   3


Important Information About the Funds

 

We believe that bond funds have an important role to play in a well-diversified investment portfolio. It is important to note, however, that in an environment where interest rates trend upward, rising rates would negatively impact the performance of most bond funds, and fixed-income securities held by a Fund are likely to decrease in value. A wide variety of factors can cause interest rates to rise (e.g., central bank monetary policies, inflation rates, general economic conditions). This risk may be particularly acute in the current market environment because market interest rates are currently near historically low levels. This, combined with recent economic recovery, the Federal Reserve Board’s conclusion of its quantitative easing program, and increases in federal funds interest rates in 2015, 2016 and 2017, which had not occurred since 2006, could potentially increase the probability of an updated interest rate environment in the near future. To the extent the Federal Reserve Board continues to raise interest rates, there is a risk that rates across the financial system may rise. Further, while the U.S. bond market has steadily grown over the past three decades, dealer inventories of corporate bonds have remained relatively stagnant. As a result, there has been a significant reduction in the ability of dealers to “make markets” in corporate bonds. All of the factors mentioned above, individually or collectively, could lead to increased volatility and/or lower liquidity in the fixed income markets, which could result in increased losses to a Fund. Bond funds and individual bonds with a longer duration (a measure of the sensitivity of a security’s price to changes in interest rates) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities or funds with shorter durations. In addition, in the current low interest rate environment, the market price of the Funds’ common shares may be particularly sensitive to changes in interest rates or the perception that there will be a change in interest rates.

 

The use of derivatives may subject the Funds to greater volatility than investments in traditional securities. The Funds may use derivative instruments for hedging purposes or as part of an investment strategy. Use of these instruments may involve certain costs and risks such as liquidity risk, interest rate risk, market risk, call risk, credit risk, management risk and the risk that a Fund could not close out a position when it would be most advantageous to do so. Certain derivative transactions may have a leveraging effect on a Fund. For example, a small investment in a derivative instrument may have a significant impact on a Fund’s exposure to interest rates, currency exchange rates or other investments. As a result, a relatively small price movement in a derivative instrument may cause an immediate and substantial loss or gain, which translates into heightened volatility in a Fund’s net asset value (“NAV”). A Fund may engage in such transactions regardless of whether the Fund owns the asset, instrument or components of the index underlying a derivative instrument. A Fund may invest a significant portion of its assets in these types of

instruments. If it does, a Fund’s investment exposure could far exceed the value of its portfolio securities and its investment performance could be primarily dependent upon securities it does not directly own. The regulation of the derivatives markets has increased over the past several years, and additional future regulation of the derivatives markets may make derivatives more costly, may limit the availability or reduce the liquidity of derivatives, or may otherwise adversely affect the value or performance of derivatives. Any such adverse future developments could impair the effectiveness of a Fund’s derivatives transactions and cause a Fund to lose value. For instance, in December 2015, the SEC proposed new regulations applicable to a registered investment company’s use of derivatives and related instruments. If adopted as proposed, these regulations could significantly limit or impact a Fund’s ability to invest in derivatives and other instruments, limit a Fund’s ability to employ certain strategies that use derivatives and/or adversely affect a Fund’s performance, efficiency in implementing its strategy, liquidity and/or ability to pursue its investment objectives.

 

Certain Funds’ monthly distributions may include, among other possible sources, interest income from its debt portfolio and payments and premiums (characterized as capital for financial accounting purposes and as ordinary income for tax purposes) generated by certain types of interest rate derivatives.

 

Strategies involving interest rate derivatives may attempt to capitalize on differences between short-term and long-term interest rates as part of a Fund’s duration and yield curve active management strategies. For instance, in the event that long-term interest rates are higher than short-term interest rates, a Fund may elect to pay a floating short-term interest rate and to receive a long-term fixed interest rate for a stipulated period of time, thereby generating payments as a function of the difference between current short-term interest rates and long-term interest rates, so long as the floating short-term interest rate (which may rise) is lower than the fixed long-term interest rate.

 

A Fund may also enter into opposite sides of multiple interest rate swaps or other derivatives with respect to the same underlying reference instrument (e.g., a 10-year U.S. treasury) that have different effective dates with respect to interest accrual time periods for the principal purpose of generating distributable gains (characterized as ordinary income for tax purposes) and that are not part of the Fund’s duration or yield curve management strategies (“paired swap transactions”). In a paired swap transaction, a Fund would generally enter into one or more interest rate swap agreements whereby the Fund agrees to make regular payments starting at the time the Fund enters into the agreements equal to a floating interest rate in return for payments equal to a fixed interest rate (the “initial leg”). The Fund would also enter into one or more interest rate swap agreements on

 

 

4   PIMCO CLOSED-END FUNDS     


 

the same underlying instrument, but take the opposite position (i.e., in this example, the Fund would make regular payments equal to a fixed interest rate in return for receiving payments equal to a floating interest rate) with respect to a contract whereby the payment obligations do not commence until a date following the commencement of the initial leg (the “forward leg”).

 

A Fund’s income- and gain-generating strategies may generate current income and gains taxable as ordinary income sufficient to support monthly distributions even in situations when the Fund has experienced a decline in net assets due to, for example, adverse changes in the broad U.S. or non-U.S. equity markets or the Fund’s debt investments, or arising from its use of derivatives. For instance, a significant portion of a Fund’s monthly distributions may be sourced from paired swap transactions utilized to produce current distributable ordinary income for tax purposes on the initial leg, with a substantial possibility that the Fund will later realize a corresponding capital loss and potential decline in its net asset value with respect to the forward leg (to the extent there are not corresponding offsetting capital gains being generated from other sources). Because some or all of these transactions may generate capital losses without corresponding offsetting capital gains, portions of a Fund’s distributions recognized as ordinary income for tax purposes (such as from paired swap transactions) may be economically similar to a taxable return of capital when considered together with such capital losses.

 

The notional exposure of a Fund’s interest rate derivatives may represent a multiple of the Fund’s total net assets. There can be no assurance a Fund’s strategies involving interest rate derivatives will work as intended and such strategies are subject to the risks related to the use of derivatives generally, as discussed above (see also Notes 6 and 7 in the Notes to Financial Statements for further discussion on the use of derivative instruments and certain of the risks associated therewith).

 

A Fund’s use of leverage creates the opportunity for increased income for the Fund’s common shareholders, but also creates special risks. Leverage is a speculative technique that may expose a Fund to greater risk and increased costs. If shorter-term interest rates rise relative to the rate of return on a Fund’s portfolio, the interest and other costs of leverage to the Fund could exceed the rate of return on the debt obligations and other investments held by the Fund, thereby reducing return to the Fund’s common shareholders. In addition, fees and expenses of any form of leverage used by a Fund will be borne entirely by its common shareholders (and not by preferred shareholders, if any) and will reduce the investment return of the Fund’s common shares.

 

There can be no assurance that a Fund’s use of leverage will result in a higher yield on its common shares, and it may result in losses. Leverage

creates several major types of risks for a Fund’s common shareholders, including: (1)  the likelihood of greater volatility of net asset value and market price of the Fund’s common shares, and of the investment return to the Fund’s common shareholders, than a comparable portfolio without leverage; (2)  the possibility either that the Fund’s common share dividends will fall if the interest and other costs of leverage rise, or that dividends paid on the Fund’s common shares will fluctuate because such costs vary over time; and (3)  the effects of leverage in a declining market or a rising interest rate environment, as leverage is likely to cause a greater decline in the net asset value of the Fund’s common shares than if the Fund were not leveraged and may result in a greater decline in the market value of the Fund’s common shares.

 

A Fund’s investments in and exposure to foreign securities involve special risks. For example, the value of these investments may decline in response to unfavorable political and legal developments, unreliable or untimely information or economic and financial instability. Foreign securities may experience more rapid and extreme changes in value than investments in securities of U.S. issuers. The securities markets of certain foreign countries are relatively small, with a limited number of companies representing a small number of industries. Issuers of foreign securities are usually not subject to the same degree of regulation as U.S. issuers. Reporting, accounting, auditing and custody standards of foreign countries differ, in some cases significantly, from U.S. standards. Also, nationalization, expropriation or other confiscation, currency blockage, political changes or diplomatic developments could adversely affect a Fund’s investments in foreign securities. In the event of nationalization, expropriation or other confiscation, a Fund could lose its entire investment in foreign securities. Risks associated with investing in foreign securities may be increased when a Fund invests in emerging markets. For example, if a Fund invests in emerging market debt, it may face increased exposure to interest rate, liquidity, volatility, and redemption risk due to the specific economic, political, geographical, or legal background of the emerging market.

 

Investments in loans are generally subject to risks similar to those of investments in other types of debt obligations, including, among others, credit risk, interest rate risk, variable and floating rate securities risk, and, as applicable, risks associated with mortgage-related securities. In addition, in many cases loans are subject to the risks associated with below-investment grade securities. In the case of a loan participation or assignment, a Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, a Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. In the event of the insolvency of the lender selling a loan participation, a Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. A Fund may be

 

 

  ANNUAL REPORT   JULY 31, 2017   5


Important Information About the Funds (Cont.)

 

subject to heightened or additional risks and potential liabilities and costs by investing in mezzanine and other subordinated loans or, with respect to certain Funds, acting as an originator of loans, including those arising under bankruptcy, fraudulent conveyance, equitable subordination, lender liability, environmental and other laws and regulations, and risks and costs associated with debt servicing and taking foreclosure actions associated with the loans. To the extent that a Fund originates a loan, it may be responsible for all or a substantial portion of the expenses associated with initiating the loan, irrespective of whether the loan transaction is ultimately consummated or closed. This may include significant legal and due diligence expenses, which will be indirectly borne by a Fund and its shareholders.

 

Mortgage-related and other asset-backed securities represent interests in “pools” of mortgages or other assets such as consumer loans or receivables held in trust and often involve risks that are different from or possibly more acute than risks associated with other types of debt instruments. Generally, rising interest rates tend to extend the duration of fixed rate mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, if a Fund holds mortgage-related securities, it may exhibit additional volatility since individual mortgage holders are less likely to exercise prepayment options, thereby putting additional downward pressure on the value of these securities and potentially causing the Fund to lose money. This is known as extension risk. Mortgage-backed securities can be highly sensitive to rising interest rates, such that even small movements can cause an investing Fund to lose value. Mortgage-backed securities, and in particular those not backed by a government guarantee, are subject to credit risk. In addition, adjustable and fixed rate mortgage-related securities are subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can reduce the returns of the Funds because the Funds may have to reinvest that money at the lower prevailing interest rates. The Funds’ investments in other asset-backed securities are subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated with the nature of the assets and the servicing of those assets. Payment of principal and interest on asset-backed securities may be largely dependent upon the cash flows generated by the assets backing the securities, and asset-backed securities may not have the benefit of any security interest in the related assets. Additionally, investments in subordinate mortgage-backed and other asset-backed securities will be subject to risks arising from delinquencies and foreclosures, thereby exposing a Fund’s investment portfolio to potential losses. Subordinate securities of mortgage-backed and other asset-backed securities are also subject to greater credit risk than those mortgage-backed or other asset-backed securities that are more highly rated.

A Fund may also invest in the residual or equity tranches of mortgage-related and other asset-backed securities, which may be referred to as subordinate mortgage-backed or asset-backed securities and interest-only mortgage-backed or asset-backed securities. Subordinate mortgage-backed or asset-backed securities are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes a large percentage of delinquent loans, there is a risk that interest payment on subordinate mortgage-backed or asset-backed securities will not be fully paid. There are multiple tranches of mortgage-backed and asset backed-securities, offering investors various maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine, and subordinated/equity or “first loss,” according to their degree of risk. The most senior tranche of a mortgage-backed or asset-backed security has the greatest collateralization and pays the lowest interest rate. If there are defaults or the collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. Lower tranches represent lower degrees of credit quality and pay higher interest rates intending to compensate for the attendant risks. The return on the lower tranches is especially sensitive to the rate of defaults in the collateral pool. The lowest tranche (i.e., the “equity” or “residual” tranche) specifically receives the residual interest payments (i.e., money that is left over after the higher tranches have been paid and expenses of the issuing entities have been paid) rather than a fixed interest rate. Each Fund expects that investments in subordinate mortgage-backed and other asset-backed securities will be subject to risks arising from delinquencies and foreclosures, thereby exposing its investment portfolio to potential losses. Subordinate securities of mortgage-backed and other asset-backed securities are also subject to greater credit risk than those mortgage-backed or other asset-backed securities that are more highly rated.

 

The risks of investing in collateralized loan obligations (“CLOs”) include prepayment risk, credit risk, liquidity risk, market risk, structural risk, legal risk and interest rate risk. CLOs may carry additional risks, including, but not limited to: (i)  the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii)  the quality of the collateral may decline in value or default; (iii)  the possibility that the investments in CLOs are subordinate to other classes or tranches thereof; and (iv)  the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.

 

High-yield bonds (commonly referred to as “junk bonds”) typically have a lower credit rating than other bonds. Lower-rated bonds generally

 

 

6   PIMCO CLOSED-END FUNDS     


 

involve a greater risk to principal than higher-rated bonds. Further, markets for lower-rated bonds are typically less liquid than for higher-rated bonds, and public information is usually less abundant in such markets. Thus, high yield investments increase the chance that a Fund will lose money on its investment. The Funds may also invest in bonds and other instruments that are not rated, but which PIMCO considers to be equivalent to high-yield investments. The Funds may hold defaulted securities that may involve special considerations including bankruptcy proceedings, other regulatory and legal restrictions affecting the Funds’ ability to trade, and the availability of prices from independent pricing services or dealer quotations. Defaulted obligations might be repaid only after lengthy workout or bankruptcy proceedings, during which the issuer might not make any interest or other payments. Defaulted securities are often illiquid and may not be actively traded. Sales of securities in bankrupt companies at an acceptable price may be difficult and differences compared to the value of the securities used by the Funds could be material.

 

Variable and floating rate securities generally are less sensitive to interest rate changes but may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not generally increase in value if interest rates decline. Inverse floating rate securities may decrease in value if interest rates increase. Inverse floating rate securities may also exhibit greater price volatility than a fixed rate obligation with similar credit quality. When a Fund holds variable or floating rate securities, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities and the NAV of the Fund’s shares.

 

The global economic crisis brought several small countries in Europe to the brink of default and many other economies into recession and weakened the banking and financial sectors of many European countries. For example, the governments of Greece, Spain, Portugal, and the Republic of Ireland have all experienced large public budget deficits, the effects of which are still yet unknown and may slow the overall recovery of the European economies from the global economic crisis. In addition, due to large public deficits, some European countries may be dependent on assistance from other European governments and institutions or other central banks or supranational agencies such as the International Monetary Fund. Assistance may be dependent on a country’s implementation of reforms or reaching a certain level of performance. Failure to reach those objectives or an insufficient level of assistance could result in a deep economic downturn which could significantly affect the value of a Fund’s European investments. It is possible that one or more Economic and Monetary Union of the European Union member countries could abandon the euro and return to a national currency and/or that the euro will cease to exist as a

single currency in its current form. The exit of any country out of the euro may have an extremely destabilizing effect on other eurozone countries and their economies and a negative effect on the global economy as a whole. Such an exit by one country may also increase the possibility that additional countries may exit the euro should they face similar financial difficulties. In June 2016, the United Kingdom approved a referendum to leave the European Union. Significant uncertainty remains in the market regarding the ramifications of that development, and the range and potential implications of possible political, regulatory, economic and market outcomes are difficult to predict.

 

As the use of technology has become more prevalent in the course of business, the Funds have become potentially more susceptible to operational and information security risks resulting from breaches in cyber security. A breach in cyber security refers to both intentional and unintentional cyber events that may, among other things, cause a Fund to lose proprietary information, suffer data corruption and/or destruction or lose operational capacity, result in the unauthorized release or other misuse of confidential information, or otherwise disrupt normal business operations. Cyber security breaches may involve unauthorized access to a Fund’s digital information systems (e.g., through “hacking” or malicious software coding), but may also result from outside attacks such as denial-of-service attacks (i.e., efforts to make network services unavailable to intended users). In addition, cyber security breaches involving a Fund’s third party service providers (including but not limited to advisers, sub-advisers, administrators, transfer agents, custodians, distributors and other third parties), trading counterparties or issuers in which a Fund invests can also subject a Fund to many of the same risks associated with direct cyber security breaches. Moreover, cyber security breaches involving trading counterparties or issuers in which a Fund invests could adversely impact such counterparties or issuers and cause the Fund’s investment to lose value.

 

Cyber security failures or breaches may result in financial losses to a Fund and its shareholders. These failures or breaches may also result in disruptions to business operations, potentially resulting in financial losses; interference with a Fund’s ability to calculate its net asset value, process shareholder transactions or otherwise transact business with shareholders; impediments to trading; violations of applicable privacy and other laws; regulatory fines; penalties; reputational damage; reimbursement or other compensation costs; additional compliance and cyber security risk management costs and other adverse consequences. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future.

 

Like with operational risk in general, the Funds have established business continuity plans and risk management systems designed to

 

 

  ANNUAL REPORT   JULY 31, 2017   7


Important Information About the Funds (Cont.)

 

reduce the risks associated with cyber security. However, there are inherent limitations in these plans and systems, including that certain risks may not have been identified, in large part because different or unknown threats may emerge in the future. As such, there is no guarantee that such efforts will succeed, especially because the Funds do not directly control the cyber security systems of issuers in which a Fund may invest, trading counterparties or third party service providers to the Funds. There is also a risk that cyber security breaches may not be detected. The Funds and their shareholders could be negatively impacted as a result.

 

The Funds may invest in securities and instruments that are economically tied to Russia. Investments in Russia are subject to various risks such as political, economic, legal, market and currency risks. The risks include uncertain political and economic policies, short-term market volatility, poor accounting standards, corruption and crime, an inadequate regulatory system, and unpredictable taxation. Investments in Russia are particularly subject to the risk that economic sanctions may be imposed by the United States and/or other countries. Such sanctions — which may impact companies in many sectors, including energy, financial services and defense, among others — may negatively impact the Funds’ performance and/or ability to achieve their investment objectives. The Russian securities market is characterized by limited volume of trading, resulting in difficulty in obtaining accurate prices. The Russian securities market, as compared to U.S. markets, has significant price volatility, less liquidity, a smaller market capitalization and a smaller number of traded securities. There may be little publicly available information about issuers. Settlement, clearing and registration of securities transactions are subject to risks because of registration systems that may not be subject to effective government supervision. This may result in significant delays or problems in registering the transfer of securities. Russian securities laws may not recognize foreign nominee accounts held with a custodian bank, and therefore the custodian may be considered the ultimate owner of securities they hold for their clients. Ownership of securities issued by Russian companies is recorded by companies themselves and by registrars instead of through a central registration system. It is possible that the ownership rights of the Funds could be lost through fraud or negligence. While applicable Russian regulations impose liability on registrars for losses resulting from their errors, it may be difficult for the Funds to enforce any rights they may have against the registrar or issuer of the securities in the event of loss of share registration. Adverse currency exchange rates are a risk and there may be a lack of available currency hedging instruments. Investments in Russia may be subject to the risk of nationalization or expropriation of assets. Oil, natural gas, metals, and timber account for a significant portion of Russia’s exports, leaving the country vulnerable to swings in world prices.

The common shares of the Funds trade on the New York Stock Exchange. As with any stock, the price of a Fund’s common shares will fluctuate with market conditions and other factors. If you sell your common shares of a Fund, the price received may be more or less than your original investment. Shares of closed-end management investment companies frequently trade at a discount from their net asset value.

 

The common shares of a Fund may trade at a price that is less than the initial offering price and/or the net asset value of such shares. Further, if a Fund’s shares trade at a price that is more than the initial offering price and/or the net asset value of such shares, including at a substantial premium and/or for an extended period of time, there is no assurance that any such premium will be sustained for any period of time and will not decrease, or that the shares will not trade at a discount to net asset value thereafter.

 

The Funds may be subject to various risks, including, but not limited to, the following: asset allocation risk, credit risk, stressed securities risk, distressed and defaulted securities risk, corporate bond risk, market risk, issuer risk, liquidity risk, equity securities and related market risk, mortgage-related and other asset-backed securities risk, extension risk, prepayment risk, privately issued mortgage-related securities risk, mortgage market/ subprime risk, foreign (non-U.S.) investment risk, emerging markets risk, currency risk, redenomination risk, non-diversification risk, management risk, municipal bond risk, inflation-indexed security risk, senior debt risk, loans, participations and assignments risk, reinvestment risk, real estate risk, U.S. Government securities risk, foreign (non-U.S.) government securities risk, valuation risk, segregation and cover risk, focused investment risk, credit default swaps risk, event-linked securities risk, counterparty risk, preferred securities risk, confidential information access risk, other investment companies risk, private placements risk, inflation/deflation risk, regulatory risk, tax risk, recent economic conditions risk, market disruptions and geopolitical risk, potential conflicts of interest involving allocation of investment opportunities, repurchase agreements risk, securities lending risk, zero-coupon bond and payment-in-kind securities risk, portfolio turnover risk, smaller company risk, short sale risk and convertible securities risk. A description of certain of these risks is available in the Notes to Financial Statements of this Report.

 

On each Fund Summary page in this Shareholder Report, the Average Annual Total Return table measures performance assuming that all dividend and capital gain distributions were reinvested. Total return is calculated by determining the percentage change in NAV or market price (as applicable) in the specified period. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions. Total return for a period of more than one year represents the average annual total return. Performance at market price will differ from results at NAV. Although market price returns tend to reflect investment

 

 

8   PIMCO CLOSED-END FUNDS     


 

results over time, during shorter periods returns at market price can also be influenced by factors such as changing views about a Fund, market conditions, supply and demand for the Fund’s shares, or changes in the Fund’s dividends. Performance shown is net of fees and expenses.

 

The following table discloses the commencement of operations and diversification status of each Fund:

 

Fund Name         Commencement
of Operations
    Diversification
Status
 

PIMCO Corporate & Income Opportunity Fund

      12/27/02       Diversified  

PIMCO Corporate & Income Strategy Fund

      12/21/01       Diversified  

PIMCO High Income Fund

      04/30/03       Diversified  

PIMCO Income Strategy Fund

      08/29/03       Diversified  

PIMCO Income Strategy Fund II

      10/29/04       Diversified  

 

An investment in a Fund is not a deposit of a bank and is not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency. It is possible to lose money on investments in the Funds.

 

The Trustees are responsible generally for overseeing the management of the Funds. The Trustees authorize the Funds to enter into service agreements with the Investment Manager and other service providers in order to provide, and in some cases authorize service providers to procure through other parties, necessary or desirable services on behalf of the Funds. Shareholders are not parties to or third-party beneficiaries of such service agreements. Neither a Fund’s original or any subsequent prospectus or Statement of Additional Information (SAI), any press release or shareholder report, any contracts filed as exhibits to a Fund’s registration statement, nor any other communications, disclosure documents or regulatory filings from or on behalf of a Fund creates a contract between or among any shareholders of a Fund, on the one hand, and the Fund, a service provider to the Fund, and/or the Trustees or officers of the Fund, on the other hand.

 

The Trustees (or the Funds and their officers, service providers or other delegates acting under authority of the Trustees) may amend its most recent or use a new prospectus or SAI with respect to a Fund, adopt and disclose new or amended policies and other changes in press

releases and shareholder reports and/or amend, file and/or issue any other communications, disclosure documents or regulatory filings, and may amend or enter into any contracts to which a Fund is a party, and interpret the investment objective(s), policies, restrictions and contractual provisions applicable to any Fund, without shareholder input or approval, except in circumstances in which shareholder approval is specifically required by law (such as changes to fundamental investment policies) or where a shareholder approval requirement was specifically disclosed in a Fund’s prospectus, SAI or shareholder report and is otherwise still in effect.

 

PIMCO has adopted written proxy voting policies and procedures (“Proxy Policy”) as required by Rule 206(4)-6 under the Investment Advisers Act of 1940. The Proxy Policy has been adopted by the Funds as the policies and procedures that PIMCO will use when voting proxies on behalf of the Funds. A description of the policies and procedures that PIMCO uses to vote proxies relating to portfolio securities of each Fund, and information about how each Fund voted proxies relating to portfolio securities held during the most recent twelve-month period ended June 30, are available without charge, upon request, by calling the Funds at (844) 33-PIMCO (844-337-4626), on the Funds’ website at www.pimco.com, and on the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.

 

Each Fund files a complete schedule of its portfolio holdings with the SEC for the first and third quarters of its fiscal year on Form N-Q. A copy of each Fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and is available without charge, upon request by calling the Funds at (844) 33-PIMCO (844-337-4626) and on the Funds’ website at www.pimco.com.

 

Updated portfolio holdings information about a Fund will be available at www.pimco.com approximately 15 calendar days after such Fund’s most recent fiscal quarter end, and will remain accessible until such Fund files a Form N-Q or a shareholder report for the period which includes the date of the information. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

 

 

  ANNUAL REPORT   JULY 31, 2017   9


PIMCO Corporate & Income Opportunity Fund

 

  Symbol on NYSE - PTY

 

Allocation Breakdown as of 07/31/2017§

 

Corporate Bonds & Notes

    45.7%  

Non-Agency Mortgage-Backed Securities

    15.7%  

Asset-Backed Securities

    14.7%  

Short-Term Instruments

    6.2%  

Loan Participations and Assignments

    5.8%  

Municipal Bonds & Notes

    3.7%  

U.S. Government Agencies

    3.3%  

Sovereign Issues

    2.1%  

Preferred Securities

    2.0%  

Other

    0.8%  
   

% of Investments, at value.

 

  § 

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

Fund Information (as of July 31, 2017)(1)

 

Market Price

    $16.92  

NAV

    $14.87  

Premium/(Discount) to NAV

    13.79%  

Market Price Distribution Yield(2)

    9.22%  

NAV Distribution Yield(2)

    10.49%  

Total Effective Leverage(3)

    43%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2017  
    1 Year     5 Year     10 Year     Commencement
of Operations
(12/27/02)
 
Market Price     29.18%       11.61%       15.70%       14.37%  
NAV     26.91%       14.54%       16.07%       14.64%  

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO (844-337-4626).

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or market price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income in accordance with its policies and good accounting practices, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the estimated composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Corporate & Income Opportunity Fund’s investment objective is to seek maximum total return through a combination of current income and capital appreciation.

 

Fund Insights at NAV

 

The following affected performance during the reporting period:

 

»  

Exposure to high yield corporate bonds contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to non-agency residential mortgage-backed securities (RMBS) contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to investment grade corporate bonds contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to Brazilian external debt contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to taxable municipal bonds contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to structured products contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to U.S. interest rates detracted from performance, as U.S. interest rates rose.

 

»  

Exposure to GBP interest rates detracted from performance, as GBP interest rates rose.

 

10   PIMCO CLOSED-END FUNDS     


PIMCO Corporate & Income Strategy Fund

 

  Symbol on NYSE - PCN

 

Allocation Breakdown as of 07/31/2017§

 

Corporate Bonds & Notes

    43.0%  

Non-Agency Mortgage-Backed Securities

    20.7%  

Asset-Backed Securities

    16.3%  

U.S. Government Agencies

    4.7%  

Loan Participations and Assignments

    3.9%  

Municipal Bonds & Notes

    3.8%  

Preferred Securities

    3.0%  

Sovereign Issues

    2.1%  

Short-Term Instruments

    1.7%  

Other

    0.8%  
   

% of Investments, at value.

 

  §

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

Fund Information (as of July 31, 2017)(1)

 

Market Price

    $17.92  

NAV

    $15.32  

Premium/(Discount) to NAV

    16.97%  

Market Price Distribution Yield(2)

    7.53%  

NAV Distribution Yield(2)

    8.81%  

Total Effective Leverage(3)

    20%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2017  
   

1 Year

   

5 Year

    10 Year     Commencement
of Operations
(12/21/01)
 
Market Price     30.63%       12.22%       15.13%       12.76%  
NAV     21.13%       12.80%       14.46%       12.47%  

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO (844-337-4626).

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or market price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income in accordance with its policies and good accounting practices, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the estimated composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Corporate & Income Strategy Fund’s primary investment objective is to seek high current income, with a secondary objective of capital preservation and appreciation.

 

Fund Insights at NAV

 

The following affected performance during the reporting period:

 

»  

Exposure to non-agency residential mortgage-backed securities (RMBS) contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to high yield industrials contributed to performance, as the high yield industrials sector generated positive total returns.

 

»  

Exposure to high yield financials contributed to performance, as the high yield financials sector generated positive total returns.

 

»  

Exposure to emerging markets contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to investment grade financials contributed to performance, as the investment grade financials sector generated positive total returns.

 

»  

Exposure to U.S. interest rates detracted from performance, as U.S. interest rates rose.

 

  ANNUAL REPORT   JULY 31, 2017   11


PIMCO High Income Fund

 

  Symbol on NYSE - PHK

 

Allocation Breakdown as of 07/31/2017§

 

Corporate Bonds & Notes

    49.6%  

Non-Agency Mortgage-Backed Securities

    14.8%  

Asset-Backed Securities

    12.7%  

Short-Term Instruments

    6.3%  

Municipal Bonds & Notes

    5.6%  

Preferred Securities

    3.1%  

U.S. Government Agencies

    2.6%  

Loan Participations and Assignments

    2.3%  

Sovereign Issues

    1.9%  

Other

    1.1%  
 

% of Investments, at value.

 

  §

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

Fund Information (as of July 31, 2017)(1)

 

Market Price

    $8.71  

NAV

    $6.90  

Premium/(Discount) to NAV

    26.23%  

Market Price Distribution Yield(2)

    11.12%  

NAV Distribution Yield(2)

    14.03%  

Total Effective Leverage(3)

    24%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2017  
    1 Year     5 Year     10 Year     Commencement
of Operations
(04/30/03)
 
Market Price     (1.45)%       3.99%       10.34%       10.09%  
NAV     22.87%       16.03%       12.99%       12.12%  

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO (844-337-4626).

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or market price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income in accordance with its policies and good accounting practices, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the estimated composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO High Income Fund’s primary investment objective is to seek high current income, with capital appreciation as a secondary objective.

 

Fund Insights at NAV

 

The following affected performance during the reporting period:

 

»  

Exposure to high yield industrials contributed to performance, as the high yield industrials sector generated positive total returns.

 

»  

Exposure to non-agency mortgage-backed securities (MBS) contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to high yield financials contributed to performance, as the high yield financials sector generated positive total returns.

 

»  

Exposure to Brazilian external debt contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to structured products contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to taxable municipal bonds contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to U.S. interest rates detracted from performance, as U.S. interest rates rose.

 

12   PIMCO CLOSED-END FUNDS     


PIMCO Income Strategy Fund

 

  Symbol on NYSE - PFL

 

Allocation Breakdown as of 07/31/2017§

 

Corporate Bonds & Notes

    45.9%  

Asset-Backed Securities

    19.6%  

Non-Agency Mortgage-Backed Securities

    11.9%  

Short-Term Instruments

    5.7%  

Municipal Bonds & Notes

    4.3%  

Loan Participations and Assignments

    4.1%  

Sovereign Issues

    2.7%  

Preferred Securities

    2.5%  

U.S. Government Agencies

    2.5%  

Other

    0.8%  
   

% of Investments, at value.

 

  §

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

Fund Information (as of July 31, 2017)(1)

 

Market Price

    $12.17  

NAV

    $11.60  

Premium/(Discount) to NAV

    4.91%  

Market Price Distribution Yield(2)

    8.87%  

NAV Distribution Yield(2)

    9.31%  

Total Effective Leverage(3)

    27%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2017  
   

1 Year

    5 Year     10 Year     Commencement
of Operations
(08/29/03)
 
Market Price     28.11%       10.24%       8.06%       7.15%  
NAV     21.55%       11.28%       8.08%       7.20%  

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO (844-337-4626).

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or market price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, in accordance with its policies and good accounting practices the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the estimated composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Income Strategy Fund’s investment objective is to seek high current income, consistent with the preservation of capital.

 

Fund Insights at NAV

 

The following affected performance during the reporting period:

 

»  

Exposure to high yield corporate bonds contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to non-agency residential mortgage-backed securities (RMBS) contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to investment grade corporate bonds contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to Brazilian external debt contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to taxable municipal bonds contributed to performance, as the sector generated positive excess returns.

 

»  

Exposure to U.S. interest rates detracted from performance, as U.S. interest rates rose.

 

»  

Exposure to GBP interest rates detracted from performance, as GBP interest rates rose.

 

  ANNUAL REPORT   JULY 31, 2017   13


PIMCO Income Strategy Fund II

 

  Symbol on NYSE - PFN

 

Allocation Breakdown as of 07/31/2017§

 

Corporate Bonds & Notes

    43.8%  

Non-Agency Mortgage-Backed Securities

    18.7%  

Asset-Backed Securities

    17.1%  

Municipal Bonds & Notes

    6.0%  

Preferred Securities

    3.5%  

Loan Participations and Assignments

    3.3%  

Short-Term Instruments

    2.3%  

Sovereign Issues

    2.2%  

U.S. Government Agencies

    2.1%  

Other

    1.0%  
   

% of Investments, at value.

 

  §

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

Fund Information (as of July 31, 2017)(1)

 

Market Price

    $10.76  

NAV

    $10.33  

Premium/(Discount) to NAV

    4.16%  

Market Price Distribution Yield(2)

    8.92%  

NAV Distribution Yield(2)

    9.29%  

Total Effective Leverage(3)

    25%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2017  
    1 Year     5 Year     10 Year     Commencement
of Operations
(10/29/04)
 
Market Price     26.32%       11.13%       6.91%       6.15%  
NAV     20.91%       11.64%       6.79%       6.18%  

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO (844-337-4626).

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or market price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income in accordance with its policies and good accounting practices, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the estimated composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Income Strategy Fund II’s investment objective is to seek high current income, consistent with the preservation of capital.

 

Fund Insights at NAV

 

The following affected performance during the reporting period:

 

»  

Exposure to high yield corporate bonds contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to non-agency residential mortgage-backed securities (RMBS) contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to investment grade corporate bonds contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to Brazilian external debt contributed to performance, as the sector generated positive total returns.

 

»  

Exposure to taxable municipal bonds contributed to performance, as the sector generated positive excess returns.

 

»  

Exposure to U.S. interest rates detracted from performance, as U.S. interest rates rose.

 

»  

Exposure to GBP interest rates detracted from performance, as GBP interest rates rose.

 

14   PIMCO CLOSED-END FUNDS     


 

 

 

(THIS PAGE INTENTIONALLY LEFT BLANK)

 

  ANNUAL REPORT   JULY 31, 2017   15


Financial Highlights

 

         

Investment Operations

          Less Distributions to Preferred
Shareholders(b)
          Less Distributions to Common Shareholders(b)  
                                                                   
    Net Asset
Value
Beginning
of Year
or Period
    Net
Investment
Income(a)
    Net
Realized/
Unrealized
Gain (Loss)
           From Net
Investment
Income
    From Net
Realized
Capital Gains
    Net Increase
(Decrease)
in Net Assets
Applicable
to Common
Shareholders
Resulting
from
Operations
    From Net
Investment
Income
    From Net
Realized
Capital Gains
    Tax Basis
Return of
Capital
    Total  

PIMCO Corporate & Income Opportunity Fund

                     

07/31/2017

  $   13.27     $   1.21     $ 2.06             $ (0.04   $ 0.00     $ 3.23     $   (1.59   $ 0.00     $ (0.14   $ (1.73

07/31/2016

    14.23       1.30       (0.65             (0.02     0.00       0.63       (1.59     0.00       0.00       (1.59

12/01/2014 - 07/31/2015(g)

    15.41       0.68       (0.33               (0.00 )^      0.00       0.35       (1.69     0.00       0.00         (1.69 )(j) 

11/30/2014

    16.62       1.14       1.06               (0.00 )^      (0.01     2.19       (1.56       (1.84     0.00       (3.40

11/30/2013

    17.58       1.43       0.19               (0.00 )^        (0.00 )^      1.62       (1.82     (0.76     0.00       (2.58

11/30/2012

    14.22       1.68       3.87               (0.01     0.00       5.54       (2.18     0.00       0.00       (2.18

PIMCO Corporate & Income Strategy Fund

                     

07/31/2017

  $   14.28     $ 1.12     $ 1.70             $ (0.01   $ 0.00     $ 2.81     $ (1.75   $ 0.00     $ (0.02   $ (1.77

07/31/2016

    14.75       1.24         (0.84 )(k)              (0.01     0.00         0.39 (l)      (1.37     0.00       0.00       (1.37

11/01/2014 - 07/31/2015(h)

    15.60       0.73       (0.21             (0.00 )^      0.00       0.52       (1.37     0.00       0.00       (1.37 )(j) 

10/31/2014

    16.04       0.99       0.87               (0.00 )^      (0.00 )^      1.86       (1.35     (0.95     0.00       (2.30

10/31/2013

    15.90       1.28       0.44               (0.01     0.00       1.71       (1.57     0.00       0.00       (1.57

10/31/2012

    13.67       1.57       2.47               (0.01     0.00       4.03       (1.80     0.00       0.00       (1.80

PIMCO High Income Fund

                     

07/31/2017

  $   6.63     $ 0.67     $ 0.71             $ (0.01   $ 0.00     $ 1.37     $ (0.91   $ 0.00     $ (0.19   $ (1.10

07/31/2016

    7.37       0.74       (0.48 )(k)              (0.00 )^      0.00       0.26 (l)      (1.18     0.00       (0.08     (1.26

04/01/2015 - 07/31/2015(i)

    7.59       0.21       0.06               (0.00 )^      0.00       0.27       (0.33     0.00         (0.16     (0.49 )(j) 

03/31/2015

    8.23       0.94       (0.12             (0.00 )^      0.00       0.82       (1.46     0.00       0.00       (1.46

03/31/2014

    8.65       0.84       0.20               (0.00 )^      0.00       1.04       (1.35     0.00       (0.11     (1.46

03/31/2013

    7.87       0.81       1.43               (0.00 )^      0.00       2.24       (1.42     0.00       (0.04     (1.46

PIMCO Income Strategy Fund

                     

07/31/2017

  $ 10.53     $ 0.88     $ 1.31             $ (0.04   $ 0.00     $ 2.15     $ (1.08   $ 0.00     $ 0.00     $ (1.08

07/31/2016

      11.46       0.88       (0.70             (0.03     0.00       0.15       (1.08     0.00       0.00       (1.08

07/31/2015

    12.15       0.79       (0.34             (0.03     0.00       0.42       (1.22     0.00       0.00       (1.22

07/31/2014

    11.70       0.79       0.78               (0.04     0.00       1.53       (1.08     0.00       0.00       (1.08

07/31/2013

    11.35       0.92       0.87               (0.04     0.00       1.75       (1.40     0.00       0.00       (1.40

PIMCO Income Strategy Fund II

                     

07/31/2017

  $ 9.42     $ 0.80     $ 1.10             $ (0.03   $ 0.00     $ 1.87     $ (0.96   $ 0.00     $ 0.00     $ (0.96

07/31/2016

      10.27       0.87       (0.67             (0.02     0.00       0.18       (1.03     0.00       0.00       (1.03

07/31/2015

    10.88       0.70       (0.29             (0.03     0.00       0.38       (1.11     0.00       0.00       (1.11

07/31/2014

    10.29       0.72       0.87               (0.04     0.00       1.55       (0.96     0.00       0.00       (0.96

07/31/2013

    10.23       0.88       0.68               (0.04     0.00       1.52       (1.46     0.00       0.00       (1.46

 

* Annualized
^ Reflects an amount rounding to less than one cent.
(a) 

Per share amounts based on average number of common shares outstanding during the year or period.

(b)

The tax characterization of distributions is determined in accordance with federal income tax regulations. See Note 2, Distributions — Common Shares, in the Notes to Financial Statements for more information.

(c) 

See Note 14, Auction-Rate Preferred Shares, in the Notes to Financial Statements.

(d) 

Total investment return is calculated assuming a purchase of a common share at the market price on the first day and a sale of a common share at the market price on the last day of each year or period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Funds’ dividend reinvestment plan. Total investment return does not reflect brokerage commissions in connection with the purchase or sale of Fund shares.

(e) 

Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. The expense ratio and net investment income do not reflect the effects of dividend payments to preferred shareholders.

(f) 

Interest expense primarily relates to participation in borrowing and financing transactions. See Note 5, Borrowings and Other Financing Transactions, in the Notes to Financial Statements for more information.

(g) 

Fiscal year end changed from November 30th to July 31st.

(h) 

Fiscal year end changed from October 31st to July 31st.

(i) 

Fiscal year end changed from March 31st to July 31st.

(j) 

Total distributions for the period ended July 31, 2015 may be lower than prior fiscal years due to fiscal year end changes resulting in a reduction of the amount of days in the period ended July 31, 2015.

(k)

The amount previously reported in the Funds’ Annual Report has been revised due to a misstatement. The misstatement was not considered material to the prior period Annual Report. In the Funds’ 2016 Annual Report, PIMCO Corporate & Income Strategy Fund and PIMCO High Income Fund reported amounts of (0.33) and (0.22), respectively.

(l)

The amount previously reported in the Funds’ Annual Report has been revised due to a misstatement. The misstatement was not considered material to the prior period Annual Report. In the Funds’ 2016 Annual Report, PIMCO Corporate & Income Strategy Fund and PIMCO High Income Fund reported amounts of 0.90 and 0.52, respectively.

 

16   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


                       

Common Share

          Ratios/Supplemental Data  
                                                      Ratios to Average Net Assets              
Increase
Resulting  from
at-the-market
offering
    Offering Cost
Charged to
Paid in Capital
   

Increase
Resulting from
Tender and
Repurchase of
Auction-Rate
Preferred
Shares(c)

           Net Asset
Value End of
Year or
Period
    Market Price
End of Year
or Period
    Total
Investment
Return(d)
           Net Assets
Applicable to
Common
Shareholders
(000s)
    Expenses(e)(f)     Expenses
Excluding
Waivers(e)(f)
    Expenses
Excluding
Interest
Expense(e)
    Expenses
Excluding
Interest
Expense
and
Waivers(e)
    Net
Investment
Income (Loss)
    Preferred
Shares
Asset
Coverage
Per Share
    Portfolio
Turnover
Rate
 
                             
$   0.10     $   0.00   $ 0.00             $   14.87     $   16.92       29.18           $   1,140,768       1.08     1.08     0.83     0.83     8.68   $   144,819       39
  N/A       N/A       0.00               13.27       14.75       16.09               946,843       0.89       0.89       0.85       0.85       9.93       124,468       45  
  N/A       N/A       0.16               14.23       14.31       (13.61             1,006,484       0.91     0.91     0.90     0.90     7.01     130,743       34  
  N/A       N/A       0.00               15.41       18.50       26.04               1,082,000       0.91       0.91       0.91       0.91       7.36       108,229       44  
  N/A       N/A       0.00               16.62       17.75       (0.15             1,149,779       0.91       0.91       0.91       0.91       8.49       113,443       118  
  N/A       N/A       0.00               17.58       20.37       36.86               1,205,090       1.05       1.05       0.93       0.93       10.63       117,697       29  
                             
$ N/A     $ N/A     $ 0.00             $ 15.32     $ 17.92       30.63           $ 599,266       1.17     1.17     0.93     0.93     7.65   $ 294,755       38
  N/A       N/A       0.51               14.28       15.43       24.21               553,569       1.10       1.10       1.02       1.02       8.91       274,223       43  
  N/A       N/A       0.00               14.75       13.71       (7.12             570,122       1.07     1.07     1.07     1.07     6.51     109,336       40  
  N/A       N/A       0.00               15.60       16.18       8.84               599,980       1.09       1.09       1.09       1.09       6.32       113,753       48  
  N/A       N/A       0.00               16.04       17.15       3.48               612,225       1.10       1.10       1.09       1.09       7.91       115,565       108  
  N/A       N/A       0.00               15.90       18.17       33.21               603,483       1.32       1.32       1.14       1.14       11.03       114,270       28  
                             
$ N/A     $ N/A     $ 0.00             $ 6.90     $ 8.71       (1.45 )%            $ 884,912       1.25     1.25     0.90     0.90     10.08   $ 241,894       32
  N/A       N/A       0.26               6.63       10.03       19.92               841,102       1.08       1.08       0.95       0.95       11.20       231,185       42  
  N/A       N/A       0.00               7.37       9.71       (18.40             925,598       1.05     1.05     1.03     1.03     8.14     104,245       8  
  N/A       N/A       0.00               7.59       12.48       12.30               949,880       1.18       1.18       1.02       1.02       11.53       106,324       58  
  N/A       N/A       0.00               8.23       12.56       15.51               1,021,120       1.14       1.14       1.03       1.03       10.14       112,424       159  
  N/A       N/A       0.00               8.65       12.35       8.53               1,063,863       1.06       1.06       1.05       1.05       10.00       116,082       70  
                             
$ N/A     $ N/A     $ 0.00             $ 11.60     $ 12.17       28.11           $ 294,525       1.35     1.35     1.17     1.17     8.01   $ 168,552       40
  N/A       N/A       0.00               10.53       10.48       12.41               266,347       1.17       1.17       1.13       1.13       8.49       154,837       38  
  N/A       N/A       0.11               11.46       10.39       (2.62             289,909       1.30       1.30       1.25       1.25       6.67       166,328       67  
  N/A       N/A       0.00               12.15       11.87       9.95               306,475       1.19       1.19       1.18       1.18       6.71       122,004       113  
  N/A       N/A       0.00               11.70       11.83       5.69               294,017       1.24       1.24       1.21       1.21       7.59       118,058       63  
                             
$ N/A     $ N/A     $   0.00             $ 10.33     $ 10.76       26.32           $ 612,310       1.26     1.26     1.09     1.09     8.15   $ 190,527       26
  N/A       N/A       0.00               9.42       9.39       11.92               556,840       1.14       1.14       1.07       1.07       9.25       175,544       38  
  N/A       N/A       0.12               10.27       9.41       (0.12             606,974       1.16       1.16       1.13       1.13       6.58       189,105       63  
  N/A       N/A       0.00               10.88       10.50       12.39               642,119       1.14       1.14       1.14       1.14       6.79       124,695       119  
  N/A       N/A       0.00               10.29       10.24       6.80               605,843       1.16       1.16       1.14       1.14       8.20       119,060       71  

 

  ANNUAL REPORT   JULY 31, 2017   17


Statements of Assets and Liabilities

 

July 31, 2017

 

(Amounts in thousands, except per share amounts)   PIMCO
Corporate &
Income
Opportunity
Fund
    PIMCO
Corporate &
Income
Strategy
Fund
    PIMCO High
Income Fund
    PIMCO Income
Strategy
Fund
    PIMCO Income
Strategy
Fund II
 

Assets:

         

Investments, at value

                                       

Investments in securities*

  $ 1,577,462     $ 723,346     $ 1,112,387     $ 377,500     $ 738,518  

Financial Derivative Instruments

                                       

Exchange-traded or centrally cleared

    680       244       704       151       313  

Over the counter

    3,322       546       4,879       348       704  

Cash

    411       0       0       8       10  

Deposits with counterparty

    30,510       12,941       25,620       7,195       16,989  

Foreign currency, at value

    1,589       824       1,847       633       1,282  

Receivable for investments sold

    8,773       14,742       22,907       13,614       30,643  

Receivable for Fund shares sold

    3,871       0       0       0       0  

Interest and/or dividends receivable

    14,016       6,130       11,644       3,064       6,108  

Other assets

    184       2       7       1       3  

Total Assets

    1,640,818       758,775       1,179,995       402,514       794,570  

Liabilities:

         

Borrowings & Other Financing Transactions

                                       

Payable for reverse repurchase agreements

  $ 177,915     $ 75,578     $ 149,703     $ 39,285     $ 69,662  

Financial Derivative Instruments

                                       

Exchange-traded or centrally cleared

    359       237       912       137       328  

Over the counter

    34,474       3,290       7,047       2,369       4,813  

Payable for investments purchased

    36,554       19,780       18,485       12,299       9,569  

Deposits from counterparty

    1,802       210       5,855       0       108  

Distributions payable to common shareholders

    9,839       4,401       10,344       2,285       4,743  

Distributions payable to preferred shareholders

    69       13       23       17       29  

Overdraft due to custodian

    0       1       20       0       0  

Accrued management fees

    699       418       592       264       501  

Other liabilities

    389       56       127       58       57  

Total Liabilities

    262,100       103,984       193,108       56,714       89,810  

Preferred Shares ($0.00001 par value and $25,000 liquidation preference per share)

    237,950       55,525       101,975       51,275       92,450  

Net Assets Applicable to Common Shareholders

  $ 1,140,768     $ 599,266     $ 884,912     $ 294,525     $ 612,310  

Net Assets Applicable to Common Shareholders Consist of:

         

Common Shares:

                                       

Par value ($0.00001 per share)

  $ 1     $ 0     $ 1     $ 0     $ 1  

Paid in capital in excess of par

    1,108,962       575,465       993,095       398,544       885,057  

Undistributed (overdistributed) net investment income

    (11,726     (5,855     (13,517     (1,141     3,791  

Accumulated undistributed net realized gain (loss)

    (136,242     (75,897     (141,417     (140,016     (356,681

Net unrealized appreciation (depreciation)

    179,773       105,553       46,750       37,138       80,142  

Net Assets Applicable to Common Shareholders

  $   1,140,768     $   599,266     $ 884,912     $ 294,525     $ 612,310  

Net Asset Value Per Common Share:

  $ 14.87     $ 15.32     $ 6.90     $ 11.60     $ 10.33  

Common Shares Outstanding

    76,693       39,121       128,181       25,383       59,294  

Preferred Shares Issued and Outstanding

    10       2       4       2       4  

Cost of investments in securities

  $ 1,485,868     $ 684,686     $   1,065,802     $ 359,202     $ 705,518  

Cost of foreign currency held

  $ 1,569     $ 819     $ 1,835     $ 626     $ 1,262  

Cost or premiums of financial derivative instruments, net

  $ (50,743   $ (1,182   $ (1,252   $ (801   $ (1,679

* Includes repurchase agreements of:

  $ 65,010     $ 9,443     $ 63,379     $ 18,865     $ 13,099  

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

18   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Statements of Operations

 

 

Year Ended July 31, 2017                              
(Amounts in thousands)   PIMCO
Corporate &
Income
Opportunity
Fund
    PIMCO
Corporate &
Income
Strategy
Fund
    PIMCO High
Income Fund
    PIMCO Income
Strategy
Fund
    PIMCO Income
Strategy
Fund II
 

Investment Income:

         

Interest, net of foreign taxes*

  $ 97,999     $ 49,523     $ 95,798     $ 25,717     $ 53,554  

Dividends

    1,004       924       464       348       1,256  

Total Income

    99,003       50,447       96,262       26,065       54,810  

Expenses:

         

Management fees

    8,120       5,074       7,230       3,117       6,126  

Trustee fees and related expenses

    141       67       101       37       76  

Interest expense

    2,566       1,391       2,935       501       991  

Auction agent fees and commissions

    209       127       194       44       98  

Auction rate preferred shares related expenses

    48       83       64       52       55  

Miscellaneous expense

    15       15       73       0       3  

Total Expenses

    11,099       6,757       10,597       3,751       7,349  

Net Investment Income (Loss)

    87,904       43,690       85,665       22,314       47,461  

Net Realized Gain (Loss):

         

Investments in securities

    (5,486     1,100       15,945       1,066       (644

Exchange-traded or centrally cleared financial derivative instruments

    88,401       10,101       35,316       21,611       51,141  

Over the counter financial derivative instruments

    10,177       3,897       15,916       1,548       2,309  

Foreign currency

    (154     (88     (60     (63     68  

Net Realized Gain (Loss)

    92,938       15,010       67,117       24,162       52,874  

Net Change in Unrealized Appreciation (Depreciation):

         

Investments in securities

    103,708       60,190       76,924       28,631       55,806  

Exchange-traded or centrally cleared financial derivative instruments

    (65,551     (7,620     (56,023       (18,666     (42,596

Over the counter financial derivative instruments

    18,521       (1,300     206       (881     (1,454

Foreign currency assets and liabilities

    (184     82       128       59       79  

Net Change in Unrealized Appreciation (Depreciation)

    56,494       51,352       21,235       9,143       11,835  

Net Increase (Decrease) in Net Assets Resulting from Operations

  $   237,336     $   110,052     $   174,017     $ 55,619     $   112,170  

Distributions on Preferred Shares from Net Investment Income

  $ (3,233   $ (567   $ (1,109   $ (1,018   $ (1,835

Net Increase (Decrease) in Net Assets Applicable to Common Shareholders Resulting from Operations

  $ 234,103     $ 109,485     $ 172,908     $ 54,601     $ 110,335  

* Foreign tax withholdings

  $ 0     $ 2     $ 7     $ 0     $ 0  

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

  ANNUAL REPORT   JULY 31, 2017   19


Statements of Changes in Net Assets

 

    PIMCO
Corporate & Income Opportunity Fund
    PIMCO
Corporate & Income Strategy Fund
 
(Amounts in thousands)   Year Ended
July 31, 2017
    Year Ended
July 31, 2016
    Year Ended
July 31, 2017
    Year Ended
July 31, 2016
 

Increase (Decrease) in Net Assets from:

       

Operations:

       

Net investment income (loss)

  $ 87,904     $ 92,254     $ 43,690     $ 47,966  

Net realized gain (loss)

    92,938       (89,368     15,010       (44,520

Net change in unrealized appreciation (depreciation)

    56,494       43,914       51,352       11,894  

Net increase in net assets resulting from operations

    237,336       46,800       110,052       15,340  

Distributions on preferred shares from net investment income(a)

    (3,233     (1,253     (567     (275

Net Increase (Decrease) in Net Assets Applicable to Common Shareholders Resulting from Operations

    234,103       45,547       109,485       15,065  

Distributions to Common Shareholders:

       

From net investment income

    (114,836     (112,955     (68,101     (53,009

Tax basis return of capital

    (10,356     0       (834     0  

Total Distributions to Common Shareholders(a)

    (125,192     (112,955     (68,935     (53,009

Preferred Share Transactions:

       

Net increase (decrease) resulting from tender and repurchase of Auction-Rate Preferred Shares***

    0       0       0       19,858  

Common Share Transactions**:

       

Net proceeds from at-the-market offering

    74,138       0       0       0  

Net at-the-market offering costs

    103       0       0       0  

Issued as reinvestment of distributions

    10,773       7,767       5,147       1,533  

Total increase (decrease) in net assets applicable to common shareholders

    85,014       7,767       5,147       1,533  

Total Increase (Decrease) in Net Assets

    193,925       (59,641     45,697       (16,553

Net Assets Applicable to Common Shareholders:

       

Beginning of year

    946,843         1,006,484       553,569       570,122  

End of year*

  $   1,140,768     $ 946,843     $   599,266     $   553,569  

* Including undistributed (overdistributed) net investment income of:

  $ (11,726   $ 11,608     $ (5,855   $ 8,897  

** Common Share Transactions:

       

Shares sold

    4,606       0       0       0  

Shares issued as reinvestment of distributions

    748       583       346       110  

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

(a) 

The tax characterization of distributions is determined in accordance with federal income tax regulations. See Note 2, Distributions - Common Shares, in the Notes to Financial Statements for more information.

*** See Note 14, Auction - Rate Preferred Shares, in the Notes to Financial Statements.

 

20   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

PIMCO
High Income Fund
    PIMCO
Income Strategy Fund
    PIMCO
Income Strategy Fund II
 
Year Ended
July 31, 2017
    Year Ended
July 31, 2016
    Year Ended
July 31, 2017
    Year Ended
July 31, 2016
    Year Ended
July 31, 2017
    Year Ended
July 31, 2016
 
         
         
$ 85,665     $ 93,715     $ 22,314     $ 22,312     $ 47,461     $ 51,163  
  67,117       42,044       24,162       (27,474     52,874       (66,963
  21,235       (103,962     9,143       9,720       11,835       27,977  
  174,017       31,797       55,619       4,558       112,170       12,177  
  (1,109     (528     (1,018     (797     (1,835     (1,437
 
    
172,908

 
    31,269       54,601       3,761         110,335       10,740  
         
  (116,768     (149,487     (27,356     (27,324     (56,792     (60,876
  (24,148     (9,562     0       0       0       0  
    (140,916       (159,049       (27,356       (27,324     (56,792     (60,876
         
  0       32,304       0       0       0       0  
         
  0       0       0       0       0       0  
  0       0       0       0       0       0  
  11,818       10,980       933       1       1,927       2  
  11,818       10,980       933       1       1,927       2  
  43,810       (84,496     28,178       (23,562     55,470       (50,134
         
  841,102       925,598       266,347       289,909       556,840       606,974  
$ 884,912     $ 841,102     $ 294,525     $   266,347     $ 612,310     $   556,840  
$ (13,517   $ (16,843   $ (1,141   $ 1,149     $ 3,791     $ 6,597  
         
  0       0       0       0       0       0  
  1,346       1,307       83       0       191       0  

 

  ANNUAL REPORT   JULY 31, 2017   21


Statements of Cash Flows

 

 

Year Ended July 31, 2017                  
(Amounts in thousands†)  

PIMCO

Corporate &
Income

Opportunity

Fund

   

PIMCO

Corporate &
Income

Strategy

Fund

    PIMCO High
Income Fund
 

Cash Flows Provided by (Used for) Operating Activities:

     

Net Increase in Net Assets Resulting from Operations

  $ 237,336     $ 110,052     $ 174,017  

Adjustments to Reconcile Net Increase in Net Assets from Operations to Net Cash Provided by (Used for) Operating Activities:

     

Purchases of long-term securities

    (831,282     (304,687     (345,395

Proceeds from sales of long-term securities

    602,943       329,531       462,455  

(Purchases) Proceeds from sales of short-term portfolio investments, net

    29,637       5,885       (44,516

(Increase) Decrease in deposits with counterparty

    (19,236     (4,302     (4,150

(Increase) decrease in receivable for investments sold

    (8,519     3,374       (22,786

(Increase) decrease in interest and/or dividends receivable

    (2,381     2       1,228  

Proceeds from (Payments on) exchange-traded or centrally cleared financial derivative instruments

    21,503       2,465       (21,774

Proceeds from (Payments on) over the counter financial derivative instruments

    5,343       3,913       14,148  

(Increase) decrease in other assets

    (178     1       33  

Increase (decrease) in payable for investments purchased

    17,239       7,758       10,857  

Increase (decrease) in deposits from counterparty

    1,342       (1,610     2,430  

(Decrease) Increase in accrued management fees

    52       5       (8

Proceeds from (Payments on) foreign currency transactions

    (144     (6     68  

Increase (Decrease) in other liabilities

    214       (114     (76

Net Realized (Gain) Loss

                       

Investments in securities

    5,486       (1,100     (15,945

Exchange-traded or centrally cleared financial derivative instruments

    (88,401     (10,101     (35,316

Over the counter financial derivative instruments

    (10,177     (3,897     (15,916

Foreign currency

    154       88       60  

Net Change in Unrealized (Appreciation) Depreciation

                       

Investments in securities

    (103,708     (60,190     (76,924

Exchange-traded or centrally cleared financial derivative instruments

    65,551       7,620       56,023  

Over the counter financial derivative instruments

    (18,521     1,300       (206

Foreign currency assets and liabilities

    184       (82     (128

Net amortization (accretion) on investments

    (9,291     (5,019     (7,437

Net Cash Provided by (Used for) Operating Activities

    (104,854     80,886       130,742  

Cash Flows Received from (Used for) Financing Activities:

     

Net proceeds from at-the-market offering

    70,267       0       0  

Net at-the-market offering costs

    103       0       0  

Increase (Decrease) in overdraft due to custodian

    0       1       (3

Cash distributions paid to common shareholders*

    (113,854     (63,749     (131,876

Cash distributions paid to preferred shareholders

    (3,190     (559     (1,095

Proceeds from reverse repurchase agreements

    1,057,727       544,738       1,089,855  

Payments on reverse repurchase agreements

    (904,812     (560,561     (1,086,032

Net Cash Received from (Used for) Financing Activities

    106,241       (80,130     (129,151

Net Increase (Decrease) in Cash and Foreign Currency

    1,387       756       1,591  

Cash and Foreign Currency:

     

Beginning of year

    613       68       256  

End of year

  $ 2,000     $ 824     $ 1,847  

* Reinvestment of distributions to common shareholders

  $ 10,876     $ 5,147     $ 11,818  

Supplemental Disclosure of Cash Flow Information:

     

Interest expense paid during the year

  $ 2,145     $ 1,280     $ 2,804  

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

A Statement of Cash Flows is presented when a Fund had a significant amount of borrowing during the year, based on the average total borrowing outstanding in relation to total assets or when substantially all of a Fund’s investments were not classified as Level 1 or 2 in the fair value hierarchy.

 

22   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Schedule of Investments PIMCO Corporate & Income Opportunity Fund

 

 

July 31, 2017

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 138.3%  
LOAN PARTICIPATIONS AND ASSIGNMENTS 8.0%  

Almonde, Inc.

       

8.459% due 06/13/2025

  $     2,300     $     2,363  

Altice Financing S.A.

       

4.054% due 07/15/2025

      658         659  

Avolon Holdings Ltd.

 

3.478% due 09/20/2020

      180         181  

3.978% due 03/20/2022

      610         613  

BMC Software Finance, Inc.

       

5.234% due 09/10/2022

      12,985         13,082  

Burger King Worldwide, Inc.

       

3.484% - 3.546% due 02/16/2024

      1,045         1,045  

BWAY Holding Co.

       

4.474% due 04/03/2024

      1,070         1,075  

CCC Information Services, Inc.

       

4.240% due 04/27/2024

      100         100  

CD&R Plumb Buyer LLC

       

TBD% due 06/25/2018

      300         299  

CenturyLink, Inc.

       

2.750% due 01/31/2025

      1,000         988  

CH Hold Corp.

       

3.000% - 4.233% due 02/01/2024

      27         27  

4.234% due 02/01/2024

      272         274  

Charter Communications Operating LLC

 

3.240% due 01/03/2021

      368         371  

CityCenter Holdings LLC

       

3.732% due 04/18/2024

      100         101  

Diamond BV

 

TBD% due 07/12/2024

      100         100  

TBD% due 07/25/2024

  EUR     100         119  

Diamond Resorts Corp.

       

7.234% due 08/11/2023

  $     5,186         5,235  

Drillships Ocean Ventures, Inc.

       

7.750% due 07/25/2021

      8,551         7,573  

Endo Luxembourg Finance Co. SARL

 

5.500% due 04/29/2024

      6,040         6,140  

Forbes Energy Services LLC

       

5.000% - 7.000% due 04/13/2021

      798         822  

Fortress Investment Group LLC

       

1.375% due 06/14/2022

      2,820         2,858  

Gartner, Inc.

       

3.234% due 04/05/2024

      31         31  

HD Supply Waterworks Ltd.

       

TBD% due 08/01/2024

      70         71  

iHeartCommunications, Inc.

       

7.984% due 01/30/2019

      19,645           16,036  

Ineos Finance PLC

       

3.250% due 04/01/2024

  EUR     2,388         2,847  

Klockner-Pentaplast of America, Inc.

 

4.750% due 06/30/2022

      100         118  

Lightstone Generation LLC

       

5.734% due 01/30/2024

  $     2,866         2,842  

Parexel International Corp.

       

TBD% due 07/18/2018

      300         298  

Petroleo Global Trading BV

       

TBD% due 02/19/2020

      400         392  

Post Holdings, Inc.

       

3.490% due 05/24/2024

      990         995  

Prestige Brands, Inc.

       

3.984% due 01/26/2024

      184         185  

Sequa Mezzanine Holdings LLC

 

6.758% - 6.814% due 11/28/2021

      870         879  

10.314% due 04/28/2022

      160         163  

Solvay Acetow GmbH

       

5.750% due 05/31/2023

  EUR     1,000         1,204  

Sprint Communications, Inc.

       

3.750% due 02/02/2024

  $     2,793         2,805  

Staples, Inc.

       

TBD% due 08/02/2018

      1,110         1,102  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Team Health Holdings, Inc.

       

3.984% due 02/06/2024

  $     399     $     399  

Univision Communications, Inc.

 

3.984% due 03/15/2024

      1,751         1,745  

UPC Financing Partnership

       

3.976% due 04/15/2025

      300         302  

Valeant Pharmaceuticals International, Inc.

 

5.980% due 04/01/2022

      569         580  

Vistra Operations Co. LLC

 

4.476% - 4.488% due 12/14/2023

    1,095         1,104  

Westmoreland Coal Co.

 

7.796% due 12/16/2020

      12,831         11,403  

Xella International GmbH

 

TBD% due 02/02/2024

  EUR     1,600         1,909  

Ziggo Secured Finance BV

 

3.000% due 04/15/2025

      150         179  
       

 

 

 

Total Loan Participations and Assignments
(Cost $91,862)

      91,614  
       

 

 

 
CORPORATE BONDS & NOTES 63.2%  
BANKING & FINANCE 30.3%  

AGFC Capital Trust

 

3.054% due 01/15/2067

  $     1,800         1,071  

Ally Financial, Inc.

 

8.000% due 11/01/2031 (l)

      18,825         23,460  

Ardonagh Midco PLC

 

8.375% due 07/15/2023

  GBP     2,300         3,061  

AssuredPartners, Inc.

 

7.000% due 08/15/2025 (c)

  $     35         35  

Banco Bilbao Vizcaya Argentaria S.A.

 

6.750% due 02/18/2020 (h)

  EUR     14,000         17,753  

8.875% due 04/14/2021 (h)

      400         559  

Banco do Brasil S.A.

 

6.250% due 04/15/2024 (h)(l)

  $     3,420         2,963  

9.000% due 06/18/2024 (h)

      7,698         8,004  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^

  EUR     5,000         1,835  

4.750% due 01/15/2018 ^

      1,000         367  

Banco Santander S.A.

 

6.250% due 09/11/2021 (h)

      9,900         12,647  

Bank of Ireland

 

7.375% due 06/18/2020 (h)

      1,200         1,586  

Barclays PLC

 

3.250% due 02/12/2027

  GBP     200         276  

6.500% due 09/15/2019 (h)

  EUR     1,600         2,002  

7.000% due 09/15/2019 (h)

  GBP     630         871  

7.250% due 03/15/2023 (h)

      10,405           14,885  

7.875% due 09/15/2022 (h)

      3,565         5,213  

8.000% due 12/15/2020 (h)

  EUR     200         266  

8.250% due 12/15/2018 (h)

  $     430         458  

Blackstone CQP Holdco LP

 

6.500% due 03/20/2021

      8,700         9,040  

BNP Paribas S.A.

 

7.375% due 08/19/2025 (h)

      5,650         6,441  

Brighthouse Financial, Inc.

 

4.700% due 06/22/2047

      184         183  

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (h)

      300         305  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (l)

      10,000         11,207  

CBL & Associates LP

 

5.950% due 12/15/2026 (l)

      3,960         3,977  

Co-operative Group Holdings Ltd.

 

7.500% due 07/08/2026

  GBP     630         1,016  

Cooperatieve Rabobank UA

 

6.625% due 06/29/2021 (h)

  EUR     1,800         2,410  

Credit Agricole S.A.

 

7.500% due 06/23/2026 (h)

  GBP     4,733         7,214  

7.875% due 01/23/2024 (h)

  $     11,400         12,889  

Credit Suisse AG

 

6.500% due 08/08/2023

      200         227  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Credit Suisse Group AG

 

7.500% due 12/11/2023 (h)

  $     2,336     $     2,662  

Deutsche Bank AG

 

4.250% due 10/14/2021 (l)

      3,600         3,795  

EPR Properties

 

4.750% due 12/15/2026 (l)

      5,400         5,597  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021

      6,000         6,419  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      6,912         7,904  

Howard Hughes Corp.

 

5.375% due 03/15/2025

      134         139  

HSBC Holdings PLC

 

6.000% due 09/29/2023 (h)

  EUR     4,977         6,742  

6.000% due 05/22/2027 (h)

  $     207         218  

Intesa Sanpaolo SpA

 

7.750% due 01/11/2027 (h)

  EUR     220         298  

Intrum Justitia AB

 

2.750% due 07/15/2022

      100         120  

3.125% due 07/15/2024

      100         120  

Jefferies Finance LLC

 

6.875% due 04/15/2022

  $     1,900         1,919  

7.250% due 08/15/2024 (c)

      200         201  

7.375% due 04/01/2020 (l)

      5,625         5,808  

7.500% due 04/15/2021

      2,391         2,499  

Jefferies LoanCore LLC

 

6.875% due 06/01/2020

      11,610         11,973  

Lloyds Bank PLC

 

12.000% due 12/16/2024 (h)

      3,500         4,761  

Lloyds Banking Group PLC

 

7.000% due 06/27/2019 (h)

  GBP     2,080         2,918  

7.625% due 06/27/2023 (h)

      2,610         3,885  

7.875% due 06/27/2029 (h)

      5,815         9,197  

MPT Operating Partnership LP

 

5.250% due 08/01/2026

  $     2,203         2,313  

Nationwide Building Society

 

10.250% due 06/29/2049 (h)

  GBP     21         4,440  

Navient Corp.

 

4.875% due 06/17/2019

  $     395         409  

5.500% due 01/15/2019 (l)

      4,950         5,154  

5.625% due 08/01/2033

      222         190  

5.875% due 03/25/2021

      710         752  

6.500% due 06/15/2022

      400         427  

6.625% due 07/26/2021 (l)

      4,170         4,483  

7.250% due 01/25/2022

      80         88  

8.000% due 03/25/2020

      230         255  

Neuberger Berman Group LLC

 

4.875% due 04/15/2045 (l)

      3,400         3,283  

Novo Banco S.A.

 

5.000% due 04/04/2019

  EUR     371         354  

5.000% due 04/23/2019

      152         145  

5.000% due 05/14/2019

      315         300  

5.000% due 05/21/2019

      73         70  

5.000% due 05/23/2019

      213         203  

OneMain Financial Holdings LLC

 

6.750% due 12/15/2019 (l)

  $     3,796         3,989  

7.250% due 12/15/2021

      192         203  

Oppenheimer Holdings, Inc.

       

6.750% due 07/01/2022

      2,844         2,878  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      57         59  

Rio Oil Finance Trust

 

9.250% due 07/06/2024

      10,232         10,520  

9.750% due 01/06/2027

      637         659  

Royal Bank of Scotland Group PLC

 

7.500% due 08/10/2020 (h)(l)

      6,840         7,242  

8.000% due 08/10/2025 (h)(l)

      13,625           14,945  

8.625% due 08/15/2021 (h)

      5,130         5,678  

Santander Holdings USA, Inc.

 

3.700% due 03/28/2022

      750         762  

4.400% due 07/13/2027

      580         593  

Santander UK Group Holdings PLC

 

6.750% due 06/24/2024 (h)

  GBP     5,505         7,793  

7.375% due 06/24/2022 (h)

      1,440         2,052  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   23


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Sberbank of Russia Via SB Capital S.A.

 

   

6.125% due 02/07/2022

  $     500     $     546  

Spirit Realty LP

       

4.450% due 09/15/2026 (l)

      2,600         2,512  

Springleaf Finance Corp.

 

5.250% due 12/15/2019 (l)

      3,271         3,414  

6.000% due 06/01/2020

      641         679  

6.125% due 05/15/2022

      1,204         1,267  

7.750% due 10/01/2021

      90         101  

8.250% due 12/15/2020

      9,210         10,361  

Stearns Holdings LLC

       

9.375% due 08/15/2020

      600         621  

Stichting AK Rabobank Certificaten

 

   

6.500% due 12/29/2049 (h)

  EUR     4,673         6,584  

Tesco Property Finance PLC

 

5.411% due 07/13/2044

  GBP     646         922  

5.661% due 10/13/2041

      513         744  

5.744% due 04/13/2040

      195         287  

5.801% due 10/13/2040

      835         1,229  

6.052% due 10/13/2039

      1,328         1,998  

WP Carey, Inc.

       

4.250% due 10/01/2026 (l)

  $     5,000         5,099  
       

 

 

 
            345,999  
       

 

 

 
INDUSTRIALS 27.6%  

Altice Financing S.A.

       

7.500% due 05/15/2026

      6,100         6,779  

AMC Networks, Inc.

 

4.750% due 08/01/2025

      170         172  

American Airlines Pass-Through Trust

 

4.950% due 08/15/2026 (l)

      3,400         3,553  

Belden, Inc.

       

3.375% due 07/15/2027

  EUR     100         120  

BMC Software Finance, Inc.

       

8.125% due 07/15/2021

  $     1,031         1,070  

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

 

9.000% due 10/15/2019 (d)(l)

      8,226         8,257  

Burger King Worldwide, Inc.

       

4.250% due 05/15/2024

      364         367  

Caesars Entertainment Operating Co., Inc.

 

9.000% due 02/15/2020 ^(i)

      26,699         34,775  

10.000% due 12/15/2018 ^

      6,095         5,813  

Charter Communications Operating LLC

 

5.375% due 05/01/2047

      113         118  

Cheniere Corpus Christi Holdings LLC

 

5.875% due 03/31/2025

      400         435  

Chesapeake Energy Corp.

       

4.554% due 04/15/2019

      157         156  

ClubCorp Club Operations, Inc.

 

8.250% due 12/15/2023

      6,500         7,280  

CMA CGM S.A.

       

6.500% due 07/15/2022

  EUR     100         122  

CommScope Technologies LLC

       

5.000% due 03/15/2027

  $     4         4  

Community Health Systems, Inc.

 

6.250% due 03/31/2023

      279         287  

CSN Islands Corp.

       

6.875% due 09/21/2019 (l)

      240         195  

CSN Resources S.A.

       

6.500% due 07/21/2020

      2,300         1,754  

DAE Funding LLC

 

4.000% due 08/01/2020 (c)

      120         122  

4.500% due 08/01/2022 (c)

      120         122  

5.000% due 08/01/2024 (c)

      290         297  

Diamond Resorts International, Inc.

 

7.750% due 09/01/2023

      278         299  

10.750% due 09/01/2024 (l)

      4,300         4,676  

DriveTime Automotive Group, Inc.

 

8.000% due 06/01/2021 (l)

      9,300         9,370  

Dynegy, Inc.

       

8.034% due 02/02/2024 (l)

      2,970         2,880  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Ecopetrol S.A.

       

5.875% due 05/28/2045

  $     200     $     188  

EI Group PLC

       

6.375% due 09/26/2031

  GBP     1,000         1,458  

Endo Finance LLC

       

5.375% due 01/15/2023

  $     600         516  

Exela Intermediate LLC

       

10.000% due 07/15/2023

      217         212  

Ferroglobe PLC

       

9.375% due 03/01/2022 (l)

      3,400         3,664  

Ford Motor Co.

       

7.700% due 05/15/2097 (l)

      31,901         39,757  

Fresh Market, Inc.

       

9.750% due 05/01/2023 (l)

      12,200         10,034  

Frontier Finance PLC

       

8.000% due 03/23/2022

  GBP     8,200         11,305  

Greene King Finance PLC

       

5.702% due 12/15/2034

      350         438  

Hampton Roads PPV LLC

       

6.171% due 06/15/2053

  $     1,800         1,890  

HCA, Inc.

 

4.500% due 02/15/2027

      1,550         1,590  

5.500% due 06/15/2047

      182         190  

7.500% due 11/15/2095 (l)

      4,800         4,962  

iHeartCommunications, Inc.

 

9.000% due 09/15/2022

      5,810         4,299  

10.625% due 03/15/2023

      5,600         4,200  

11.250% due 03/01/2021

      2,920         2,241  

Intelsat Jackson Holdings S.A.

 

7.250% due 10/15/2020

      9,970         9,621  

9.750% due 07/15/2025

      361         374  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021

      18,643         12,025  

8.125% due 06/01/2023

      1,939         1,210  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      15,631         15,514  

Kinder Morgan Energy Partners LP

 

6.375% due 03/01/2041

      800         917  

Kinder Morgan, Inc.

 

7.750% due 01/15/2032 (l)

      3,100         3,978  

7.800% due 08/01/2031 (l)

      6,000         7,681  

Kleopatra Holdings S.C.A. (8.500% PIK)

 

8.500% due 06/30/2023 (d)

  EUR     100         117  

Mallinckrodt International Finance S.A.

 

4.750% due 04/15/2023 (l)

  $     6,000         5,340  

5.500% due 04/15/2025

      1,560         1,451  

Park Aerospace Holdings Ltd.

 

5.250% due 08/15/2022

      24         25  

5.500% due 02/15/2024

      66         67  

Petroleos Mexicanos

 

6.500% due 03/13/2027

      936         1,032  

6.750% due 09/21/2047

      500         528  

PetSmart, Inc.

       

5.875% due 06/01/2025

      199         192  

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

      1,065         1,191  

QVC, Inc.

 

4.375% due 03/15/2023

      768         790  

5.450% due 08/15/2034

      1,650         1,615  

5.950% due 03/15/2043

      6,770         6,633  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     1,500         2,459  

Sabine Pass Liquefaction LLC

       

5.875% due 06/30/2026 (l)

  $     4,300         4,849  

Safeway, Inc.

       

7.250% due 02/01/2031

      9,392         8,688  

Scientific Games International, Inc.

 

10.000% due 12/01/2022 (l)

      1,364         1,526  

SFR Group S.A.

 

6.250% due 05/15/2024 (l)

      12,500           13,250  

7.375% due 05/01/2026 (l)

      3,600         3,910  

Sirius XM Radio, Inc.

       

3.875% due 08/01/2022

      105         108  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Spirit Issuer PLC

 

0.850% due 12/28/2028

  GBP     748     $     804  

3.000% due 12/28/2031

      1,855         2,388  

6.582% due 12/28/2027

      2,500         3,560  

Symantec Corp.

       

5.000% due 04/15/2025

  $     75         79  

Time Warner Cable LLC

       

8.250% due 04/01/2019

      140         154  

UAL Pass-Through Trust

       

7.336% due 01/02/2021

      1,699         1,827  

UCP, Inc.

       

8.500% due 10/21/2017

      10,900         11,009  

Unique Pub Finance Co. PLC

       

5.659% due 06/30/2027

  GBP     6,776         10,092  

United Group BV

 

4.375% due 07/01/2022

  EUR     200         238  

4.875% due 07/01/2024

      200         236  

UPCB Finance Ltd.

       

3.625% due 06/15/2029

      350         413  

Valeant Pharmaceuticals International, Inc.

 

6.500% due 03/15/2022

  $     153         162  

7.000% due 03/15/2024

      293         313  

Virgin Media Secured Finance PLC

 

5.000% due 04/15/2027

  GBP     1,780         2,459  

Wynn Las Vegas LLC

       

5.250% due 05/15/2027

  $     111         114  
       

 

 

 
          314,906  
       

 

 

 
UTILITIES 5.3%  

AT&T, Inc.

 

2.215% due 02/14/2023 (c)

      180         181  

2.850% due 02/14/2023 (c)

      370         371  

3.400% due 08/14/2024 (c)

      740         742  

3.900% due 08/14/2027 (c)

      670         671  

4.900% due 08/14/2037 (c)

      678         677  

5.150% due 02/14/2050 (c)

      1,018         1,018  

5.300% due 08/14/2058 (c)

      304         304  

Frontier Communications Corp.

 

8.500% due 04/15/2020

      788         804  

Gazprom OAO Via Gaz Capital S.A.

 

9.250% due 04/23/2019

      11,200         12,373  

Mountain States Telephone & Telegraph Co.

 

7.375% due 05/01/2030

      15,730         16,615  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 06/30/2022 ^

      501         312  

Odebrecht Offshore Drilling Finance Ltd.

 

6.625% due 10/01/2023 ^(j)

      4,696         1,679  

6.750% due 10/01/2023 ^(j)

      4,465         1,598  

Petrobras Global Finance BV

 

6.125% due 01/17/2022

      704         742  

6.250% due 12/14/2026

  GBP     6,100         8,327  

6.625% due 01/16/2034

      800         1,064  

6.750% due 01/27/2041 (l)

  $     4,100         3,951  

7.250% due 03/17/2044

      447         451  

7.375% due 01/17/2027 (l)

      1,224         1,329  

Sprint Capital Corp.

 

6.900% due 05/01/2019

      2,000         2,132  

TerraForm Power Operating LLC

 

6.375% due 02/01/2023

      1,075         1,123  

Transocean Phoenix Ltd.

 

7.750% due 10/15/2024

      2,765         3,013  

Transocean Proteus Ltd.

 

6.250% due 12/01/2024

      380         400  
       

 

 

 
          59,877  
       

 

 

 

Total Corporate Bonds & Notes
(Cost $661,010)

      720,782  
       

 

 

 
 

 

24   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
CONVERTIBLE BONDS & NOTES 0.6%  
INDUSTRIALS 0.6%  

DISH Network Corp.

 

3.375% due 08/15/2026

  $     5,900     $     7,360  
       

 

 

 

Total Convertible Bonds & Notes (Cost $5,900)

    7,360  
       

 

 

 
MUNICIPAL BONDS & NOTES 5.1%  
CALIFORNIA 1.2%  

Riverside County, California Redevelopment Successor Agency Tax Allocation Bonds, Series 2010

 

7.500% due 10/01/2030

      3,425         3,679  

Stockton Public Financing Authority, California Revenue Bonds, (BABs), Series 2009

 

7.942% due 10/01/2038

      8,500         9,380  
       

 

 

 
            13,059  
       

 

 

 
ILLINOIS 2.4%  

Chicago, Illinois General Obligation Bonds, (BABs), Series 2010

 

7.517% due 01/01/2040

      23,700         25,308  

Chicago, Illinois General Obligation Bonds, Series 2014

 

6.314% due 01/01/2044

      120         120  

Chicago, Illinois General Obligation Bonds, Series 2015

 

7.375% due 01/01/2033

      100         108  

7.750% due 01/01/2042

      300         314  

Chicago, Illinois General Obligation Bonds, Series 2017

 

7.045% due 01/01/2029

      200         217  

Illinois State General Obligation Bonds, (BABs), Series 2010

 

6.725% due 04/01/2035

      60         67  

7.350% due 07/01/2035

      40         46  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      1,035         1,039  
       

 

 

 
          27,219  
       

 

 

 
IOWA 0.0%  

Iowa Tobacco Settlement Authority Revenue Bonds, Series 2005

 

6.500% due 06/01/2023

      480         480  
       

 

 

 
TEXAS 0.2%  

Texas Public Finance Authority Revenue Notes, Series 2014

 

8.250% due 07/01/2024

      2,300         2,433  
       

 

 

 
VIRGINIA 0.1%  

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

 

6.706% due 06/01/2046

      1,400         1,203  
       

 

 

 
WEST VIRGINIA 1.2%  

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

 

0.000% due 06/01/2047 (g)

      78,700         4,094  

7.467% due 06/01/2047

      10,510         9,978  
       

 

 

 
          14,072  
       

 

 

 

Total Municipal Bonds & Notes (Cost $54,624)

      58,466  
       

 

 

 
U.S. GOVERNMENT AGENCIES 4.6%  

Fannie Mae

 

3.000% due 01/25/2042 (a)

      1,290         106  

3.500% due 02/25/2033 (a)

      3,133         403  

4.232% due 10/25/2029

      950         996  

4.782% due 07/25/2029

      1,490         1,604  

4.868% due 07/25/2040 (a)

      1,466         177  

5.482% due 01/25/2029

      800         898  

6.082% due 10/25/2029

      590         648  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

6.982% due 07/25/2029

  $     2,010     $     2,353  

Freddie Mac

 

0.000% due 04/25/2045 -
08/25/2046 (b)(g)

      19,541         15,178  

0.100% due 04/25/2046 -
08/25/2046 (a)

      91,606         357  

0.200% due 04/25/2045 (a)

      10,054         27  

5.874% due 02/15/2034 (a)

      2,566         480  

6.174% due 11/25/2055

      14,634         8,360  

6.470% due 07/15/2039 (l)

      2,407         2,620  

7.557% due 03/15/2044 (l)

      1,485         1,734  

8.727% due 02/15/2036 (l)

      5,228         6,994  

8.732% due 04/15/2044

      49         55  

8.782% due 12/25/2027

      4,443         5,222  

11.982% due 03/25/2025

      2,356         3,191  

Ginnie Mae

 

3.000% due 12/20/2042 (a)

      74         10  

3.500% due 09/16/2041 -
06/20/2042 (a)

      1,849         261  

5.522% due 01/20/2042 (a)

      2,813         347  
       

 

 

 

Total U.S. Government Agencies (Cost $48,714)

      52,021  
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 21.7%  

Adjustable Rate Mortgage Trust

 

1.572% due 05/25/2036

      2,148         1,265  

Banc of America Alternative Loan Trust

 

6.000% due 01/25/2036 ^

      235         221  

6.000% due 04/25/2036 ^

      4,231         4,295  

Banc of America Funding Trust

 

5.500% due 01/25/2036

      234         240  

6.000% due 07/25/2037 ^

      665         515  

BCAP LLC Trust

 

3.278% due 07/26/2037

      484         14  

3.285% due 03/27/2036

      3,825         2,195  

5.045% due 03/26/2037

      1,992         1,202  

7.000% due 12/26/2036

      5,417         4,839  

Bear Stearns ALT-A Trust

 

3.268% due 11/25/2036 ^

      927         764  

3.312% due 08/25/2046

      5,924         5,363  

3.525% due 08/25/2036 ^

      3,978         2,972  

3.587% due 11/25/2034

      405         389  

3.625% due 09/25/2035 ^

      1,383         1,132  

Bear Stearns Commercial Mortgage Securities Trust

 

5.713% due 04/12/2038

      370         292  

Bear Stearns Mortgage Funding Trust

 

7.500% due 08/25/2036

      2,450         2,405  

Chase Mortgage Finance Trust

 

3.224% due 12/25/2035 ^

      26         25  

6.000% due 02/25/2037 ^

      2,203         1,812  

6.000% due 03/25/2037 ^

      505         437  

6.000% due 07/25/2037 ^

      1,889         1,736  

Citigroup Commercial Mortgage Trust

 

5.691% due 12/10/2049

      1,787         1,633  

Citigroup Mortgage Loan Trust, Inc.

 

3.203% due 04/25/2037 ^

      4,303         3,520  

3.308% due 03/25/2037 ^

      1,162         1,013  

3.922% due 11/25/2035

      18,103         10,298  

6.000% due 11/25/2036

      14,984         11,300  

Citigroup/Deutsche Bank Commercial Mortgage Trust

 

5.398% due 12/11/2049

      108         62  

5.688% due 10/15/2048

      14,858         7,972  

CitiMortgage Alternative Loan Trust

 

5.750% due 04/25/2037 ^

      3,353         2,946  

Commercial Mortgage Loan Trust

 

6.155% due 12/10/2049

      3,476         2,194  

Countrywide Alternative Loan Resecuritization Trust

 

6.000% due 08/25/2037 ^

      2,587         2,053  

Countrywide Alternative Loan Trust

 

1.438% due 03/20/2046

      6,133         5,262  

1.502% due 08/25/2035

      376         255  

3.451% due 06/25/2047

      4,092         3,891  

4.018% due 04/25/2037 ^(a)

      27,483         5,375  

5.250% due 05/25/2021 ^

      19         19  

5.500% due 03/25/2035

      649         509  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

5.500% due 09/25/2035 ^

  $     6,065     $     5,537  

5.500% due 03/25/2036 ^

      230         185  

5.750% due 01/25/2035

      848         855  

5.750% due 02/25/2035

      898         860  

6.000% due 02/25/2035

      848         863  

6.000% due 04/25/2036

      2,318         1,804  

6.000% due 05/25/2036 ^

      2,506         1,998  

6.000% due 02/25/2037 ^

      821         579  

6.000% due 02/25/2037

      3,103         2,425  

6.000% due 04/25/2037 ^

      8,262         6,426  

6.000% due 08/25/2037 ^

      11,381         9,534  

6.250% due 10/25/2036 ^

      3,256         2,595  

6.250% due 12/25/2036 ^

      3,894         2,886  

6.500% due 08/25/2036 ^

      1,065         726  

6.500% due 09/25/2036 ^

      541         459  

17.115% due 02/25/2036

      2,354         2,979  

Countrywide Home Loan Mortgage Pass-Through Trust

 

5.500% due 07/25/2037 ^

      838         696  

6.000% due 04/25/2036 ^

      658         622  

Credit Suisse Commercial Mortgage Trust

 

5.870% due 09/15/2040

      1,320         1,320  

Credit Suisse Mortgage Capital Mortgage-Backed Trust

 

5.750% due 04/25/2036 ^

      1,855         1,469  

Epic Drummond Ltd.

       

0.000% due 01/25/2022

  EUR     231         273  

First Horizon Alternative Mortgage Securities Trust

 

6.000% due 08/25/2036 ^

  $     2,636         2,219  

GS Mortgage Securities Trust

       

5.622% due 11/10/2039

      1,689         1,554  

GSR Mortgage Loan Trust

 

3.234% due 11/25/2035 ^

      2,221         2,054  

3.450% due 03/25/2037 ^

      3,990         3,654  

5.500% due 05/25/2036 ^

      310         296  

IndyMac Mortgage Loan Trust

 

6.500% due 07/25/2037 ^

      6,865         4,580  

JPMorgan Alternative Loan Trust

 

3.046% due 03/25/2037

      12,278           10,275  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.411% due 05/15/2047

      3,600         2,567  

5.623% due 05/12/2045

      2,686         2,313  

JPMorgan Mortgage Trust

 

3.244% due 10/25/2035

      69         66  

3.304% due 01/25/2037 ^

      1,616         1,592  

3.378% due 02/25/2036 ^

      2,630         2,360  

3.493% due 06/25/2036 ^

      1,254         1,119  

Lehman Mortgage Trust

 

6.000% due 07/25/2037 ^

      314         297  

22.648% due 11/25/2035 ^

      292         420  

Lehman XS Trust

 

1.452% due 06/25/2047

      4,649         4,060  

MASTR Alternative Loan Trust

 

6.750% due 07/25/2036

      4,018         2,847  

Merrill Lynch Mortgage Investors Trust

 

3.214% due 03/25/2036 ^

      4,094         2,999  

Mesdag Delta BV

 

0.000% due 01/25/2020

  EUR     2,043         2,366  

Morgan Stanley Capital Trust

 

5.991% due 06/11/2049

  $     3,047         3,057  

RBSSP Resecuritization Trust

 

1.436% due 10/27/2036

      3,609         904  

1.456% due 08/27/2037

      8,000         2,371  

Residential Accredit Loans, Inc. Trust

 

1.422% due 08/25/2036

      1,312         1,220  

1.462% due 05/25/2037 ^

      463         352  

6.000% due 08/25/2036 ^

      902         780  

6.000% due 05/25/2037 ^

      2,796         2,520  

Residential Asset Securitization Trust

 

5.750% due 02/25/2036 ^

      482         378  

6.000% due 02/25/2037 ^

      2,295         1,783  

6.250% due 09/25/2037 ^

      5,479         4,013  

Residential Funding Mortgage Securities, Inc. Trust

 

4.030% due 02/25/2037

      3,829         3,080  

Structured Adjustable Rate Mortgage Loan Trust

 

3.243% due 11/25/2036 ^

      5,836         5,295  

3.291% due 07/25/2036 ^

      1,403         1,116  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   25


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

3.342% due 03/25/2037 ^

  $     1,176     $     951  

3.391% due 01/25/2036 ^

      8,639         6,613  

3.559% due 07/25/2035 ^

      2,842         2,476  

Structured Asset Mortgage Investments Trust

 

1.352% due 08/25/2036

      237         210  

Suntrust Adjustable Rate Mortgage Loan Trust

 

3.482% due 02/25/2037 ^

      9,529         8,175  

3.531% due 02/25/2037 ^

      859         771  

3.604% due 04/25/2037 ^

      953         814  

WaMu Mortgage Pass-Through Certificates Trust

 

2.999% due 07/25/2037 ^

      1,045         869  

3.030% due 10/25/2036 ^

      2,023         1,798  

3.160% due 02/25/2037 ^

      1,437         1,367  

3.326% due 07/25/2037 ^

      2,377         2,216  

Washington Mutual Mortgage Pass-Through Certificates Trust

 

1.616% due 05/25/2047 ^

      446         93  

6.000% due 10/25/2035 ^

      2,011         1,583  

6.000% due 03/25/2036 ^

      2,894         2,939  

6.000% due 02/25/2037

      7,203         6,416  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $231,674)

      247,304  
       

 

 

 
ASSET-BACKED SECURITIES 20.3%  

Airspeed Ltd.

       

1.496% due 06/15/2032

      5,473         4,582  

Ameriquest Mortgage Securities, Inc. Asset-Backed Pass-Through Certificates

 

2.582% due 03/25/2033

      89         88  

Bear Stearns Asset-Backed Securities Trust

 

1.632% due 04/25/2037

      19,909         15,608  

Belle Haven ABS CDO Ltd.

 

1.551% due 07/05/2046

      324,260         5,610  

BlueMountain CLO Ltd.

 

6.754% due 04/13/2027

      1,000         994  

CIFC Funding Ltd.

 

0.000% due 05/24/2026 (g)

      4,100         2,742  

0.000% due 07/22/2026 (g)

      3,000         1,966  

Citigroup Mortgage Loan Trust, Inc.

 

1.392% due 12/25/2036

      7,303         4,894  

1.632% due 11/25/2046

      8,292         8,019  

Cork Street CLO Designated Activity Co.

 

0.000% due 11/27/2028

  EUR     2,667         2,779  

3.600% due 11/27/2028

      1,197         1,419  

4.500% due 11/27/2028

      1,047         1,243  

6.200% due 11/27/2028

      1,296         1,543  

Countrywide Asset-Backed Certificates

 

1.402% due 03/25/2037

  $     4,309         4,101  

1.432% due 06/25/2047

      18,750         16,282  

1.542% due 09/25/2037 ^

      19,068         9,735  

3.707% due 08/25/2033

      307         258  

Credit-Based Asset Servicing and Securitization LLC

 

3.882% due 12/25/2035 ^

      85         85  

Emerald Aviation Finance Ltd.

 

6.350% due 10/15/2038

      826         851  

First Franklin Mortgage Loan Trust

 

1.392% due 10/25/2036

      5,499         4,097  

Fremont Home Loan Trust

 

1.382% due 01/25/2037

      7,335         4,259  

1.552% due 02/25/2036

      15,173         6,436  

Glacier Funding CDO Ltd.

       

1.442% due 08/04/2035

      8,642         2,327  

Grosvenor Place CLO BV

       

0.000% due 04/30/2029

  EUR     750         701  

IndyMac Home Equity Mortgage Loan Asset-Backed Trust

 

1.392% due 07/25/2037

  $     3,600         2,273  

JPMorgan Mortgage Acquisition Trust

 

5.830% due 07/25/2036 ^

      145         83  

Lehman XS Trust

 

6.290% due 06/24/2046

      3,946         3,673  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Long Beach Mortgage Loan Trust

 

1.532% due 01/25/2036

  $     8,000     $     5,890  

Merrill Lynch Mortgage Investors Trust

 

5.895% due 03/25/2037

      7,624         2,483  

Morgan Stanley ABS Capital, Inc. Trust

 

1.382% due 10/25/2036

      8,201         5,429  

Morgan Stanley Mortgage Loan Trust

 

6.250% due 07/25/2047 ^

      1,459         1,045  

Park Place Securities, Inc. Asset-Backed Pass-Through Certificates

 

1.882% due 07/25/2035

      6,000         4,484  

Renaissance Home Equity Loan Trust

 

5.612% due 04/25/2037

      11,685         6,318  

7.238% due 09/25/2037 ^

      9,691         5,681  

Residential Asset Securities Corp. Trust

 

1.812% due 08/25/2034

      10,491         8,640  

Securitized Asset-Backed Receivables LLC Trust

 

1.512% due 03/25/2036

      11,668         6,300  

SLM Student Loan Trust

 

0.000% due 10/28/2029 (g)

      8         8,317  

0.000% due 01/25/2042 (g)

      7         6,132  

SoFi Professional Loan Program LLC

 

0.000% due 05/25/2040 (g)

      7,500         3,913  

0.000% due 07/25/2040 (g)

      38         2,158  

0.000% due 09/25/2040 (g)

      3,226         1,826  

Sound Point CLO Ltd.

 

6.163% due 01/23/2027

      1,000         972  

South Coast Funding Ltd.

 

1.785% due 08/10/2038

      20,485         4,015  

Symphony CLO Ltd.

 

5.904% due 07/14/2026

      3,600         3,465  

6.204% due 10/15/2025

      1,400         1,404  

Taberna Preferred Funding Ltd.

 

1.531% due 12/05/2036

      12,029         9,262  

1.551% due 08/05/2036

      762         575  

1.551% due 08/05/2036 ^

      14,754         11,139  

1.571% due 02/05/2036

      8,785         6,720  

Thunderbolt Aircraft Lease Ltd.

 

4.212% due 05/17/2032

      385         397  

Tropic CDO Ltd.

 

2.058% due 04/15/2034

      25,000         17,750  
       

 

 

 

Total Asset-Backed Securities
(Cost $224,190)

      230,963  
       

 

 

 
SOVEREIGN ISSUES 2.9%  

Argentine Government International Bond

 

2.260% due 12/31/2038

  EUR     1,300         952  

3.875% due 01/15/2022

      300         354  

5.000% due 01/15/2027

      400         442  

7.820% due 12/31/2033

      14,043         17,478  

Autonomous Community of Catalonia

 

4.900% due 09/15/2021

      2,650         3,339  

Ghana Government International Bond

 

10.750% due 10/14/2030

  $     600         749  

Republic of Greece Government International Bond

 

3.800% due 08/08/2017

  JPY     695,000         6,316  

4.750% due 04/17/2019

  EUR     600         727  

Saudi Government International Bond

 

3.250% due 10/26/2026

  $     400         396  

4.500% due 10/26/2046

      2,600         2,655  

Sri Lanka Government International Bond

 

6.200% due 05/11/2027

      200         207  
       

 

 

 

Total Sovereign Issues (Cost $31,210)

    33,615  
       

 

 

 
        SHARES            
COMMON STOCKS 0.4%  
ENERGY 0.1%  

Forbes Energy Services Ltd. (e)(j)

    64,837         694  
       

 

 

 
        SHARES         MARKET
VALUE
(000S)
 
FINANCIALS 0.3%  

TIG FinCo PLC (j)

      3,315,033     $     4,374  
       

 

 

 

Total Common Stocks (Cost $6,913)

    5,068  
       

 

 

 
WARRANTS 0.1%  
INDUSTRIALS 0.1%  

Sequa Corp. - Exp. 04/28/2024

    1,355,000         635  
       

 

 

 
UTILITIES 0.0%  

Dynegy, Inc. - Exp. 02/02/2024

    99,521         19  
       

 

 

 

Total Warrants (Cost $262)

          654  
       

 

 

 
PREFERRED SECURITIES 2.8%  
BANKING & FINANCE 0.6%  

Farm Credit Bank of Texas

 

10.000% due 12/15/2020 (h)

      5,745         7,063  
       

 

 

 
INDUSTRIALS 2.2%  

Sequa Corp. 9.000%

      25,121         24,504  
       

 

 

 

Total Preferred Securities (Cost $31,460)

    31,567  
       

 

 

 
SHORT-TERM INSTRUMENTS 8.6%  
REPURCHASE AGREEMENTS (k) 5.7%  
          65,010  
       

 

 

 
    PRINCIPAL
AMOUNT
(000S)
           
U.S. TREASURY BILLS 2.9%  

0.926% due 08/31/2017 - 01/04/2018 (f)(g)(n)(p)

    33,068         33,038  
     

 

 

 
Total Short-Term Instruments
(Cost $98,049)
        98,048  
       

 

 

 
     
Total Investments in Securities
(Cost $1,485,868)
        1,577,462  
     
Total Investments 138.3%
(Cost $1,485,868)
    $     1,577,462  

Financial Derivative
Instruments (m)(o) (2.7)%

(Cost or Premiums, net $(50,743))

 

 

      (30,831
Preferred Shares (20.9)%           (237,950
Other Assets and Liabilities, net (14.7)%         (167,913
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%     $       1,140,768  
       

 

 

 
 

 

26   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) Principal only security.
(c) When-issued security.
(d) Payment in-kind security.
(e) Security did not produce income within the last twelve months.
(f) Coupon represents a weighted average yield to maturity.
(g) Zero coupon security.
(h) Perpetual maturity; date shown, if applicable, represents next contractual call date.
(i) Security is subject to a forbearance agreement entered into by the Fund which forbears the Fund from taking action to, among other things, accelerate and collect payments on the subject note with respect to specified events of default.

 

(j)  RESTRICTED SECURITIES:

 

Issuer Description                Acquisition
Date
    Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

Forbes Energy Services Ltd.

         10/09/2014 - 11/18/2016       $      2,472     $ 694       0.06

Odebrecht Offshore Drilling Finance Ltd.

6.625% due 10/01/2023

         04/09/2015 - 07/30/2015       3,726       1,679       0.15  

Odebrecht Offshore Drilling Finance Ltd.

6.750% due 10/01/2023

         04/09/2015 - 07/30/2015       3,317       1,598       0.14  

TIG FinCo PLC

         04/02/2015 - 07/20/2017       4,441       4,374       0.38  
        

 

 

   

 

 

   

 

 

 
    $    13,956     $     8,345       0.73
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(k)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
    Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
     Repurchase
Agreements,
at Value
     Repurchase
Agreement
Proceeds
to be
Received(1)
 
BPG     1.160     07/31/2017       08/01/2017     $     31,500     U.S. Treasury Bonds 3.000% due 11/15/2045   $ (32,256    $ 31,500      $ 31,501  

RDR

    1.160       07/31/2017       08/01/2017       26,800     U.S. Treasury Notes 2.750% due 02/15/2024     (27,352      26,800        26,801  
SSB     0.200       07/31/2017       08/01/2017       6,710     U.S. Treasury Notes 3.500% due 05/15/2020(2)     (6,849      6,710        6,710  
           

 

 

    

 

 

    

 

 

 

Total Repurchase Agreements

 

    $     (66,457    $     65,010      $     65,012  
           

 

 

    

 

 

    

 

 

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(3)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(3)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.750 )%      06/22/2017       TBD (4)    $ (231   $ (231

BPS

    1.610       06/02/2017       08/31/2017       (9,256     (9,281
    1.810       07/13/2017       10/13/2017       (4,596     (4,600
    1.890       06/02/2017       08/31/2017       (2,151     (2,158

NOM

    (0.750     06/16/2017       TBD (4)      (176     (176

RBC

    2.150       07/05/2017       01/05/2018           (18,281         (18,310

RDR

    1.590       05/17/2017       08/17/2017       (5,356     (5,374
    1.590       05/23/2017       08/23/2017       (3,557     (3,568
    1.620       07/13/2017       08/15/2017       (10,070     (10,079
    1.710       07/07/2017       10/10/2017       (4,881     (4,887
    1.900       05/17/2017       08/17/2017       (9,589     (9,627

SOG

    1.800       08/11/2017       09/14/2017       (2,504     (2,504
    1.750       05/23/2017       08/23/2017       (15,845     (15,899
    1.750       06/06/2017       08/23/2017       (1,398     (1,402
    1.750       06/07/2017       08/16/2017       (1,227     (1,230
    1.750       06/08/2017       08/23/2017       (2,647     (2,654
    1.780       06/08/2017       09/07/2017       (4,739     (4,752
    1.800       06/14/2017       09/14/2017       (26,356     (29,051
    1.850       07/11/2017       10/11/2017       (3,870     (3,874
    1.850       07/18/2017       10/18/2017       (7,273     (7,278

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   27


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

 

Counterparty   Borrowing
Rate(3)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(3)
    Payable for
Reverse
Repurchase
Agreements
 

UBS

    1.590     05/23/2017       08/23/2017     $     (12,485   $ (12,524
    1.590       06/02/2017       08/23/2017       (2,379     (2,385
    1.700       07/07/2017       10/10/2017       (4,198     (4,203
    1.840       05/30/2017       08/23/2017       (2,654     (2,663
    1.940       05/30/2017       08/23/2017       (4,510     (4,525
    1.990       05/26/2017       08/28/2017       (5,684     (5,705
    2.140       06/14/2017       09/14/2017       (8,949     (8,975
         

 

 

 

Total Reverse Repurchase Agreements

 

    $     (177,915
         

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral pledged/(received) as of July 31, 2017:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(5)  

Global/Master Repurchase Agreement

 

BCY

  $ 0     $ (231   $ 0      $ (231   $ 261     $ 30  

BPG

    31,501       0       0        31,501           (32,256     (755

BPS

    0       (16,039     0        (16,039     17,125       1,086  

NOM

    0       (176     0        (176     195       19  

RBC

    0       (18,310     0        (18,310     20,025       1,715  

RDR

    26,801       (33,535     0        (6,734     8,782           2,048  

SOG

    0       (68,644     0            (68,644     71,966       3,322  

SSB

    6,710       0       0        6,710       (6,849     (139

UBS

    0       (40,980     0        (40,980     46,960       5,980  
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     65,012     $     (177,915   $     0         
 

 

 

   

 

 

   

 

 

        

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

 

Corporate Bonds & Notes

  $ 0     $ (68,007   $ (81,563   $ (18,717   $ (168,287

U.S. Government Agencies

    0       (9,628     0       0       (9,628
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0     $     (77,635   $     (81,563   $     (18,717   $     (177,915
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements

 

  $ (177,915
         

 

 

 

 

(l) Securities with an aggregate market value of $194,306 have been pledged as collateral under the terms of the above master agreements as of July 31, 2017.

 

(1)

Includes accrued interest.

(2)

Collateral is held in custody by the counterparty.

(3)

The average amount of borrowings outstanding during the period ended July 31, 2017 was $(160,595) at a weighted average interest rate of 1.580%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

(4)

Open maturity reverse repurchase agreement.

(5)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

28   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

(m)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION(1)

 

Reference Entity

 

Fixed
Receive Rate

   

Maturity
Date

    Implied
Credit Spread at
July 31, 2017(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
   

Unrealized

Appreciation/

(Depreciation)

   

Market
Value(4)

    Variation Margin  
                Asset      Liability  

Ally Financial, Inc.

    5.000     06/20/2022       1.823     $       4,040     $ 523     $ 81     $ 604     $ 3      $ 0  

Banco Espirito Santo S.A.

    5.000       09/20/2020       17.441       EUR       8,000       (2,531     393           (2,138         124        0  

Frontier Communications Corp.

    5.000       06/20/2020       6.967       $       10,200       (330     (124     (454     14        0  

Frontier Communications Corp.

    5.000       06/20/2022       9.668         1,000       (135     (26     (161     1        0  

Navient Corp.

    5.000       12/20/2021       2.538         15,900       (30     1,706       1,676       0        (6
           

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
            $     (2,503   $     2,030     $ (473   $ 142      $     (6
           

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION(1)

 

Index/Tranches   Fixed
Receive Rate
  Maturity
Date
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
              Asset      Liability  

CDX.HY-26 5-Year Index

  5.000%     06/20/2021     $ 2,772     $ 126     $ 122     $ 248     $ 1      $ 0  

CDX.HY-28 5-Year Index

  5.000     06/20/2022           25,600           1,801       301       2,102       15        0  

CDX.IG-27 5-Year Index

  1.000     12/20/2021       7,500       93       77       170       1        0  

CDX.IG-28 5-Year Index

  1.000     06/20/2022       16,800       291       61       352       4        0  
       

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
        $ 2,311     $     561     $     2,872     $     21      $     0  
       

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value
    Variation Margin  
                Asset      Liability  

Pay

 

1-Year BRL-CDI

    11.250     01/04/2021       BRL       210,000     $ (1,280   $ 1,777     $ 497     $ 25      $ 0  

Pay

 

1-Year BRL-CDI

    11.500       01/04/2021         22,400       (223     410       187       5        0  

Pay(5)

 

3-Month USD-LIBOR

    2.250       12/20/2022       $       12,500       (120     (31     (151     1        0  

Pay

 

3-Month USD-LIBOR

    2.750       06/17/2025         145,380       9,193       (2,423     6,770       18        0  

Pay

 

3-Month USD-LIBOR

    2.250       06/15/2026         44,400       2,099       (1,866     233       12        0  

Pay(5)

 

3-Month USD-LIBOR

    2.500       12/20/2027         71,200       482       662       1,144       33        0  

Pay

 

3-Month USD-LIBOR

    3.500       06/19/2044         305,100       (9,953     68,433       58,480       203        0  

Receive(5)

 

3-Month USD-LIBOR

    2.750       12/20/2047         470,000       (14,597     (674         (15,271     0        (353

Pay

 

6-Month  AUD-BBR-BBSW

    3.500       06/17/2025       AUD       13,400       332       301       633       10        0  

Receive(5)

 

6-Month EUR-EURIBOR

    1.000       09/20/2027       EUR       35,900       44       (134     (90     79        0  

Receive(5)

 

6-Month GBP-LIBOR

    1.500       09/20/2027       GBP       46,600       (753     (371     (1,124     131        0  
           

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
            $ (14,776   $ 66,084     $ 51,308     $ 517      $ (353
           

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Swap Agreements

 

  $     (14,968   $     68,675     $ 53,707     $     680      $     (359
           

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2017:

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
                Market Value     Variation Margin
Liability
       
     Purchased
Options
    Futures     Swap
Agreements
    Total           Written
Options
    Futures     Swap
Agreements
    Total  

Total Exchange-Traded or Centrally Cleared

  $     0     $     0     $     680     $     680       $     0     $     0     $     (359)     $     (359)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(n) Securities with an aggregate market value of $2,030 and cash of $29,508 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2017. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   29


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

 

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate or sovereign issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4)

The prices and resulting values for credit default swap agreements on credit indices serve as indicators of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(5)

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(o)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

BOA

     08/2017     EUR     2,008     $     2,321     $ 0     $ (56
     08/2017     GBP     2,719         3,523       0       (65

BPS

     08/2017     EUR     74,446         84,471       0       (3,658
     08/2017     JPY     704,349         6,299       0       (90

GLM

     08/2017     AUD     134         103       0       (4
     08/2017     GBP     588         760       0       (16
     08/2017     $     116,455     GBP     88,626       479       0  
     09/2017     GBP     88,626     $     116,584       0       (480

HUS

     08/2017     AUD     466         357       0       (16

JPM

     08/2017     GBP     1,097         1,431       0       (16

MSB

     08/2017     BRL     1,737         555       0       (2
     08/2017     $     552     BRL     1,737       5       0  
     08/2017         92,541     EUR     78,939       908       0  
     09/2017     BRL     1,737     $     548       0       (5
     09/2017     EUR     78,939         92,704       0       (909

NGF

     08/2017     BRL     1,737         516       0       (41
     08/2017     $     555     BRL     1,737       2       0  

RBC

     08/2017     GBP     84,222     $     109,459       0       (1,663

TOR

     08/2017     $     6,334     JPY     704,349       55       0  
     09/2017     JPY     704,349     $     6,344       0       (55

UAG

     08/2017     EUR     2,485         2,840       0       (102
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

  $     1,449     $     (7,178
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE AND SOVEREIGN ISSUES - SELL PROTECTION(1)

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2017(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000     12/20/2024       3.536     $       1,800     $ (352   $ 73     $ 0     $ (279
BRC  

Springleaf Finance Corp.

    5.000       12/20/2021       2.573         2,700       (40     319       279       0  
DUB  

Petroleos Mexicanos

    1.000       12/20/2021       1.804         100       (9     6       0       (3
GST  

Petrobras Global Finance BV

    1.000       09/20/2020       1.821         20       (3     2       0       (1
 

Petrobras Global Finance BV

    1.000       12/20/2024       3.536         2,400       (476     104       0       (372
 

Springleaf Finance Corp.

    5.000       06/20/2022       2.843         1,550       138       17       155       0  
HUS  

Petrobras Global Finance BV

    1.000       12/20/2019       1.407         500       (41     37       0       (4
 

Petrobras Global Finance BV

    1.000       09/20/2020       1.821         60       (9     8       0       (1
 

Petrobras Global Finance BV

    1.000       12/20/2024       3.536         3,000       (623     158       0       (465
JPM  

Russia Government International Bond

    1.000       06/20/2019       0.619             28,600       (1,957     2,194       237       0  
 

Russia Government International Bond

    1.000       12/20/2020       1.126         1,300       (149     145       0       (4
 

Springleaf Finance Corp.

    5.000       06/20/2022       2.843         6,570       620       38       658       0  
MYC  

Banco Espirito Santo S.A.

    5.000       09/20/2020       17.441       EUR       3,000       (28     (774     0       (802
 

Petrobras Global Finance BV

    1.000       12/20/2019       1.407       $       14,500       (1,342     1,221       0       (121
             

 

 

   

 

 

   

 

 

   

 

 

 
            $     (4,271   $     3,548     $     1,329     $     (2,052
             

 

 

   

 

 

   

 

 

   

 

 

 

 

30   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION(1)

 

Counterparty   Index/Tranches   Fixed
Receive Rate
    Maturity
Date
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at  Value(4)
 
              Asset     Liability  
BRC  

ABX.HE.AAA.6-2 Index

    0.110     05/25/2046     $           74,796     $ (15,300   $ 8,951     $ 0     $ (6,349
DUB  

CMBX.NA.BBB-.6 Index

    3.000       05/11/2063         3,200       (195     (166     0       (361
 

CMBX.NA.BBB-.8 Index

    3.000       10/17/2057         4,400       (507     (141     0       (648
 

CMBX.NA.BBB-.9 Index

    3.000       09/17/2058         2,800       (351     33       0       (318
FBF  

CMBX.NA.BBB-.10 Index

    3.000       11/17/2059         100       (11     1       0       (10
 

CMBX.NA.BBB-.6 Index

    3.000       05/11/2063         300       (36     2       0       (34
 

CMBX.NA.BBB-.7 Index

    3.000       01/17/2047         400       (36     1       0       (35
 

CMBX.NA.BBB-.8 Index

    3.000       10/17/2057         1,300       (203     12       0       (191
GST  

ABX.HE.AAA.6-2 Index

    0.110       05/25/2046         5,254       (1,113     667       0       (445
 

CMBX.NA.A.6 Index

    2.000       05/11/2063         4,300       (219     99       0       (120
 

CMBX.NA.BB.6 Index

    5.000       05/11/2063         2,900       (392     (155     0       (547
 

CMBX.NA.BBB-.6 Index

    3.000       05/11/2063         6,500       (358     (376     0       (734
 

CMBX.NA.BBB-.7 Index

    3.000       01/17/2047         1,100       (56     (41     0       (97
 

CMBX.NA.BBB-.9 Index

    3.000       09/17/2058         6,400       (797     70       0       (727
MEI  

ABX.HE.AAA.6-2 Index

    0.110       05/25/2046         72,394       (14,429     8,283       0       (6,146
 

CMBX.NA.BBB-.10 Index

    3.000       11/17/2059         100       (10     0       0       (10
MYC  

ABX.HE.AAA.6-2 Index

    0.110       05/25/2046         78,811       (10,968     4,278       0       (6,691
 

CMBX.NA.BBB-.10 Index

    3.000       11/17/2059         6,850       (731     25       0       (706
 

CMBX.NA.BBB-.6 Index

    3.000       05/11/2063         3,250       (176     (191     0       (367
 

CMBX.NA.BBB-.7 Index

    3.000       01/17/2047         2,200       (97     (97     0       (194
 

CMBX.NA.BBB-.8 Index

    3.000       10/17/2057         1,100       (127     (35     0       (162
 

CMBX.NA.BBB-.9 Index

    3.000       09/17/2058         3,100       (381     29       0       (352
           

 

 

   

 

 

   

 

 

   

 

 

 
          $     (46,493   $     21,249     $     0     $     (25,244
           

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

Counterparty   Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
  Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
MYC  

Pay

 

3-Month USD-LIBOR

    2.200%       10/12/2022     $    500,000   $ 21     $ 523     $ 544     $ 0  
           

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

  $     (50,743   $     25,320     $     1,873     $     (27,296
           

 

 

   

 

 

   

 

 

   

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral pledged/(received) as of July 31, 2017:

 

    Financial Derivative Assets           Financial Derivative Liabilities                    
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
Pledged/
(Received)
    Net
Exposure(5)
 

BOA

  $ 0      $ 0      $ 0      $ 0       $ (121   $ 0      $ 0     $ (121   $ (121   $ 0     $ (121

BPS

    0        0        0        0         (3,748     0        (279     (4,027     (4,027     3,337           (690

BRC

    0        0        279        279         0       0        (6,349     (6,349     (6,070     6,317       247  

DUB

    0        0        0        0         0       0        (1,330     (1,330         (1,330         1,393       63  

FBF

    0        0        0        0         0       0        (270     (270     (270     272       2  

GLM

    479        0        0        479         (500     0        0       (500     (21     0       (21

GST

    0        0        155        155         0       0        (3,044     (3,044     (2,889     2,763       (126

HUS

    0        0        0        0         (16     0        (470     (486     (486     456       (30

JPM

    0        0        895        895         (16     0        (4     (20     875       (900     (25

MEI

    0        0        0        0         0       0        (6,156     (6,156     (6,156     6,199       43  

MSB

    913        0        0        913         (916     0        0       (916     (3     0       (3

MYC

    0        0        544        544         0       0        (9,394     (9,394     (8,850     8,070       (780

NGF

    2        0        0        2         (41     0        0       (41     (39     0       (39

RBC

    0        0        0        0         (1,663     0        0       (1,663     (1,663     1,301       (362

TOR

    55        0        0        55         (55     0        0       (55     0       0       0  

UAG

    0        0        0        0         (102     0        0       (102     (102     0       (102
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $     1,449      $     0      $     1,873      $     3,322       $     (7,178   $     0      $     (27,296   $     (34,474      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(p) Securities with an aggregate market value of $31,007 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2017.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   31


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

 

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate or sovereign issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4)

The prices and resulting values for credit default swap agreements on credit indices serve as indicators of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(5)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 163     $ 0     $ 0     $ 517     $ 680  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 1,449     $ 0     $ 1,449  

Swap Agreements

    0       1,329       0       0       544       1,873  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 1,329     $ 0     $ 1,449     $ 544     $ 3,322  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 1,492     $ 0     $ 1,449     $     1,061     $ 4,002  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 6     $ 0     $ 0     $ 353     $ 359  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 7,178     $ 0     $ 7,178  

Swap Agreements

    0       27,296       0       0       0       27,296  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 27,296     $ 0     $ 7,178     $ 0     $ 34,474  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     27,302     $     0     $     7,178     $ 353     $     34,833  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain (Loss) on Financial Derivative Instruments

 

Exchange-traded or centrally cleared

           

Swap Agreements

  $     0     $ 3,572     $ 0     $ 0     $ 84,829     $ 88,401  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 3,544     $ 0     $ 3,544  

Swap Agreements

    0       9,090       0       0       (2,457     6,633  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 9,090     $ 0     $ 3,544     $ (2,457   $ 10,177  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $     12,662     $     0     $ 3,544     $ 82,372     $ 98,578  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

 

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 1,714     $ 0     $ 0     $     (67,265   $     (65,551
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $     (5,841   $ 0     $ (5,841

Swap Agreements

    0       21,529       0       0       2,833       24,362  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 21,529     $ 0     $ (5,841   $ 2,833     $ 18,521  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 23,243     $ 0     $ (5,841   $ (64,432   $ (47,030
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2017 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 89,772     $ 1,842     $ 91,614  

Corporate Bonds & Notes

 

Banking & Finance

    0           337,790       8,209       345,999  

Industrials

    0       303,897           11,009           314,906  

Utilities

    0       59,877       0       59,877  

Convertible Bonds & Notes

 

Industrials

    0       7,360       0       7,360  

Municipal Bonds & Notes

 

California

    0       13,059       0       13,059  

Illinois

    0       27,219       0       27,219  

Iowa

    0       480       0       480  

Texas

    0       2,433       0       2,433  

Virginia

    0       1,203       0       1,203  

West Virginia

    0       14,072       0       14,072  

U.S. Government Agencies

    0       43,661       8,360       52,021  

Non-Agency Mortgage-Backed Securities

    0       247,304       0       247,304  

Asset-Backed Securities

    0       208,617       22,346       230,963  

Sovereign Issues

    0       33,615       0       33,615  

Common Stocks

 

Energy

        694       0       0       694  

Financials

    0       0       4,374       4,374  

Warrants

 

Industrials

    0       0       635       635  

Utilities

    19       0       0       19  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Preferred Securities

 

Banking & Finance

  $ 0     $ 7,063     $ 0     $ 7,063  

Industrials

    0       0       24,504       24,504  

Short-Term Instruments

 

Repurchase Agreements

    0       65,010       0       65,010  

U.S. Treasury Bills

    0       33,038       0       33,038  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     713     $     1,495,470     $     81,279     $     1,577,462  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

    0       680       0       680  

Over the counter

    0       3,322       0       3,322  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 4,002     $ 0     $ 4,002  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

    0       (359     0       (359

Over the counter

    0       (34,474     0       (34,474
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (34,833   $ 0     $ (34,833
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ (30,831   $ 0     $ (30,831
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 713     $ 1,464,639     $ 81,279     $ 1,546,631  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2017.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2017:

 

Category and Subcategory   Beginning
Balance
at 07/31/2016
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation)(1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2017
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2017(1)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 5,670     $     6,180     $ (117   $     324     $ 7     $ 1,181     $ 0     $     (11,403   $ 1,842     $ 109  

Corporate Bonds & Notes

 

Banking & Finance

        10,421       300           (2,481     4           307       (342     0       0       8,209       (3

Industrials

    10,850       0       0       15       0       144       0       0           11,009       144  

U.S. Government Agencies

    7,929       0       (146     146       59       372       0       0       8,360       363  

Asset-Backed Securities

    17,050       7,897       0       40       0           (2,641         0       0       22,346           (2,641

Common Stocks

 

Financials

    505       3,263       0       0       0       606       0       0       4,374       606  

Warrants

 

Industrials

    0       0       0       0       0       635       0       0       635       635  

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   33


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

 

July 31, 2017

 

Category and Subcategory   Beginning
Balance
at 07/31/2016
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation)(1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2017
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2017(1)
 

Preferred Securities

 

Industrials

  $ 0     $ 25,121     $ 0     $ 0     $ 0     $ (617   $ 0     $ 0     $ 24,504     $ (617
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     52,425     $     42,761     $     (2,744   $     529     $     373     $     (662   $     0     $     (11,403   $     81,279     $     (1,404
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and Subcategory   Ending
Balance
at 07/31/2017
     Valuation
Technique
    Unobservable
Inputs
   Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 822        Other Valuation Techniques(2)          —    
    597        Proxy Pricing     Base Price      99.500  
    423        Third Party Vendor     Broker Quote      98.000-100.563  

Corporate Bonds & Notes

 

Banking & Finance

    8,209        Proxy Pricing     Base Price      101.000-114.491  

Industrials

    11,009        Proxy Pricing     Base Price      101.000  

U.S. Government Agencies

    8,360        Proxy Pricing     Base Price      57.000  

Asset-Backed Securities

    22,346        Proxy Pricing     Base Price      52.170-100,000.000  

Common Stocks

 

Financials

    4,374        Other Valuation Techniques (2)         —    

Warrants

 

Industrials

    635        Other Valuation Techniques (2)         —    

Preferred Securities

         

Industrials

    24,504        Fundamental Valuation     Company Assets      $    551,000.000  
 

 

 

         

Total

  $     81,279          
 

 

 

         

 

(1)

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2017 may be due to an investment no longer held or categorized as Level 3 at period end.

(2)

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

34   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Schedule of Investments PIMCO Corporate & Income Strategy Fund

 

July 31, 2017

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 120.7%  
LOAN PARTICIPATIONS AND ASSIGNMENTS 4.7%  

Avolon Holdings Ltd.

 

3.478% due 09/20/2020

  $     50     $     50  

3.978% due 03/20/2022

      350         352  

BMC Software Finance, Inc.

 

5.234% due 09/10/2022

      7,956         8,015  

CD&R Plumb Buyer LLC

 

TBD% due 06/25/2018

      200         199  

CenturyLink, Inc.

 

2.750% due 01/31/2025

      1,000         988  

Diamond BV

 

TBD% due 07/25/2024

  EUR     100         119  

Drillships Ocean Ventures, Inc.

 

7.750% due 07/25/2021

  $     1,500         1,329  

Forbes Energy Services LLC

 

5.000% - 7.000% due 04/13/2021

    140         145  

HD Supply Waterworks Ltd.

 

TBD% due 08/01/2024

      40         40  

iHeartCommunications, Inc.

 

7.984% due 01/30/2019

      14,300         11,672  

Parexel International Corp.

 

TBD% due 07/18/2018

      200         199  

Petroleo Global Trading BV

 

TBD% due 02/19/2020

      200         196  

Sequa Mezzanine Holdings LLC

 

6.758% - 6.814% due 11/28/2021

    220         222  

10.314% due 04/28/2022

      90         92  

Sprint Communications, Inc.

 

3.750% due 02/02/2024

      1,596         1,603  

Staples, Inc.

 

TBD% due 08/02/2018

      590         586  

Team Health Holdings, Inc.

 

3.984% due 02/06/2024

      200         199  

UPC Financing Partnership

 

3.976% due 04/15/2025

      200         201  

Westmoreland Coal Co.

 

7.796% due 12/16/2020

      2,084         1,852  
       

 

 

 

Total Loan Participations and Assignments (Cost $28,689)

 

        28,059  
       

 

 

 
CORPORATE BONDS & NOTES 51.9%  
BANKING & FINANCE 26.1%  

AGFC Capital Trust

 

3.054% due 01/15/2067

      2,300         1,369  

Ally Financial, Inc.

 

8.000% due 11/01/2031 (l)

      6,486         8,083  

Ardonagh Midco PLC

 

8.375% due 07/15/2023

  GBP     700         932  

AssuredPartners, Inc.

 

7.000% due 08/15/2025 (c)

  $     18         18  

Banco Bilbao Vizcaya Argentaria S.A.

 

6.750% due 02/18/2020 (h)

  EUR     600         761  

Banco do Brasil S.A.

 

6.250% due 04/15/2024 (h)

  $     3,630         3,145  

9.000% due 06/18/2024 (h)

      3,127         3,251  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^

  EUR     4,300         1,578  

4.750% due 01/15/2018 ^

      5,100         1,872  

Banco Santander S.A.

 

6.250% due 09/11/2021 (h)

      1,300         1,661  

Barclays PLC

 

6.500% due 09/15/2019 (h)

      900         1,126  

7.250% due 03/15/2023 (h)

  GBP     4,700         6,723  

8.000% due 12/15/2020 (h)

  EUR     2,100         2,794  

Blackstone CQP Holdco LP

 

6.500% due 03/20/2021

  $     4,900         5,092  

BNP Paribas S.A.

 

7.375% due 08/19/2025 (h)

      3,220         3,671  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Brighthouse Financial, Inc.

 

4.700% due 06/22/2047

  $     98     $     97  

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (h)

      200         203  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (l)

      8,000         8,965  

Credit Agricole S.A.

 

7.875% due 01/23/2024 (h)(l)

      7,530         8,514  

Credit Suisse Group AG

 

7.500% due 12/11/2023 (h)(l)

      7,105         8,097  

Deutsche Bank AG

 

4.250% due 10/14/2021 (l)

      2,000         2,109  

EPR Properties

 

4.750% due 12/15/2026 (l)

      3,100         3,213  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021 (l)

      3,500         3,745  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      3,715         4,248  

Howard Hughes Corp.

 

5.375% due 03/15/2025

      72         75  

HSBC Holdings PLC

 

6.000% due 09/29/2023 (h)

  EUR     3,193         4,325  

6.000% due 05/22/2027 (h)

  $     200         210  

Intrum Justitia AB

 

2.750% due 07/15/2022

  EUR     100         120  

Jefferies Finance LLC

 

6.875% due 04/15/2022

  $     1,000         1,010  

7.375% due 04/01/2020

      2,100         2,168  

7.500% due 04/15/2021

      1,444         1,509  

Jefferies LoanCore LLC

 

6.875% due 06/01/2020

      6,100         6,291  

Lloyds Banking Group PLC

 

7.625% due 06/27/2023 (h)

  GBP     2,166         3,224  

7.875% due 06/27/2029 (h)

      1,500         2,372  

MPT Operating Partnership LP

 

5.250% due 08/01/2026

  $     1,283         1,347  

Nationwide Building Society

 

10.250% due 06/29/2049 (h)

  GBP     12         2,568  

Navient Corp.

 

5.500% due 01/15/2019 (l)

  $     7,425         7,731  

5.625% due 08/01/2033

      2,290         1,958  

Novo Banco S.A.

 

5.000% due 04/04/2019

  EUR     298         284  

5.000% due 04/23/2019

      508         484  

5.000% due 05/14/2019

      402         383  

5.000% due 05/21/2019

      225         214  

5.000% due 05/23/2019

      224         214  

OneMain Financial Holdings LLC

 

6.750% due 12/15/2019

  $     1,349         1,417  

Oppenheimer Holdings, Inc.

 

6.750% due 07/01/2022

      1,496         1,514  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      31         32  

Rio Oil Finance Trust

 

9.250% due 07/06/2024

      3,620         3,722  

9.750% due 01/06/2027

      467         484  

Royal Bank of Scotland Group PLC

 

7.500% due 08/10/2020 (h)

      4,070         4,309  

8.000% due 08/10/2025 (h)

      6,390           7,009  

8.625% due 08/15/2021 (h)

      1,700         1,882  

Santander UK Group Holdings PLC

 

6.750% due 06/24/2024 (h)

  GBP     3,795         5,372  

7.375% due 06/24/2022 (h)

      3,520         5,015  

Sberbank of Russia Via SB Capital S.A.

 

5.717% due 06/16/2021

  $     1,900         2,048  

6.125% due 02/07/2022

      1,300         1,420  

Spirit Realty LP

 

4.450% due 09/15/2026 (l)

      1,600         1,546  

Springleaf Finance Corp.

 

6.125% due 05/15/2022

      656         690  

8.250% due 10/01/2023

      1,200         1,356  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Tesco Property Finance PLC

 

7.623% due 07/13/2039

  GBP     419     $     718  
       

 

 

 
            156,288  
       

 

 

 
INDUSTRIALS 20.8%  

Altice Financing S.A.

 

7.500% due 05/15/2026

  $     1,600         1,778  

AMC Networks, Inc.

 

4.750% due 08/01/2025

      90         91  

BMC Software Finance, Inc.

 

8.125% due 07/15/2021

      1,688         1,751  

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

 

9.000% due 10/15/2019 (d)

      4,342         4,358  

Burger King Worldwide, Inc.

 

4.250% due 05/15/2024

      199         201  

Caesars Entertainment Operating Co., Inc.

 

8.500% due 02/15/2020 ^(i)

      3,246         4,220  

9.000% due 02/15/2020 ^(i)

      1,854         2,415  

10.000% due 12/15/2018 ^

      5,770         5,503  

Charter Communications Operating LLC

 

5.375% due 05/01/2047

      64         67  

Chesapeake Energy Corp.

 

4.554% due 04/15/2019

      115         114  

CommScope Technologies LLC

 

5.000% due 03/15/2027

      2         2  

Community Health Systems, Inc.

 

6.250% due 03/31/2023

      158         162  

Continental Airlines Pass-Through Trust

 

9.798% due 10/01/2022

      831         914  

CSN Resources S.A.

 

6.500% due 07/21/2020

      519         396  

DAE Funding LLC

 

4.000% due 08/01/2020 (c)

      60         61  

4.500% due 08/01/2022 (c)

      60         61  

5.000% due 08/01/2024 (c)

      150         154  

DriveTime Automotive Group, Inc.

 

8.000% due 06/01/2021 (l)

      4,100         4,131  

Dynegy, Inc.

 

8.034% due 02/02/2024

      1,832         1,777  

Exela Intermediate LLC

 

10.000% due 07/15/2023

      117         114  

Ferroglobe PLC

 

9.375% due 03/01/2022

      2,000         2,155  

Ford Motor Co.

 

7.700% due 05/15/2097 (l)

      7,830         9,758  

Fresh Market, Inc.

 

9.750% due 05/01/2023 (l)

      5,650         4,647  

Frontier Finance PLC

 

8.000% due 03/23/2022

  GBP     4,600         6,342  

HCA, Inc.

 

5.500% due 06/15/2047

  $     98         102  

7.500% due 11/15/2095

      1,200         1,241  

iHeartCommunications, Inc.

 

9.000% due 09/15/2022

      3,440         2,546  

Intelsat Jackson Holdings S.A.

 

7.250% due 10/15/2020

      3,720         3,590  

9.750% due 07/15/2025

      195         202  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021

      10,492         6,767  

8.125% due 06/01/2023

      1,121         700  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      7,070         7,017  

Kinder Morgan Energy Partners LP

 

6.375% due 03/01/2041 (l)

      400         458  

Kinder Morgan, Inc.

 

7.800% due 08/01/2031 (l)

      3,580         4,583  

Mallinckrodt International Finance S.A.

 

4.750% due 04/15/2023

      960         854  

5.500% due 04/15/2025

      770         716  

New Albertson’s, Inc.

 

6.570% due 02/23/2028 (l)

      5,600         4,298  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   35


Schedule of Investments PIMCO Corporate & Income Strategy Fund (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Park Aerospace Holdings Ltd.

 

5.250% due 08/15/2022

  $     13     $     13  

5.500% due 02/15/2024

      36         37  

Petroleos Mexicanos

 

6.500% due 03/13/2027

      260         287  

6.750% due 09/21/2047

      270         285  

PetSmart, Inc.

 

5.875% due 06/01/2025

      108         104  

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

      627         702  

QVC, Inc.

 

4.375% due 03/15/2023

      410         422  

5.450% due 08/15/2034

      900         881  

5.950% due 03/15/2043

      3,682         3,608  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     1,000         1,639  

Safeway, Inc.

 

7.250% due 02/01/2031 (l)

  $     1,345         1,244  

SFR Group S.A.

 

7.375% due 05/01/2026 (l)

      5,340         5,801  

Sirius XM Radio, Inc.

 

3.875% due 08/01/2022

      57         58  

Spirit Issuer PLC

 

3.000% due 12/28/2031

  GBP     1,000         1,288  

6.582% due 12/28/2027

      1,400         1,993  

Symantec Corp.

 

5.000% due 04/15/2025

  $     44         46  

Times Square Hotel Trust

 

8.528% due 08/01/2026

      1,678         2,013  

UCP, Inc.

 

8.500% due 10/21/2017

      6,000         6,060  

Unique Pub Finance Co. PLC

 

5.659% due 06/30/2027

  GBP     3,630         5,407  

6.542% due 03/30/2021

      1,511         2,182  

United Group BV

 

4.375% due 07/01/2022

  EUR     100         119  

4.875% due 07/01/2024

      100         118  

UPCB Finance Ltd.

 

3.625% due 06/15/2029

      190         224  

Valeant Pharmaceuticals International, Inc.

 

6.500% due 03/15/2022

  $     86         91  

7.000% due 03/15/2024

      165         176  

Virgin Media Secured Finance PLC

 

5.000% due 04/15/2027

  GBP     300         414  

Westmoreland Coal Co.

 

8.750% due 01/01/2022

  $     5,955         5,203  

Wynn Las Vegas LLC

 

5.250% due 05/15/2027

      60         62  
       

 

 

 
            124,723  
       

 

 

 
UTILITIES 5.0%  

AT&T, Inc.

 

2.215% due 02/14/2023 (c)

      90         90  

2.850% due 02/14/2023 (c)

      200         201  

3.400% due 08/14/2024 (c)

      390         391  

3.900% due 08/14/2027 (c)

      350         350  

4.900% due 08/14/2037 (c)

      358         358  

5.150% due 02/14/2050 (c)

      538         538  

5.300% due 08/14/2058 (c)

      160         160  

Frontier Communications Corp.

 

8.500% due 04/15/2020

      985         1,005  

Gazprom Neft OAO Via GPN Capital S.A.

 

4.375% due 09/19/2022 (l)

      5,700         5,775  

6.000% due 11/27/2023 (l)

      700         764  

Mountain States Telephone & Telegraph Co.

 

7.375% due 05/01/2030

      8,200         8,661  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 06/30/2022 ^

      286         178  

Odebrecht Offshore Drilling Finance Ltd.

 

6.625% due 10/01/2023 ^(j)

      2,600         930  

6.750% due 10/01/2023 ^(j)

      2,811         1,006  

Petrobras Global Finance BV

 

6.250% due 12/14/2026

  GBP     4,800         6,552  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

6.625% due 01/16/2034

  GBP     100     $     133  

6.750% due 01/27/2041

  $     2,300         2,217  

7.250% due 03/17/2044

      244         246  

TerraForm Power Operating LLC

 

6.375% due 02/01/2023

      625         653  
       

 

 

 
          30,208  
       

 

 

 

Total Corporate Bonds & Notes (Cost $294,035)

          311,219  
       

 

 

 
CONVERTIBLE BONDS & NOTES 0.7%  
INDUSTRIALS 0.7%  

DISH Network Corp.

 

3.375% due 08/15/2026

      3,400         4,241  
       

 

 

 

Total Convertible Bonds & Notes (Cost $3,400)

        4,241  
       

 

 

 
MUNICIPAL BONDS & NOTES 4.6%  
CALIFORNIA 0.9%  

Riverside County, California Redevelopment Successor Agency Tax Allocation Bonds, Series 2010

 

7.750% due 10/01/2037

      1,220         1,349  

Stockton Public Financing Authority, California Revenue Bonds, (BABs), Series 2009

 

7.942% due 10/01/2038

      3,400         3,752  
       

 

 

 
          5,101  
       

 

 

 
ILLINOIS 2.3%  

Chicago, Illinois General Obligation Bonds, (BABs), Series 2010

 

7.517% due 01/01/2040

      12,700         13,562  

Chicago, Illinois General Obligation Bonds, Series 2014

 

6.314% due 01/01/2044

      60         60  

Chicago, Illinois General Obligation Bonds, Series 2017

 

7.045% due 01/01/2029

      110         119  

Illinois State General Obligation Bonds, (BABs), Series 2010

 

6.725% due 04/01/2035

      35         39  

7.350% due 07/01/2035

      20         23  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      270         271  
       

 

 

 
          14,074  
       

 

 

 
VIRGINIA 0.1%  

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

 

6.706% due 06/01/2046

      785         674  
       

 

 

 
WEST VIRGINIA 1.3%  

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

 

0.000% due 06/01/2047 (g)

      44,400         2,310  

7.467% due 06/01/2047

      5,885         5,587  
       

 

 

 
          7,897  
       

 

 

 

Total Municipal Bonds & Notes
(Cost $25,728)

        27,746  
       

 

 

 
U.S. GOVERNMENT AGENCIES 5.7%  

Fannie Mae

 

3.000% due 02/25/2043 (a)

      58,999         12,149  

4.232% due 10/25/2029

      520         545  

4.782% due 07/25/2029

      850         915  

5.482% due 01/25/2029

      400         449  

6.082% due 10/25/2029

      330         362  

6.982% due 07/25/2029

      1,150         1,346  

Freddie Mac

 

0.000% due 04/25/2045 -
08/25/2046 (b)(g)

      10,900         8,475  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

0.100% due 04/25/2046 -
08/25/2046 (a)

  $     50,710     $     198  

0.200% due 04/25/2045 (a)

      5,683         15  

6.174% due 11/25/2055

      8,250         4,713  

8.782% due 12/25/2027

      3,295         3,872  

11.982% due 03/25/2025

      736         997  
       

 

 

 

Total U.S. Government Agencies (Cost $31,462)

          34,036  
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 25.0%  

Banc of America Alternative Loan Trust

 

5.500% due 10/25/2035 ^

      4,839         4,290  

6.000% due 01/25/2036 ^

      127         119  

Banc of America Funding Trust

 

6.000% due 07/25/2037 ^

      344         266  

Banc of America Mortgage Trust

 

3.622% due 03/25/2035

      107         105  

6.000% due 03/25/2037 ^

      424         408  

BCAP LLC Trust

 

3.285% due 03/27/2036

      2,211         1,269  

3.517% due 08/28/2037

      6,772         6,343  

5.045% due 03/26/2037

      1,042         629  

7.711% due 07/26/2036

      1,661         1,636  

Bear Stearns ALT-A Trust

 

1.732% due 01/25/2036 ^

      1,574         1,583  

3.226% due 09/25/2047 ^

      7,169         5,652  

3.268% due 11/25/2036 ^

      4,735         3,903  

3.322% due 11/25/2035 ^

      6,816         6,204  

3.525% due 08/25/2036 ^

      1,109         828  

3.625% due 09/25/2035 ^

      715         586  

Bear Stearns Commercial Mortgage Securities Trust

 

5.713% due 04/12/2038

      210         166  

Bear Stearns Mortgage Funding Trust

 

7.500% due 08/25/2036

      1,319         1,295  

Chase Mortgage Finance Trust

 

3.224% due 12/25/2035 ^

      13         13  

6.000% due 07/25/2037 ^

      972         893  

Citigroup Mortgage Loan Trust, Inc.

 

3.203% due 04/25/2037 ^

      317         259  

3.661% due 09/25/2037 ^

      2,359         1,964  

Citigroup/Deutsche Bank Commercial Mortgage Trust

 

5.398% due 12/11/2049

      62         35  

5.688% due 10/15/2048

      8,290         4,448  

Commercial Mortgage Loan Trust

 

6.155% due 12/10/2049

      1,973         1,245  

Countrywide Alternative Loan Resecuritization Trust

 

6.000% due 08/25/2037 ^

      1,313         1,042  

Countrywide Alternative Loan Trust

 

5.500% due 03/25/2035

      334         262  

5.500% due 03/25/2036 ^

      184         148  

5.750% due 01/25/2035

      462         465  

5.750% due 02/25/2035

      487         466  

5.750% due 03/25/2037 ^

      872         742  

6.000% due 02/25/2035

      1,190         1,212  

6.000% due 04/25/2036

      1,318         1,026  

6.000% due 02/25/2037 ^

      6,521         4,602  

6.000% due 04/25/2037 ^

      1,439         1,119  

6.000% due 07/25/2037 ^

      331         322  

6.250% due 12/25/2036 ^

      1,678         1,244  

6.500% due 08/25/2036 ^

      596         406  

Countrywide Home Loan Mortgage Pass-Through Trust

 

3.331% due 09/20/2036 ^

      344         287  

6.000% due 07/25/2037

      2,074         1,685  

Credit Suisse Commercial Mortgage Trust

 

5.870% due 09/15/2040

      768         768  

Credit Suisse Mortgage Capital Certificates

 

1.440% due 10/26/2036

      6,989         4,654  

Epic Drummond Ltd.

 

0.000% due 01/25/2022

  EUR     135         159  

First Horizon Alternative Mortgage Securities Trust

 

6.000% due 08/25/2036 ^

  $     5,207         4,384  

GS Mortgage Securities Trust

 

5.622% due 11/10/2039

      939         863  

GSR Mortgage Loan Trust

 

3.716% due 08/25/2034

      496         482  
 

 

36   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

5.500% due 05/25/2036 ^

  $     465     $     444  

6.000% due 02/25/2036 ^

      3,326         2,690  

HarborView Mortgage Loan Trust

 

1.468% due 01/19/2036 ^

      4,452         3,083  

3.472% due 06/19/2036 ^

      8,413         6,157  

IndyMac Mortgage Loan Trust

 

6.500% due 07/25/2037 ^

      3,530         2,355  

Jefferies Resecuritization Trust

 

6.000% due 05/26/2036

      15,481         11,311  

JPMorgan Alternative Loan Trust

 

3.079% due 03/25/2037 ^

      2,052         1,834  

6.000% due 12/25/2035 ^

      2,069         2,013  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.623% due 05/12/2045

      1,547         1,331  

JPMorgan Mortgage Trust

 

3.304% due 01/25/2037 ^

      840         828  

3.378% due 02/25/2036 ^

      3,174         2,849  

3.463% due 04/25/2037

      11         10  

LB-UBS Commercial Mortgage Trust

 

5.407% due 11/15/2038

      913         700  

5.562% due 02/15/2040

      1,319         950  

Lehman Mortgage Trust

 

6.000% due 07/25/2037 ^

      216         204  

Lehman XS Trust

 

1.452% due 06/25/2047

      2,737         2,390  

MASTR Alternative Loan Trust

 

6.750% due 07/25/2036

      2,065         1,464  

Merrill Lynch Mortgage Investors Trust

 

3.214% due 03/25/2036 ^

      845         619  

Mesdag Delta BV

 

0.000% due 01/25/2020

  EUR     1,244         1,440  

Morgan Stanley Capital Trust

 

5.991% due 06/11/2049

  $     1,741         1,747  

Residential Accredit Loans, Inc. Trust

 

1.462% due 05/25/2037 ^

      229         174  

4.284% due 12/26/2034 ^

      2,290         1,814  

6.000% due 08/25/2036 ^

      433         375  

Residential Asset Mortgage Products Trust

 

6.500% due 12/25/2031

      640         646  

Residential Asset Securitization Trust

 

6.000% due 11/25/2036 ^

      3,038         2,075  

6.250% due 09/25/2037 ^

      2,834         2,076  

6.250% due 06/25/2046

      1,447         1,224  

Residential Funding Mortgage Securities, Inc. Trust

 

4.030% due 02/25/2037

      2,028         1,631  

6.500% due 03/25/2032

      198         204  

Sequoia Mortgage Trust

 

3.228% due 02/20/2047

      459         414  

4.707% due 07/20/2037 ^

      915         803  

Structured Adjustable Rate Mortgage Loan Trust

 

3.243% due 11/25/2036 ^

      3,051         2,768  

3.291% due 07/25/2036 ^

      740         589  

3.337% due 07/25/2036 ^

      8,280         6,294  

3.342% due 03/25/2037 ^

      3,487         2,818  

3.391% due 01/25/2036 ^

      2,719         2,081  

3.559% due 07/25/2035 ^

      981         855  

Suntrust Adjustable Rate Mortgage Loan Trust

 

3.531% due 02/25/2037 ^

      448         402  

3.604% due 04/25/2037 ^

      726         620  

WaMu Mortgage Pass-Through Certificates Trust

 

2.999% due 07/25/2037 ^

      547         455  

3.030% due 10/25/2036 ^

      2,696         2,396  

3.160% due 02/25/2037 ^

      719         684  

3.326% due 07/25/2037 ^

      1,261         1,176  

Washington Mutual Mortgage Pass-Through Certificates Trust

 

1.616% due 05/25/2047 ^

      220         46  

6.000% due 10/25/2035 ^

      2,117         1,667  

Wells Fargo Mortgage-Backed Securities Trust

 

3.166% due 07/25/2036 ^

      458         461  

3.329% due 05/25/2036 ^

      84         80  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $141,927)

      149,724  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
ASSET-BACKED SECURITIES 19.7%  

ACE Securities Corp. Home Equity Loan Trust

 

1.622% due 02/25/2036

  $     28,019     $       14,216  

Airspeed Ltd.

 

1.496% due 06/15/2032

      3,155         2,642  

Argent Securities Trust

 

1.422% due 03/25/2036

      4,033         2,162  

Bear Stearns Asset-Backed Securities Trust

 

1.372% due 10/25/2036 ^

      5,597         5,538  

6.500% due 10/25/2036 ^

      374         286  

Belle Haven ABS CDO Ltd.

 

1.551% due 07/05/2046

      175,347         3,034  

BlueMountain CLO Ltd.

 

6.754% due 04/13/2027

      1,000         994  

CIFC Funding Ltd.

 

0.000% due 05/24/2026 (g)

      2,300         1,538  

0.000% due 07/22/2026 (g)

      1,500         983  

Citigroup Mortgage Loan Trust, Inc.

 

1.392% due 12/25/2036

      4,292         2,876  

Countrywide Asset-Backed Certificates

 

1.372% due 06/25/2047 ^

      1,801         1,404  

1.402% due 03/25/2037

      2,545         2,422  

1.952% due 01/25/2036

      4,000         3,898  

First Franklin Mortgage Loan Trust

 

1.862% due 09/25/2035

      3,835         2,142  

2.207% due 05/25/2036

      7,682         3,791  

Fremont Home Loan Trust

 

2.162% due 06/25/2035 ^

      6,000         4,964  

Grosvenor Place CLO BV

 

0.000% due 04/30/2029

  EUR     500         467  

Highbridge Loan Management Ltd.

 

6.621% due 05/05/2027

  $     500         490  

HSI Asset Securitization Corp. Trust

 

0.000% due 10/25/2036 (g)

      3,404         1,426  

IndyMac Home Equity Mortgage Loan Asset-Backed Trust

 

1.392% due 07/25/2037

      11,099         7,007  

JPMorgan Mortgage Acquisition Corp.

 

1.522% due 01/25/2036

      747         723  

JPMorgan Mortgage Acquisition Trust

 

1.392% due 11/25/2036

      5,133         4,633  

4.852% due 10/25/2030 ^

      6,831         5,062  

Lehman XS Trust

 

5.170% due 08/25/2035 ^

      260         246  

Long Beach Mortgage Loan Trust

 

1.532% due 01/25/2036

      5,000         3,785  

Magnetite Ltd.

 

6.454% due 04/15/2027

      1,000         969  

Merrill Lynch Mortgage Investors Trust

 

1.392% due 04/25/2037

      589         333  

Morgan Stanley ABS Capital, Inc. Trust

 

1.382% due 06/25/2036

      1,412         1,353  

Morgan Stanley Mortgage Loan Trust

 

6.250% due 07/25/2047 ^

      778         557  

Park Place Securities, Inc. Asset-Backed Pass-Through Certificates

 

1.752% due 08/25/2035

      5,000         4,056  

3.002% due 10/25/2034

      573         532  

Residential Asset Mortgage Products Trust

 

2.327% due 12/25/2033

      199         192  

2.432% due 01/25/2035 ^

      2,856         2,113  

SLM Student Loan Trust

 

0.000% due 10/28/2029 (g)

      3         3,386  

0.000% due 01/25/2042 (g)

      4         3,504  

SoFi Professional Loan Program LLC

 

0.000% due 05/25/2040 (g)

      4,300         2,243  

0.000% due 07/25/2040 (g)

      21         1,175  

0.000% due 09/25/2040 (g)

      1,718         973  

Soundview Home Loan Trust

 

1.482% due 08/25/2037

      2,000         1,665  

South Coast Funding Ltd.

 

1.785% due 08/10/2038

      10,414         2,042  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Symphony CLO Ltd.

 

5.904% due 07/14/2026

  $     2,000     $     1,925  

Taberna Preferred Funding Ltd.

 

1.551% due 08/05/2036

      451         341  

1.551% due 08/05/2036 ^

      8,350         6,304  

1.771% due 07/05/2035

      8,849         7,478  
       

 

 

 

Total Asset-Backed Securities (Cost $110,384)

            117,870  
       

 

 

 
SOVEREIGN ISSUES 2.5%  

Argentine Government International Bond

 

2.260% due 12/31/2038

  EUR     650         476  

3.875% due 01/15/2022

      200         236  

5.000% due 01/15/2027

      300         331  

7.820% due 12/31/2033

      6,743         8,395  

Autonomous Community of Catalonia

 

4.900% due 09/15/2021

      1,500         1,890  

Republic of Greece Government International Bond

 

3.000% due 02/24/2023

      142         158  

3.000% due 02/24/2024

      142         155  

3.000% due 02/24/2025

      142         153  

3.000% due 02/24/2026

      142         151  

3.000% due 02/24/2027

      142         149  

3.000% due 02/24/2028

      142         142  

3.000% due 02/24/2029

      142         137  

3.000% due 02/24/2030

      142         135  

3.000% due 02/24/2031

      142         132  

3.000% due 02/24/2032

      142         130  

3.000% due 02/24/2033

      142         128  

3.000% due 02/24/2034

      142         127  

3.000% due 02/24/2035

      142         124  

3.000% due 02/24/2036

      142         122  

3.000% due 02/24/2037

      142         121  

3.000% due 02/24/2038

      142         120  

3.000% due 02/24/2039

      142         120  

3.000% due 02/24/2040

      142         120  

3.000% due 02/24/2041

      142         120  

3.000% due 02/24/2042

      142         120  

3.800% due 08/08/2017

  JPY     47,000         427  

4.750% due 04/17/2019

  EUR     400         484  

Sri Lanka Government International Bond

 

6.200% due 05/11/2027

  $     200         206  
       

 

 

 

Total Sovereign Issues (Cost $13,313)

    15,109  
       

 

 

 
        SHARES            
COMMON STOCKS 0.2%  
ENERGY 0.0%  

Forbes Energy Services Ltd. (e)(j)

    11,400         122  
       

 

 

 
FINANCIALS 0.2%  

TIG FinCo PLC (j)

      761,602         1,005  
       

 

 

 

Total Common Stocks (Cost $1,390)

 

      1,127  
       

 

 

 
WARRANTS 0.1%  
INDUSTRIALS 0.1%  

Sequa Corp. - Exp. 04/28/2024

    775,000         363  
       

 

 

 
UTILITIES 0.0%  

Dynegy, Inc. - Exp. 02/02/2024

    61,388         12  
       

 

 

 

Total Warrants (Cost $161)

          375  
       

 

 

 
PREFERRED SECURITIES 3.6%  
BANKING & FINANCE 1.3%  

Farm Credit Bank of Texas

 

10.000% due 12/15/2020 (h)

      6,250         7,683  
       

 

 

 
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   37


Schedule of Investments PIMCO Corporate & Income Strategy Fund (Cont.)

 

        SHARES         MARKET
VALUE
(000S)
 
INDUSTRIALS 2.3%  

Sequa Corp.

 

9.000%

      14,354     $     14,002  
       

 

 

 

Total Preferred Securities (Cost $22,042)

      21,685  
       

 

 

 
SHORT-TERM INSTRUMENTS 2.0%  
REPURCHASE AGREEMENTS (k) 1.6%      
          9,443  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
U.S. TREASURY BILLS 0.4%  

0.966% due 08/31/2017 - 01/04/2018 (f)(g)(n)(p)

  $     2,716         2,712  
       

 

 

 
Total Short-Term Instruments (Cost $12,155)     $     12,155  
       

 

 

 
                  MARKET
VALUE
(000S)
 
Total Investments in Securities (Cost $684,686)         723,346  
       
Total Investments 120.7% (Cost $684,686)       $       723,346  

Financial Derivative
Instruments (m)(o) (0.5)%

(Cost or Premiums, net $(1,182))

          (2,737
Preferred Shares (9.3)%           (55,525
Other Assets and Liabilities, net (10.9)%     (65,818
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%       $     599,266  
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) Principal only security.
(c) When-issued security.
(d) Payment in-kind security.
(e) Security did not produce income within the last twelve months.
(f) Coupon represents a weighted average yield to maturity.
(g) Zero coupon security.
(h) Perpetual maturity; date shown, if applicable, represents next contractual call date.
(i) Security is subject to a forbearance agreement entered into by the Fund which forbears the Fund from taking action to, among other things, accelerate and collect payments on the subject note with respect to specified events of default.

 

(j)  RESTRICTED SECURITIES:

 

Issuer Description                Acquisition
Date
    Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

Forbes Energy Services Ltd.

         10/09/2014 - 11/18/2016     $ 370     $ 122       0.02

Odebrecht Offshore Drilling Finance Ltd.

6.625% due 10/01/2023

         04/09/2015 - 07/30/2015     2,058       930       0.16  

Odebrecht Offshore Drilling Finance Ltd.

6.750% due 10/01/2023

         04/09/2015 - 07/30/2015       2,077       1,006       0.17  

TIG FinCo PLC

         04/02/2015 - 07/20/2017       1,020       1,005       0.16  
        

 

 

   

 

 

   

 

 

 
    $    5,525     $     3,063       0.51
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(k)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
    Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received(1)
 
SAL     1.160     07/31/2017       08/01/2017     $     8,400     U.S. Treasury Notes 1.125% due 02/28/2021   $ (8,568   $ 8,400     $ 8,400  
SSB     0.200       07/31/2017       08/01/2017       1,043     U.S. Treasury Notes 3.500% due 05/15/2020(2)     (1,068     1,043       1,043  
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

 

        $     (9,636   $     9,443     $     9,443  
           

 

 

   

 

 

   

 

 

 

 

38   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(3)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(3)
    Payable for
Reverse
Repurchase
Agreements
 

FOB

    1.600     07/21/2017       08/04/2017     $ (2,931   $ (2,932

JML

    1.950       07/18/2017       08/18/2017       (614     (615
    1.950       07/31/2017       08/18/2017       (4,687     (4,687

MSC

    1.770       05/02/2017       08/02/2017           (8,554     (8,592

RBC

    2.060       02/27/2017       08/28/2017       (6,785     (6,845

RDR

    1.590       05/17/2017       08/17/2017       (4,366     (4,381
    1.590       05/18/2017       08/17/2017       (1,969     (1,976
    1.640       06/14/2017       09/14/2017       (8,797     (8,816

RTA

    2.064       06/08/2017       12/08/2017       (3,384     (3,395
    2.072       06/14/2017       12/14/2017       (8,202     (8,225

SOG

    1.780       06/07/2017       09/07/2017       (6,422     (6,439

UBS

    1.590       05/23/2017       08/23/2017       (424     (425
    1.590       06/02/2017       08/23/2017       (1,464     (1,468
    1.840       05/30/2017       08/23/2017       (2,126     (2,133
    1.990       05/22/2017       08/22/2017       (4,482     (4,500
    2.010       06/02/2017       09/05/2017       (5,487     (5,505
    2.030       05/15/2017       08/15/2017       (4,624     (4,644
         

 

 

 

Total Reverse Repurchase Agreements

 

      $     (75,578
         

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral pledged/(received) as of July 31, 2017:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(4)  

Global/Master Repurchase Agreement

            

FOB

  $ 0     $ (2,932   $ 0      $ (2,932   $ 3,140     $ 208  

JML

    0       (5,302     0        (5,302     6,539       1,237  

MSC

    0       (8,592     0        (8,592     9,548       956  

RBC

    0       (6,845     0        (6,845     7,710       865  

RDR

    0       (15,173     0            (15,173     15,657       484  

RTA

    0       (11,620     0        (11,620     12,337       717  

SAL

    8,400       0       0        8,400           (8,568         (168

SOG

    0       (6,439     0        (6,439     7,046       607  

SSB

    1,043       0       0        1,043       (1,068     (25

UBS

    0       (18,675     0        (18,675     22,007       3,332  
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     9,443     $     (75,578   $     0         
 

 

 

   

 

 

   

 

 

        

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

         

Corporate Bonds & Notes

  $ 0     $ (43,198   $ (20,761   $ (11,619   $ (75,578
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0     $     (43,198   $     (20,761   $     (11,619   $     (75,578
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements

 

      $ (75,578
         

 

 

 

 

(l) Securities with an aggregate market value of $84,831 have been pledged as collateral under the terms of the above master agreements as of July 31, 2017.

 

(1) 

Includes accrued interest.

(2) 

Collateral is held in custody by the counterparty.

(3) 

The average amount of borrowings outstanding during the period ended July 31, 2017 was $(84,961) at a weighted average interest rate of 1.617%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

(4) 

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   39


Schedule of Investments PIMCO Corporate & Income Strategy Fund (Cont.)

 

 

(m)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION(1)

 

Reference Entity    Fixed
Receive Rate
  Maturity
Date
     Implied
Credit Spread at
July 31, 2017(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
                  Asset      Liability  

Banco Espirito Santo S.A.

   5.000%     12/20/2021        14.980     EUR       100     $ (23   $ (5   $ (28   $ 1      $ 0  

Frontier Communications Corp.

   5.000     06/20/2020        6.967       $           5,500       (177     (68     (245     8        0  

Navient Corp.

   5.000     12/20/2021        2.538         600       21       43       64       0        0  
             

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
              $     (179   $     (30   $     (209   $     9      $     0  
             

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION(1)

 

Index/Tranches   Fixed
Receive Rate
    Maturity
Date
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
              Asset     Liability  

CDX.HY-26 5-Year Index

    5.000     06/20/2021     $     1,386     $ 63     $ 61     $ 124     $ 1     $ 0  

CDX.HY-28 5-Year Index

    5.000       06/20/2022       1,000       71       11       82       0       0  
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        $     134     $     72     $     206     $     1     $     0  
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
     Variation Margin  
                 Asset      Liability  

Pay

 

3-Month USD-LIBOR

    2.000     12/16/2020       $       59,300     $ 1,546     $ (1,011   $ 535      $ 0      $ (13

Pay

 

3-Month USD-LIBOR

    2.000       06/15/2021         36,800       1,248       (943     305        0        (8

Pay(5)

 

3-Month USD-LIBOR

    2.250       12/20/2022         62,000       747       2       749        0        (7

Pay

 

3-Month USD-LIBOR

    2.750       06/17/2025         75,590       4,663       (1,143     3,520        10        0  

Pay(5)

 

3-Month USD-LIBOR

    2.500       12/20/2027         43,400       299       398       697        20        0  

Pay

 

3-Month USD-LIBOR

    3.500       06/19/2044             169,400       (5,526     37,996       32,470        113        0  

Receive

 

3-Month USD-LIBOR

    2.250       12/21/2046         234,240       (16,773     33,055       16,282        0        (199

Receive(5)

 

3-Month USD-LIBOR

    2.750       12/20/2047         13,300       (490     58       (432      0        (10

Pay

 

6-Month  AUD-BBR-BBSW

    3.500       06/17/2025       AUD       7,600       188       171       359        6        0  

Receive(5)

 

6-Month EUR-EURIBOR

    1.000       09/20/2027       EUR       11,800       14       (44     (30      26        0  

Receive(5)

 

6-Month GBP-LIBOR

    1.500       09/20/2027       GBP       21,100       (341     (168     (509      59        0  
           

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
            $ (14,425   $ 68,371     $ 53,946      $ 234      $ (237
           

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total Swap Agreements

 

  $     (14,470   $     68,413     $     53,943      $     244      $     (237
           

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2017:

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
   

Total

          Market Value     Variation Margin
Liability
   

Total

 
     Purchased
Options
    Futures     Swap
Agreements
            Written
Options
    Futures     Swap
Agreements
   

Total Exchange-Traded or Centrally Cleared

  $     0     $     0     $     244     $     244       $     0     $     0     $     (237)     $     (237)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(n) Securities with an aggregate market value of $636 and cash of $12,478 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2017. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(1) 

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2) 

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3) 

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

 

40   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

(4) 

The prices and resulting values for credit default swap agreements on credit indices serve as indicators of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(5) 

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(o)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

BOA

     08/2017     EUR     2,186     $     2,511     $ 0     $ (76
     08/2017     GBP     742         961       0       (18

BPS

     08/2017     EUR     23,791         27,101       0       (1,062
     08/2017     JPY     44,300         396       0       (6

CBK

     08/2017     EUR     776         886       0       (33

GLM

     08/2017     GBP     363         469       0       (10
     08/2017     $     53,816     GBP     40,956       221       0  
     09/2017     GBP     40,956     $     53,876       0       (222

HUS

     08/2017     AUD     196         150       0       (7

JPM

     08/2017     EUR     364         422       0       (9

MSB

     08/2017     $     32,742     EUR     27,930       321       0  
     09/2017     EUR     27,930     $     32,800       0       (321

RBC

     08/2017     GBP     4,759         6,185       0       (94

TOR

     08/2017     $     398     JPY     44,300       4       0  
     09/2017     JPY     44,300     $     399       0       (3

UAG

     08/2017     EUR     1,033         1,181       0       (42
     08/2017     GBP     35,092         45,014       0       (1,286
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

  $     546     $     (3,189
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION(1)

 

Counterparty

  Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2017(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000%       12/20/2019       1.407%       $    2,400     $ (247   $ 227     $ 0     $ (20
GST  

Petrobras Global Finance BV

    1.000          12/20/2019       1.407          8,900       (912     838       0       (74
 

Petrobras Global Finance BV

    1.000          09/20/2020       1.821          10       (1     1       0       0  
 

Petrobras Global Finance BV

    1.000          12/20/2021       2.538          100       (16     10       0       (6
HUS  

Petrobras Global Finance BV

    1.000          09/20/2020       1.821          40       (6     5       0       (1
           

 

 

   

 

 

   

 

 

   

 

 

 
          $ (1,182   $ 1,081     $ 0     $ (101
           

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

    $     (1,182   $     1,081     $     0     $     (101
           

 

 

   

 

 

   

 

 

   

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral pledged/(received) as of July 31, 2017:

 

    Financial Derivative Assets           Financial Derivative Liabilities                     
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
   

Collateral
Pledged/

(Received)

     Net
Exposure(4)
 

BOA

  $ 0      $ 0      $ 0      $ 0       $ (94   $ 0      $ 0     $ (94   $ (94   $ 0      $ (94

BPS

    0        0        0        0         (1,068     0        (20     (1,088       (1,088     883        (205

CBK

    0        0        0        0         (33     0        0       (33     (33     0        (33

GLM

    221        0        0        221         (232     0        0       (232     (11     0        (11

GST

    0        0        0        0         0       0        (80     (80     (80     163        83  

HUS

    0        0        0        0         (7     0        (1     (8     (8     0        (8

JPM

    0        0        0        0         (9     0        0       (9     (9     0        (9

MSB

    321        0        0        321         (321     0        0       (321     0       0        0  

RBC

    0        0        0        0         (94     0        0       (94     (94     0        (94

TOR

    4        0        0        4         (3     0        0       (3     1       0        1  

UAG

    0        0        0        0         (1,328     0        0       (1,328     (1,328       1,030          (298
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

        

Total Over the Counter

  $  546      $  0      $  0      $  546       $  (3,189   $  0      $  (101   $  (3,290       
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

        

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   41


Schedule of Investments PIMCO Corporate & Income Strategy Fund (Cont.)

 

 

(p) Securities with an aggregate market value of $2,076 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2017.

 

(1) 

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2) 

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3) 

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4) 

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 10     $ 0     $ 0     $ 234     $ 244  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 546     $ 0     $ 546  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 10     $ 0     $ 546     $ 234     $ 790  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 0     $ 0     $ 0     $ 237     $ 237  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 3,189     $ 0     $ 3,189  

Swap Agreements

    0       101       0       0       0       101  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 101     $ 0     $ 3,189     $ 0     $ 3,290  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     101     $     0     $     3,189     $     237     $     3,527  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain on Financial Derivative Instruments

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 1,288     $ 0     $ 0     $ 8,813     $ 10,101  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 3,693     $ 0     $ 3,693  

Swap Agreements

    0       204       0       0       0       204  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 204     $ 0     $ 3,693     $ 0     $ 3,897  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 1,492     $ 0     $ 3,693     $ 8,813     $     13,998  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

 

     

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ (537   $ 0     $ 0     $ (7,083   $ (7,620
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ (2,588   $ 0     $ (2,588

Swap Agreements

    0       1,288       0       0       0       1,288  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $     1,288     $ 0     $ (2,588   $ 0     $ (1,300
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $ 751     $     0     $     (2,588   $     (7,083   $ (8,920
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

42   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2017 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Investments in Securities, at Value

       

Loan Participations and Assignments

  $ 0     $ 27,320     $ 739     $ 28,059  

Corporate Bonds & Notes

       

Banking & Finance

    0       151,837       4,451       156,288  

Industrials

    0       118,663       6,060       124,723  

Utilities

    0       30,208       0       30,208  

Convertible Bonds & Notes

       

Industrials

    0       4,241       0       4,241  

Municipal Bonds & Notes

       

California

    0       5,101       0       5,101  

Illinois

    0       14,074       0       14,074  

Virginia

    0       674       0       674  

West Virginia

    0       7,897       0       7,897  

U.S. Government Agencies

    0       29,323       4,713       34,036  

Non-Agency Mortgage-Backed Securities

    0       149,724       0       149,724  

Asset-Backed Securities

    0           106,589           11,281       117,870  

Sovereign Issues

    0       15,109       0       15,109  

Common Stocks

       

Energy

        122       0       0       122  

Financials

    0       0       1,005       1,005  

Warrants

       

Industrials

    0       0       363       363  

Utilities

    12       0       0       12  

Preferred Securities

       

Banking & Finance

    0       7,683       0       7,683  

Industrials

    0       0       14,002           14,002  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Short-Term Instruments

       

Repurchase Agreements

  $ 0     $ 9,443     $ 0     $ 9,443  

U.S. Treasury Bills

    0       2,712       0       2,712  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ 134     $ 680,598     $ 42,614     $ 723,346  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

    0       244       0       244  

Over the counter

    0       546       0       546  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 790     $ 0     $ 790  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

    0       (237     0       (237

Over the counter

    0       (3,290     0       (3,290
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (3,527   $ 0     $ (3,527
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ (2,737   $ 0     $ (2,737
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     134     $     677,861     $     42,614     $     720,609  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2017.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2017:

 

Category and Subcategory   Beginning
Balance
at 07/31/2016
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation)(1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2017
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2017(1)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 717     $ 0     $ 1     $ 0     $ 21     $ 0     $ 0     $ 739     $ 21  

Corporate Bonds & Notes

                   

Banking & Finance

    5,517       200       (1,249     2       154       (173     0       0       4,451       (1

Industrials

    5,973       0       0       8       0       79       0       0       6,060       79  

U.S. Government Agencies

    4,470       0       (82     81       33       211       0       0       4,713       207  

Asset-Backed Securities

    8,165       4,391       0       23       0       (1,298     0       0       11,281           (1,298

Common Stocks

                   

Financials

    116       750       0       0       0       139       0       0       1,005       139  

Warrants

                   

Industrials

    0       0       0       0       0       363       0       0       363       363  

Preferred Securities

                   

Industrials

    0       14,354       0       0       0       (352     0       0       14,002       (352
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     24,241     $     20,412     $     (1,331   $     115     $     187     $     (1,010   $     0     $     0     $     42,614     $ (842
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   43


Schedule of Investments PIMCO Corporate & Income Strategy Fund (Cont.)

 

July 31, 2017

 

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and Subcategory   Ending
Balance
at 07/31/2017
     Valuation
Technique
   Unobservable
Inputs
   Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 145      Other Valuation Techniques(2)         —    
    398      Proxy Pricing    Base Price      99.500  
    196      Third Party Vendor    Broker Quote      98.000  

Corporate Bonds & Notes

          

Banking & Finance

    4,451      Proxy Pricing    Base Price      101.000-114.491

Industrials

    6,060      Proxy Pricing    Base Price      101.000  

U.S. Government Agencies

    4,713      Proxy Pricing    Base Price      57.000  

Asset-Backed Securities

    11,281      Proxy Pricing    Base Price      52.170-100,000.000  

Common Stocks

          

Financials

    1,005      Other Valuation Techniques(2)         —    

Warrants

          

Industrials

    363      Other Valuation Techniques(2)         —    

Preferred Securities

          

Industrials

    14,002      Fundamental Valuation    Company Assets      $    551,000.000  
 

 

 

          

Total

  $     42,614           
 

 

 

          

 

(1) 

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2017 may be due to an investment no longer held or categorized as Level 3 at period end.

(2) 

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

44   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Schedule of Investments PIMCO High Income Fund

 

July 31, 2017

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 125.7%  
LOAN PARTICIPATIONS AND ASSIGNMENTS 2.9%  

Almonde, Inc.

 

8.459% due 06/13/2025

  $     100     $     103  

CD&R Plumb Buyer LLC

 

TBD% due 06/25/2018

      250         249  

Diamond BV

 

TBD% due 07/12/2024

      100         100  

TBD% due 07/25/2024

  EUR     100         119  

Drillships Ocean Ventures, Inc.

 

7.750% due 07/25/2021

  $     5,000         4,428  

Forbes Energy Services LLC

 

5.000% - 7.000% due 04/13/2021

      813         839  

Gartner, Inc.

 

3.234% due 04/05/2024

      26         26  

HD Supply Waterworks Ltd.

 

TBD% due 08/01/2024

      60         61  

iHeartCommunications, Inc.

 

7.984% due 01/30/2019

      17,200         14,040  

Klockner-Pentaplast of America, Inc.

 

4.750% due 06/30/2022

  EUR     100         118  

Parexel International Corp.

 

TBD% due 07/18/2018

  $     200         199  

Petroleo Global Trading BV

 

TBD% due 02/19/2020

      300         294  

Sequa Mezzanine Holdings LLC

 

6.758% - 6.814% due 11/28/2021

      330         333  

10.314% due 04/28/2022

      140         143  

Staples, Inc.

 

TBD% due 08/02/2018

      870         863  

Vistra Operations Co. LLC

 

4.476% - 4.488% due 12/14/2023

      896         903  

Westmoreland Coal Co.

 

7.796% due 12/16/2020

      3,176         2,822  
       

 

 

 

Total Loan Participations and Assignments (Cost $26,961)

 

        25,640  
       

 

 

 
CORPORATE BONDS & NOTES 62.4%  
BANKING & FINANCE 31.7%  

AGFC Capital Trust

 

3.054% due 01/15/2067

      27,410         16,309  

Ally Financial, Inc.

 

8.000% due 11/01/2031

      2,670         3,327  

8.000% due 11/01/2031 (l)

      2,762         3,442  

Ardonagh Midco PLC

 

8.375% due 07/15/2023

  GBP     2,700         3,593  

AssuredPartners, Inc.

 

7.000% due 08/15/2025 (c)

  $     27         27  

Atlantic Marine Corps Communities LLC

 

5.383% due 02/15/2048

      4,579         4,440  

Banco Bilbao Vizcaya Argentaria S.A.

 

6.750% due 02/18/2020 (h)

  EUR     3,000         3,804  

Banco do Brasil S.A.

 

6.250% due 04/15/2024 (h)

  $     5,950         5,154  

9.000% due 06/18/2024 (h)

      7,739         8,046  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^

  EUR     5,800         2,128  

4.750% due 01/15/2018 ^

      6,400         2,349  

Banco Santander S.A.

 

6.250% due 09/11/2021 (h)

      2,300         2,938  

Barclays PLC

 

6.500% due 09/15/2019 (h)

      600         751  

7.875% due 09/15/2022 (h)

  GBP     7,210         10,543  

8.000% due 12/15/2020 (h)

  EUR     7,340         9,764  

BNP Paribas S.A.

 

7.375% due 08/19/2025 (h)

  $     3,200         3,648  

Brighthouse Financial, Inc.

 

4.700% due 06/22/2047

      146         145  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (h)

  $     200     $     203  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (l)

      13,100         14,681  

CBL & Associates LP

 

5.950% due 12/15/2026 (l)

      3,200         3,214  

Co-operative Group Holdings Ltd.

 

7.500% due 07/08/2026

  GBP     3,000         4,838  

Cooperatieve Rabobank UA

 

6.625% due 06/29/2021 (h)

  EUR     1,600         2,142  

Credit Agricole S.A.

 

7.500% due 06/23/2026 (h)

  GBP     400         610  

7.875% due 01/23/2024 (h)(l)

  $     2,750         3,109  

7.875% due 01/23/2024 (h)

      1,700         1,922  

Doctors Co.

 

6.500% due 10/15/2023 (l)

      10,000         11,275  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021 (l)

      3,000         3,210  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      6,134         7,015  

HSBC Holdings PLC

 

6.000% due 09/29/2023 (h)

  EUR     2,600         3,522  

6.000% due 05/22/2027 (h)

  $     200         210  

International Lease Finance Corp.

 

6.980% due 10/15/2018

      18,000         18,414  

Intrum Justitia AB

 

2.750% due 07/15/2022

  EUR     100         120  

3.125% due 07/15/2024

      100         120  

Jefferies Finance LLC

 

7.250% due 08/15/2024 (c)

  $     200         201  

7.375% due 04/01/2020

      1,200         1,239  

Jefferies LoanCore LLC

 

6.875% due 06/01/2020 (l)

      17,000         17,531  

Lloyds Bank PLC

 

12.000% due 12/16/2024 (h)(l)

      12,450         16,935  

Lloyds Banking Group PLC

 

7.875% due 06/27/2029 (h)

  GBP     200         316  

Midwest Family Housing LLC

 

6.631% due 01/01/2051 (l)

  $     4,891         4,253  

Nationwide Building Society

 

10.250% due 06/29/2049 (h)

  GBP     19         3,983  

Navient Corp.

 

5.625% due 08/01/2033 (l)

  $     25,371         21,692  

Novo Banco S.A.

 

5.000% due 04/04/2019

  EUR     439         418  

5.000% due 04/23/2019

      745         710  

5.000% due 05/14/2019

      792         755  

5.000% due 05/21/2019

      387         369  

5.000% due 05/23/2019

      384         366  

Oppenheimer Holdings, Inc.

 

6.750% due 07/01/2022

  $     68         69  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      45         47  

Rio Oil Finance Trust

 

9.250% due 07/06/2024

      22,518         23,151  

Royal Bank of Scotland Group PLC

 

7.500% due 08/10/2020 (h)(l)

      7,040         7,454  

8.000% due 08/10/2025 (h)(l)

      7,660         8,402  

8.625% due 08/15/2021 (h)

      2,500         2,767  

Santander UK Group Holdings PLC

 

6.750% due 06/24/2024 (h)

  GBP     1,895         2,683  

7.375% due 06/24/2022 (h)

      6,363         9,066  

Spirit Realty LP

 

4.450% due 09/15/2026 (l)

  $     2,300         2,223  

Springleaf Finance Corp.

 

6.125% due 05/15/2022

      975         1,026  
       

 

 

 
            280,669  
       

 

 

 
INDUSTRIALS 25.6%  

AMC Networks, Inc.

 

4.750% due 08/01/2025

      130         131  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Belden, Inc.

 

3.375% due 07/15/2027

  EUR     100     $     120  

BMC Software Finance, Inc.

 

8.125% due 07/15/2021 (l)

  $     2,827         2,933  

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

 

9.000% due 10/15/2019 (d)(l)

      4,932         4,950  

Caesars Entertainment Operating Co., Inc. (i)

 

9.000% due 02/15/2020 ^

      18,786           24,469  

Charter Communications Operating LLC

 

5.375% due 05/01/2047

      95         99  

Chesapeake Energy Corp.

 

4.554% due 04/15/2019

      120         119  

CMA CGM S.A.

 

6.500% due 07/15/2022

  EUR     100         122  

CommScope Technologies LLC

 

5.000% due 03/15/2027

  $     4         4  

Community Health Systems, Inc.

 

6.250% due 03/31/2023

      233         239  

CSN Resources S.A.

 

6.500% due 07/21/2020

      770         587  

DAE Funding LLC

 

4.000% due 08/01/2020 (c)

      90         92  

4.500% due 08/01/2022 (c)

      90         92  

5.000% due 08/01/2024 (c)

      220         225  

Diamond Resorts International, Inc.

 

10.750% due 09/01/2024 (l)

      3,800         4,133  

DriveTime Automotive Group, Inc.

 

8.000% due 06/01/2021 (l)

      11,130         11,213  

Dynegy, Inc.

 

8.034% due 02/02/2024

      3,605         3,497  

EI Group PLC

 

6.000% due 10/06/2023

  GBP     500         720  

6.875% due 05/09/2025

      6,600         9,661  

Endo Finance LLC

 

5.375% due 01/15/2023

  $     1,300         1,118  

Exela Intermediate LLC

 

10.000% due 07/15/2023

      172         168  

Ferroglobe PLC

 

9.375% due 03/01/2022 (l)

      3,000         3,233  

Ford Motor Co.

 

7.700% due 05/15/2097 (l)

      16,610         20,701  

Fresh Market, Inc.

 

9.750% due 05/01/2023 (l)

      9,300         7,649  

General Shopping Finance Ltd.

 

10.000% due 08/31/2017 (h)(l)

      5,300         4,479  

General Shopping Investments Ltd.

 

12.000% due 03/20/2022 ^(h)

      2,500         1,088  

Hampton Roads PPV LLC

 

6.621% due 06/15/2053

      20,264         18,598  

HCA, Inc.

 

5.500% due 06/15/2047

      146         153  

7.500% due 11/15/2095

      3,462         3,579  

iHeartCommunications, Inc.

 

9.000% due 09/15/2022

      6,800         5,032  

Intelsat Jackson Holdings S.A.

 

7.250% due 10/15/2020

      4,385         4,232  

9.750% due 07/15/2025

      288         298  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021

      5,615         3,622  

8.125% due 06/01/2023

      15,504         9,675  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      11,750         11,662  

Kinder Morgan Energy Partners LP

 

6.950% due 01/15/2038 (l)

      1,000         1,213  

Kleopatra Holdings S.C.A. (8.500% PIK)

 

8.500% due 06/30/2023 (d)

  EUR     100         117  

Mallinckrodt International Finance S.A.

 

4.750% due 04/15/2023

  $     400         356  

New Albertson’s, Inc.

 

6.570% due 02/23/2028

      4,021         3,086  

Park Aerospace Holdings Ltd.

 

5.250% due 08/15/2022

      19         19  

5.500% due 02/15/2024

      54         55  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   45


Schedule of Investments PIMCO High Income Fund (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Petroleos Mexicanos

 

6.500% due 03/13/2027

  $     390     $     430  

6.750% due 09/21/2047

      400         422  

PetSmart, Inc.

 

5.875% due 06/01/2025

      161         155  

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

      912         1,020  

QVC, Inc.

 

5.950% due 03/15/2043

      5,000         4,899  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     18,100         29,672  

Safeway, Inc.

 

7.250% due 02/01/2031 (l)

  $     5,348         4,947  

Sirius XM Radio, Inc.

 

3.875% due 08/01/2022

      83         85  

Symantec Corp.

 

5.000% due 04/15/2025

      65         68  

UCP, Inc.

 

8.500% due 10/21/2017

      10,300         10,403  

Unique Pub Finance Co. PLC

 

5.659% due 06/30/2027

  GBP     289         431  

United Group BV

 

4.375% due 07/01/2022

  EUR     100         119  

4.875% due 07/01/2024

      100         118  

Valeant Pharmaceuticals International, Inc.

 

6.500% due 03/15/2022

  $     127         134  

7.000% due 03/15/2024

      246         263  

Westmoreland Coal Co.

 

8.750% due 01/01/2022

      10,638         9,295  

Wynn Las Vegas LLC

 

5.250% due 05/15/2027

      89         91  
       

 

 

 
          226,091  
       

 

 

 
UTILITIES 5.1%  

AT&T, Inc.

 

2.215% due 02/14/2023 (c)

      140         141  

2.850% due 02/14/2023 (c)

      290         291  

3.400% due 08/14/2024 (c)

      580         581  

3.900% due 08/14/2027 (c)

      520         521  

4.900% due 08/14/2037 (c)

      528         527  

5.150% due 02/14/2050 (c)

      792         792  

5.300% due 08/14/2058 (c)

      238         238  

CenturyLink, Inc.

 

7.200% due 12/01/2025

      1,122         1,144  

Mountain States Telephone & Telegraph Co.

 

7.375% due 05/01/2030

      15,200         16,055  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 06/30/2022 ^

      4,576         2,849  

Odebrecht Offshore Drilling Finance Ltd.

 

6.625% due 10/01/2023 ^(j)

      4,907         1,754  

6.750% due 10/01/2023 ^(j)

      10,650         3,813  

Petrobras Global Finance BV

 

6.125% due 01/17/2022

      322         339  

6.250% due 12/14/2026

  GBP     8,600         11,739  

6.625% due 01/16/2034

      200         266  

6.750% due 01/27/2041

  $     800         771  

6.850% due 06/05/2115

      300         276  

7.250% due 03/17/2044

      363         366  

7.375% due 01/17/2027 (l)

      2,407         2,613  

8.750% due 05/23/2026

      173         204  
       

 

 

 
          45,280  
       

 

 

 

Total Corporate Bonds & Notes (Cost $514,417)

 

        552,040  
       

 

 

 
CONVERTIBLE BONDS & NOTES 0.7%  
INDUSTRIALS 0.7%  

DISH Network Corp.

 

3.375% due 08/15/2026

      5,100         6,362  
       

 

 

 

Total Convertible Bonds & Notes (Cost $5,100)

    6,362  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
MUNICIPAL BONDS & NOTES 7.0%  
CALIFORNIA 0.5%  

Anaheim Redevelopment Agency, California Tax Allocation Bonds, (AGM Insured), Series 2007

 

6.506% due 02/01/2031

  $     2,000     $     2,300  

Sacramento County, California Revenue Bonds, Series 2013

 

7.250% due 08/01/2025

      1,500         1,755  

San Diego Tobacco Settlement Funding Corp., California Revenue Bonds, Series 2006

 

7.125% due 06/01/2032

      255         287  
       

 

 

 
          4,342  
       

 

 

 
DISTRICT OF COLUMBIA 1.2%  

District of Columbia Revenue Bonds, Series 2011

 

7.625% due 10/01/2035

      9,740         10,473  
       

 

 

 
ILLINOIS 2.4%  

Chicago, Illinois General Obligation Bonds, (BABs), Series 2010

 

6.257% due 01/01/2040

      11,000         10,486  

7.517% due 01/01/2040

      9,805         10,470  

Illinois State General Obligation Bonds, (BABs), Series 2010

 

6.725% due 04/01/2035

      45         50  

7.350% due 07/01/2035

      30         35  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      365         366  
       

 

 

 
          21,407  
       

 

 

 
NEW YORK 0.2%  

Erie Tobacco Asset Securitization Corp., New York Revenue Bonds, Series 2005

 

6.000% due 06/01/2028

      1,800         1,801  
       

 

 

 
TEXAS 1.1%  

El Paso Downtown Development Corp., Texas Revenue Bonds, Series 2013

 

7.250% due 08/15/2043

      7,535         9,620  
       

 

 

 
VIRGINIA 0.1%  

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

 

6.706% due 06/01/2046

      1,375         1,181  
       

 

 

 
WEST VIRGINIA 1.5%  

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

 

0.000% due 06/01/2047 (g)

      66,200         3,444  

7.467% due 06/01/2047

      9,895         9,394  
       

 

 

 
          12,838  
       

 

 

 

Total Municipal Bonds & Notes (Cost $57,120)

      61,662  
       

 

 

 
U.S. GOVERNMENT AGENCIES 3.2%  

Fannie Mae

 

3.500% due 09/25/2027 (a)

      521         59  

4.232% due 10/25/2029

      780         817  

5.438% due 10/25/2017 (a)

      4,424         10  

6.082% due 10/25/2029

      490         538  

7.536% due 10/25/2041

      500         591  

10.000% due 01/25/2034

      219         253  

11.071% due 05/25/2043

      669         677  

Freddie Mac

 

0.000% due 04/25/2046 - 08/25/2046 (b)(g)

      12,305         9,153  

0.100% due 04/25/2046 - 08/25/2046 (a)

      74,060         287  

4.000% due 08/15/2020 (a)

      370         16  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

4.500% due 10/15/2037 (a)

  $     962     $     92  

4.874% due 07/15/2035 (a)

      1,363         152  

4.974% due 02/15/2042 (a)

      2,391         312  

5.000% due 06/15/2033 (a)

      1,788         255  

5.914% due 08/15/2036 (a)

      804         175  

6.174% due 11/25/2055

      14,241         8,136  

8.727% due 12/15/2043

      71         75  

10.432% due 10/25/2027

      4,339         5,680  

10.549% due 05/15/2033

      63         76  

Ginnie Mae

 

3.500% due 06/20/2042 - 03/20/2043 (a)

      3,490         473  

4.500% due 07/20/2042 (a)

      285         47  

5.000% due 09/20/2042 (a)

      498         95  

5.022% due 02/20/2042 (a)

      10,487         870  
       

 

 

 

Total U.S. Government Agencies (Cost $33,933)

 

        28,839  
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 18.5%  

Adjustable Rate Mortgage Trust

 

1.572% due 05/25/2036

      4,568         2,691  

Banc of America Alternative Loan Trust

 

4.368% due 06/25/2046 ^(a)

      7,659         1,016  

Banc of America Funding Trust

 

6.000% due 07/25/2037 ^

      596         462  

6.250% due 10/26/2036

      10,656         8,909  

Banc of America Mortgage Trust

 

3.434% due 02/25/2036 ^

      23         21  

BCAP LLC Trust

 

5.045% due 03/26/2037

      1,958         1,182  

6.000% due 05/26/2037

      6,982         4,685  

6.903% due 10/26/2036

      7,306         6,618  

7.336% due 09/26/2036

      6,938         6,624  

12.536% due 06/26/2036

      2,696         1,259  

Bear Stearns Adjustable Rate Mortgage Trust

 

3.313% due 11/25/2034

      71         66  

Bellemeade Re Ltd.

 

7.532% due 07/25/2025

      1,250         1,312  

Chase Mortgage Finance Trust

 

3.224% due 12/25/2035 ^

      27         26  

3.406% due 09/25/2036 ^

      140         126  

5.500% due 05/25/2036 ^

      6         5  

Citigroup Commercial Mortgage Trust

 

5.691% due 12/10/2049

      1,411         1,289  

Citigroup Mortgage Loan Trust, Inc.

 

1.566% due 07/25/2036

      1         1  

3.571% due 07/25/2037 ^

      168         155  

3.589% due 08/25/2037 ^

      854         725  

3.922% due 11/25/2035

      16,565         9,423  

6.500% due 09/25/2036

      4,835         4,083  

Citigroup/Deutsche Bank Commercial Mortgage Trust

 

5.398% due 12/11/2049

      4,140         2,352  

5.688% due 10/15/2048

      3,400         1,824  

Commercial Mortgage Loan Trust

 

6.155% due 12/10/2049

      2,051         1,294  

Commercial Mortgage Trust

 

5.656% due 06/10/2046

      1,922         1,307  

Countrywide Alternative Loan Trust

 

1.482% due 12/25/2046

      3,172         2,159  

2.913% due 07/25/2046 ^

      98         96  

3.533% due 02/25/2037 ^

      336         307  

3.768% due 04/25/2035 (a)

      5,012         547  

4.716% due 07/25/2021 ^

      294         285  

5.500% due 03/25/2036 ^

      333         268  

6.000% due 02/25/2037 ^

      6,781         4,788  

6.250% due 12/25/2036 ^

      3,521         2,610  

6.500% due 06/25/2036 ^

      1,041         849  

Countrywide Home Loan Mortgage Pass-Through Trust

 

3.184% due 09/25/2047 ^

      66         62  

3.331% due 09/20/2036 ^

      607         507  

4.118% due 12/25/2036 (a)

      3,785         667  

Credit Suisse Commercial Mortgage Trust

 

5.676% due 02/15/2039

      1,000         1,007  

5.869% due 09/15/2040

      8,008         7,928  

5.870% due 09/15/2040

      1,152         1,152  
 

 

46   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Credit Suisse First Boston Mortgage Securities Corp.

 

6.000% due 01/25/2036

  $     2,178     $     1,953  

Epic Drummond Ltd.

 

0.000% due 01/25/2022

  EUR     215         254  

Grifonas Finance PLC

 

0.042% due 08/28/2039

      5,422         5,561  

HarborView Mortgage Loan Trust

 

3.353% due 08/19/2036 ^

  $     460         340  

3.732% due 08/19/2036 ^

      33         31  

IM Pastor Fondo de Titluzacion Hipotecaria

 

0.000% due 03/22/2043

  EUR     7,164         7,048  

JPMorgan Alternative Loan Trust

 

3.079% due 03/25/2037 ^

  $     8,059         7,202  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.411% due 05/15/2047

      5,100         3,637  

5.623% due 05/12/2045

      2,279         1,962  

JPMorgan Mortgage Trust

 

3.020% due 07/27/2037

      5,793         1,497  

5.388% due 01/25/2037 ^(a)

      21,850         5,697  

LB-UBS Commercial Mortgage Trust

 

5.407% due 11/15/2038

      1,404         1,077  

5.562% due 02/15/2040

      2,044         1,472  

Lehman XS Trust

 

1.452% due 06/25/2047

      4,227         3,691  

Morgan Stanley Capital Trust

 

5.991% due 06/11/2049

      2,539         2,548  

Nomura Asset Acceptance Corp. Alternative Loan Trust

 

3.634% due 04/25/2036 ^

      6,827         5,031  

Nomura Resecuritization Trust

 

3.491% due 07/26/2035

      4,471         2,823  

RBSSP Resecuritization Trust

 

8.426% due 06/26/2037

      4,721         3,651  

Residential Asset Securitization Trust

 

6.250% due 10/25/2036 ^

      656         596  

6.250% due 09/25/2037 ^

      5,347         3,916  

6.500% due 08/25/2036 ^

      901         561  

Structured Adjustable Rate Mortgage Loan Trust

 

3.391% due 01/25/2036 ^

      217         166  

3.518% due 04/25/2047

      791         621  

Structured Asset Mortgage Investments Trust

 

1.422% due 07/25/2046 ^

      13,943         11,437  

WaMu Mortgage Pass-Through Certificates Trust

 

2.845% due 05/25/2037 ^

      179         147  

Washington Mutual Mortgage Pass-Through Certificates Trust

 

5.448% due 04/25/2037 (a)

      13,773         3,804  

6.500% due 03/25/2036 ^

      8,319         6,781  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $151,294)

 

        164,191  
       

 

 

 
ASSET-BACKED SECURITIES 16.0%  

ACE Securities Corp. Home Equity Loan Trust

 

1.372% due 07/25/2036

      4,710         3,657  

Airspeed Ltd.

 

1.496% due 06/15/2032

      4,635         3,880  

Apidos CLO

 

0.000% due 07/22/2026

      3,000         1,839  

Argent Securities Trust

 

1.422% due 03/25/2036

      6,223         3,336  

Belle Haven ABS CDO Ltd.

 

1.551% due 07/05/2046

      185,947         3,217  

CIFC Funding Ltd.

 

0.000% due 05/24/2026 (g)

      4,000         2,675  

0.000% due 07/22/2026 (g)

      3,000         1,966  

Citigroup Mortgage Loan Trust, Inc.

 

1.332% due 12/25/2036

      11,140         7,257  

1.392% due 12/25/2036

      6,535         4,379  

Cork Street CLO Designated Activity Co.

 

0.000% due 11/27/2028

  EUR     2,667         2,779  

3.600% due 11/27/2028

      1,197         1,419  

4.500% due 11/27/2028

      1,047         1,243  

6.200% due 11/27/2028

      1,296         1,543  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Countrywide Asset-Backed Certificates Trust

 

1.502% due 09/25/2046

  $     15,000     $     7,823  

Duke Funding Ltd.

 

1.819% due 08/07/2033

      18,783         7,474  

Glacier Funding CDO Ltd.

 

1.442% due 08/04/2035

      7,612         2,050  

GLG Euro CLO DAC

 

0.000% due 04/15/2028

  EUR     4,150         4,306  

Grosvenor Place CLO BV

 

0.000% due 04/30/2029

      1,000         934  

Halcyon Loan Advisors European Funding BV

 

0.000% due 01/15/2027

      1,100         1,164  

Long Beach Mortgage Loan Trust

 

1.422% due 02/25/2036

  $     1,646         1,128  

Merrill Lynch Mortgage Investors Trust

 

1.392% due 04/25/2037

      982         555  

5.953% due 03/25/2037

      4,046         1,318  

Morgan Stanley Mortgage Loan Trust

 

2.698% due 11/25/2036 ^

      896         442  

5.965% due 09/25/2046 ^

      8,174         4,626  

NovaStar Mortgage Funding Trust

 

1.392% due 10/25/2036

      35,741         21,272  

People’s Financial Realty Mortgage Securities Trust

 

1.392% due 09/25/2036

      22,599         6,978  

Putnam Structured Product CDO Ltd.

 

9.092% due 02/25/2037

      121         122  

Renaissance Home Equity Loan Trust

 

5.812% due 11/25/2036

      9,497         5,694  

6.998% due 09/25/2037 ^

      8,126         4,765  

7.238% due 09/25/2037 ^

      6,852         4,017  

Sherwood Funding CDO Ltd.

 

1.583% due 11/06/2039

      36,337         11,788  

South Coast Funding Ltd.

 

1.785% due 08/10/2038

      27,090         5,310  

Taberna Preferred Funding Ltd.

 

1.551% due 08/05/2036

      677         511  

1.551% due 08/05/2036 ^

      13,259         10,010  

Washington Mutual Asset-Backed Certificates Trust

 

1.382% due 05/25/2036

      274         205  
       

 

 

 

Total Asset-Backed Securities (Cost $144,274)

      141,682  
       

 

 

 
SOVEREIGN ISSUES 2.4%  

Argentine Government International Bond

 

7.820% due 12/31/2033

  EUR     10,957         13,637  

Autonomous Community of Catalonia

 

4.900% due 09/15/2021

      2,350         2,961  

Republic of Greece Government International Bond

 

3.000% due 02/24/2023

      25         28  

3.000% due 02/24/2024

      25         27  

3.000% due 02/24/2025

      25         27  

3.000% due 02/24/2026

      25         27  

3.000% due 02/24/2027

      25         26  

3.000% due 02/24/2028

      25         25  

3.000% due 02/24/2029

      25         24  

3.000% due 02/24/2030

      25         24  

3.000% due 02/24/2031

      25         23  

3.000% due 02/24/2032

      25         23  

3.000% due 02/24/2033

      25         23  

3.000% due 02/24/2034

      25         22  

3.000% due 02/24/2035

      25         22  

3.000% due 02/24/2036

      25         22  

3.000% due 02/24/2037

      25         21  

3.000% due 02/24/2038

      25         21  

3.000% due 02/24/2039

      25         21  

3.000% due 02/24/2040

      25         21  

3.000% due 02/24/2041

      25         21  

3.000% due 02/24/2042

      25         21  

3.800% due 08/08/2017

  JPY     4,000         36  

4.750% due 04/17/2019

  EUR     3,000         3,634  

Sri Lanka Government International Bond

 

6.200% due 05/11/2027

  $     200         207  
       

 

 

 

Total Sovereign Issues (Cost $18,531)

 

      20,944  
       

 

 

 
        SHARES         MARKET
VALUE
(000S)
 
COMMON STOCKS 0.6%  
ENERGY 0.1%  

Forbes Energy Services Ltd. (e)(j)

    66,131     $     708  

Warren Resources, Inc.

      23,043         31  
       

 

 

 
          739  
       

 

 

 
FINANCIALS 0.5%  

TIG FinCo PLC (j)

      3,457,270         4,561  
       

 

 

 

Total Common Stocks (Cost $8,270)

 

      5,300  
       

 

 

 
WARRANTS 0.1%  
INDUSTRIALS 0.1%  

Sequa Corp. -
Exp. 04/28/2024

      1,795,000         842  
       

 

 

 
UTILITIES 0.0%  

Dynegy, Inc. -
Exp. 02/02/2024

      120,830         23  
       

 

 

 

Total Warrants (Cost $318)

          865  
       

 

 

 
PREFERRED SECURITIES 3.9%  
BANKING & FINANCE 0.2%  

Farm Credit Bank of Texas

 

10.000% due 12/15/2020 (h)

      1,840         2,262  
       

 

 

 
INDUSTRIALS 3.7%  

Sequa Corp.

 

9.000%

      33,284         32,467  
       

 

 

 

Total Preferred Securities (Cost $35,451)

 

      34,729  
       

 

 

 
SHORT-TERM INSTRUMENTS 8.0%  
REPURCHASE AGREEMENTS (k) 7.2%  
          63,379  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
U.S. TREASURY BILLS 0.8%  

0.969% due 08/31/2017 - 01/04/2018 (f)(g)(n)(p)

  $     6,766         6,754  
       

 

 

 
Total Short-Term Instruments (Cost $70,133)         70,133  
       

 

 

 
       
Total Investments in Securities (Cost $1,065,802)         1,112,387  
       
Total Investments 125.7% (Cost $1,065,802)     $       1,112,387  

Financial Derivative
Instruments (m)(o) (0.3)%

(Cost or Premiums, net $(1,252))

 

 

      (2,376

Preferred Shares (11.5)%

          (101,975
Other Assets and Liabilities, net (13.9)%         (123,124
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%     $     884,912  
       

 

 

 
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   47


Schedule of Investments PIMCO High Income Fund (Cont.)

 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) Principal only security.
(c) When-issued security.
(d) Payment in-kind security.
(e) Security did not produce income within the last twelve months.
(f) Coupon represents a weighted average yield to maturity.
(g) Zero coupon security.
(h) Perpetual maturity; date shown, if applicable, represents next contractual call date.
(i) Security is subject to a forbearance agreement entered into by the Fund which forbears the Fund from taking action to, among other things, accelerate and collect payments on the subject note with respect to specified events of default.

 

(j)  RESTRICTED SECURITIES:

 

Issuer Description                Acquisition
Date
    Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

Forbes Energy Services Ltd.

         10/09/2014 - 10/17/2016     $ 2,028     $ 708       0.08

Odebrecht Offshore Drilling Finance Ltd.

6.625% due 10/01/2023

         02/24/2015 - 06/25/2015       3,909       1,754       0.20  

Odebrecht Offshore Drilling Finance Ltd.

6.750% due 10/01/2023

         02/23/2015 - 06/25/2015       8,705       3,813       0.43  

TIG FinCo PLC

         04/02/2015 - 07/20/2017       4,631       4,561       0.51  
        

 

 

   

 

 

   

 

 

 
  $     19,273     $     10,836       1.22
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(k)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
    Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received(1)
 
DEU     1.160     07/31/2017       08/01/2017     $ 7,200     U.S. Treasury Bonds 3.750% due 11/15/2043   $ (7,380   $ 7,200     $ 7,200  
FOB     1.160       07/31/2017       08/01/2017           50,600     U.S. Treasury Notes 0.750% due 02/28/2018         (51,701         50,600           50,602  
SSB     0.200       07/31/2017       08/01/2017       5,579     U.S. Treasury Notes 3.500% due 05/15/2020(2)     (5,691     5,579       5,579  
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

 

    $     (64,772   $     63,379     $     63,381  
           

 

 

   

 

 

   

 

 

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(3)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(3)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    0.500     06/16/2017       TBD (4)    $ (1,486   $ (1,487

BPS

    1.890       06/02/2017       08/31/2017       (231     (232
    1.970       05/25/2017       08/25/2017           (11,227         (11,269

DEU

    2.210       06/16/2017       09/15/2017       (3,419     (3,429

MSC

    1.880       05/18/2017       08/18/2017       (11,003     (11,046

RBC

    2.050       02/06/2017       08/07/2017       (12,699     (12,826
    2.120       06/07/2017       12/07/2017       (4,513     (4,528
    2.120       06/12/2017       12/12/2017       (2,513     (2,520
    2.170       06/12/2017       12/12/2017       (3,525     (3,536
    2.170       07/10/2017       01/10/2018       (4,567     (4,573

RDR

    1.590       05/17/2017       08/17/2017       (3,032     (3,042
    1.640       06/14/2017       09/14/2017       (14,405     (14,436

RTA

    2.044       04/21/2017       10/23/2017       (3,887     (3,910
    2.044       07/19/2017       10/23/2017       (2,731     (2,733
    2.044       07/24/2017       10/23/2017       (2,884     (2,885

SOG

    1.750       06/07/2017       08/16/2017       (13,429     (13,465
    1.780       06/07/2017       09/07/2017       (4,851     (4,864
    2.154       07/12/2017       07/12/2018       (9,789     (9,789

UBS

    1.580       05/15/2017       08/15/2017       (1,114     (1,118
    1.610       06/02/2017       09/05/2017       (7,607     (7,627

 

48   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

Counterparty   Borrowing
Rate(3)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(3)
    Payable for
Reverse
Repurchase
Agreements
 
    1.640 %       06/02/2017       08/23/2017     $ (2,115   $ (2,121
    1.660       06/02/2017       09/05/2017           (10,136     (10,164
    1.840       05/30/2017       08/23/2017       (2,908     (2,917
    1.990       05/26/2017       08/28/2017       (5,850     (5,872
    2.010       06/02/2017       09/05/2017       (4,111     (4,125
    2.140       06/14/2017       09/14/2017       (5,174     (5,189
         

 

 

 

Total Reverse Repurchase Agreements

 

        $     (149,703
         

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral pledged/(received) as of July 31, 2017:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
   

Payable for
Reverse

Repurchase
Agreements

    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(5)  

Global/Master Repurchase Agreement

            

BCY

  $ 0     $ (1,487   $ 0      $ (1,487   $ 1,733     $ 246  

BPS

    0       (11,501     0        (11,501     12,807       1,306  

DEU

    7,200       (3,429     0        3,771       (3,192     579  

FOB

    50,602       0       0        50,602           (51,701         (1,099

MSC

    0       (11,046     0        (11,046     12,103       1,057  

RBC

    0       (27,983     0        (27,983     31,742       3,759  

RDR

    0       (17,478     0        (17,478     17,895       417  

RTA

    0       (9,528     0        (9,528     10,800       1,272  

SOG

    0       (28,118     0            (28,118     31,554       3,436  

SSB

    5,579       0       0        5,579       (5,691     (112

UBS

    0       (39,133     0        (39,133     44,926       5,793  
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     63,381     $     (149,703   $     0         
 

 

 

   

 

 

   

 

 

        

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

         

Corporate Bonds & Notes

  $ 0     $ (63,676   $ (59,594   $ (26,433   $ (149,703
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0     $     (63,676   $     (59,594   $     (26,433   $ (149,703
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements

 

  $     (149,703
         

 

 

 

 

(l) Securities with an aggregate market value of $174,586 and cash of $374 have been pledged as collateral under the terms of the above master agreements as of July 31, 2017.

 

(1)

Includes accrued interest.

(2)

Collateral is held in custody by the counterparty.

(3)

The average amount of borrowings outstanding during the period ended July 31, 2017 was $(177,999) at a weighted average interest rate of 1.623%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

(4)

Open maturity reverse repurchase agreement.

(5)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(m)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION(1)

 

Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2017(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value
    Variation Margin  
                Asset     Liability  

Banco Espirito Santo S.A.

    5.000     09/20/2020       17.441     EUR       5,000     $ (977   $ (359   $ (1,336   $ 77     $ 0  

Banco Espirito Santo S.A.

    5.000       12/20/2021       14.980         300       (71     (12     (83     5       0  

Frontier Communications Corp.

    5.000       06/20/2020       6.967       $       9,600       (318     (110     (428     13       0  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            $     (1,366   $     (481   $     (1,847   $     95     $     0  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   49


Schedule of Investments PIMCO High Income Fund (Cont.)

 

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value
    Variation Margin  
                Asset      Liability  

Pay

 

3-Month USD-LIBOR

    1.550     01/20/2022       $           360,000     $     (6,488   $     1,604     $     (4,884   $     0      $     (86

Receive

 

3-Month USD-LIBOR

    1.500       06/21/2027         37,400       2,804       (332     2,472       0        (18

Pay

 

3-Month USD-LIBOR

    3.500       06/19/2044         617,800       110,476       7,943       118,419       411        0  

Receive

 

3-Month USD-LIBOR

    2.250       12/21/2046         26,500       1,966       (285     1,681       0        (32

Receive

 

3-Month USD-LIBOR

    1.750       06/21/2047         840,100       159,154       (6,830     152,324       0        (776

Receive(4)

 

6-Month EUR-EURIBOR

    1.000       09/20/2027       EUR       18,900       20       (68     (48     42        0  

Receive(4)

 

6-Month GBP-LIBOR

    1.500       09/20/2027       GBP       55,200       (828     (503     (1,331     156        0  
           

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
            $ 267,104     $ 1,529     $ 268,633     $ 609      $ (912
           

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Swap Agreements

 

  $     265,738     $     1,048     $     266,786     $     704      $     (912
           

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2017:

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
                Market Value     Variation Margin
Liability
       
     Purchased
Options
    Futures     Swap
Agreements
    Total           Written
Options
    Futures     Swap
Agreements
    Total  

Total Exchange-Traded or Centrally Cleared

  $     0     $     0     $     704     $     704       $     0     $     0     $     (912)     $     (912)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(n) Securities with an aggregate market value of $1,808 and cash of $24,199 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2017. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4)

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(o)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

BOA

     08/2017     EUR     1,524     $     1,762     $ 0     $ (42
     08/2017     GBP     2,639         3,419       0       (63

BPS

     08/2017     EUR     63,464         72,011       0       (3,118

GLM

     08/2017     GBP     718         928       0       (19
     08/2017     $     94,691     GBP     72,063       389       0  
     09/2017     GBP     72,064     $     94,796       0       (390

JPM

     08/2017         1,270         1,656       0       (20
     08/2017     $     12,257     GBP     9,396       140       0  

MSB

     08/2017         78,179     EUR     66,688       767       0  
     09/2017     EUR     66,688     $     78,317       0       (768

RBC

     08/2017     GBP     76,833         99,855       0       (1,518

UAG

     08/2017     EUR     1,700         1,943       0       (70
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

  $     1,296     $     (6,008
            

 

 

   

 

 

 

 

50   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION(1)

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2017(2)
   

Notional
Amount(3)

    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000     12/20/2024       3.536     $    1,700     $ (332   $ 68     $ 0     $ (264
GST  

Petrobras Global Finance BV

    1.000       12/20/2024       3.536       2,200       (437     96       0       (341
HUS  

Petrobras Global Finance BV

    1.000       12/20/2024       3.536       2,800       (581     147       0       (434
           

 

 

   

 

 

   

 

 

   

 

 

 
          $     (1,350   $     311     $     0     $     (1,039
           

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

Counterparty   Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
  Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
               
                Asset     Liability  

GLM

 

Pay

 

3-Month USD-LIBOR

    2.270     10/12/2022       $     1,000,000   $ 173     $ 1,508     $ 1,681     $ 0  

MYC

 

Pay

 

3-Month USD-LIBOR

    2.130       09/01/2022       1,000,000     (75     1,977       1,902       0  
             

 

 

   

 

 

   

 

 

   

 

 

 
  $ 98     $ 3,485     $ 3,583     $ 0  
             

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

  $     (1,252   $     3,796     $     3,583     $     (1,039
             

 

 

   

 

 

   

 

 

   

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral pledged/(received) as of July 31, 2017:

 

    Financial Derivative Assets           Financial Derivative Liabilities                    
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
Pledged/
(Received)
    Net
Exposure(4)
 

BOA

  $ 0      $ 0      $ 0      $ 0       $ (105   $ 0      $ 0     $ (105   $ (105   $ 0     $ (105

BPS

    0        0        0        0         (3,118     0        (264     (3,382      (3,382     2,832       (550

GLM

    389        0        1,681        2,070         (409     0        0       (409     1,661        (1,540     121  

GST

    0        0        0        0         0       0        (341     (341     (341     470       129  

HUS

    0        0        0        0         0       0        (434     (434     (434     458       24  

JPM

    140        0        0        140         (20     0        0       (20     120       0       120  

MSB

    767        0        0        767         (768     0        0       (768     (1     0       (1

MYC

    0        0        1,902        1,902         0       0        0       0       1,902       (3,700      (1,798

RBC

    0        0        0        0         (1,518     0        0       (1,518     (1,518     1,188       (330

UAG

    0        0        0        0         (70     0        0       (70     (70     0       (70
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $  1,296      $  0      $  3,583      $  4,879       $  (6,008   $  0      $  (1,039   $  (7,047      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(p) Securities with an aggregate market value of $4,946 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2017.

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   51


Schedule of Investments PIMCO High Income Fund (Cont.)

 

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 95     $ 0     $ 0     $ 609     $ 704  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 1,296     $ 0     $ 1,296  

Swap Agreements

    0       0       0       0       3,583       3,583  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 0     $ 0     $ 1,296     $ 3,583     $ 4,879  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 95     $ 0     $ 1,296     $     4,192     $     5,583  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 0     $ 0     $ 0     $ 912     $ 912  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 6,008     $ 0     $ 6,008  

Swap Agreements

    0       1,039       0       0       0       1,039  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 1,039     $ 0     $ 6,008     $ 0     $ 7,047  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     1,039     $     0     $     6,008     $ 912     $ 7,959  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain on Financial Derivative Instruments

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 2,446     $ 0     $ 0     $ 32,870     $ 35,316  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 1,683     $ 0     $ 1,683  

Swap Agreements

    0       559       0       0       13,674       14,233  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 559     $ 0     $ 1,683     $ 13,674     $ 15,916  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 3,005     $ 0     $ 1,683     $ 46,544     $ 51,232  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $     (2,051   $     0     $ 0     $ (53,972   $ (56,023
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ (4,504   $ 0     $ (4,504

Swap Agreements

    0       2,700       0       0       2,010       4,710  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 2,700     $ 0     $ (4,504   $ 2,010     $ 206  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $ 649     $ 0     $     (4,504   $     (51,962   $     (55,817
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

52   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2017 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 24,033     $ 1,607     $ 25,640  

Corporate Bonds & Notes

 

Banking & Finance

    0       273,451       7,218       280,669  

Industrials

    0       215,688           10,403           226,091  

Utilities

    0       45,280       0       45,280  

Convertible Bonds & Notes

 

Industrials

    0       6,362       0       6,362  

Municipal Bonds & Notes

 

California

    0       4,342       0       4,342  

District of Columbia

    0       10,473       0       10,473  

Illinois

    0       21,407       0       21,407  

New York

    0       1,801       0       1,801  

Texas

    0       9,620       0       9,620  

Virginia

    0       1,181       0       1,181  

West Virginia

    0       12,838       0       12,838  

U.S. Government Agencies

    0       20,703       8,136       28,839  

Non-Agency Mortgage-Backed Securities

    0       164,191       0       164,191  

Asset-Backed Securities

    0           141,682       0       141,682  

Sovereign Issues

    0       20,944       0       20,944  

Common Stocks

 

Energy

        708       0       31       739  

Financials

    0       0       4,561       4,561  

Warrants

 

Industrials

    0       0       842       842  

Utilities

    23       0       0       23  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Preferred Securities

 

Banking & Finance

  $ 0     $ 2,262     $ 0     $ 2,262  

Industrials

    0       0       32,467       32,467  

Short-Term Instruments

 

Repurchase Agreements

    0       63,379       0       63,379  

U.S. Treasury Bills

    0       6,754       0       6,754  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ 731     $ 1,046,391     $ 65,265     $ 1,112,387  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

    0       704       0       704  

Over the counter

    0       4,879       0       4,879  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 5,583     $ 0     $ 5,583  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

    0       (912     0       (912

Over the counter

    0       (7,047     0       (7,047
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (7,959   $ 0     $ (7,959
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ (2,376   $ 0     $ (2,376
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     731     $     1,044,015     $     65,265     $     1,110,011  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2017.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2017:

 

Category and Subcategory   Beginning
Balance
at 07/31/2016
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation)(1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2017
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held  at
07/31/2017(1)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 1,491     $ 0     $ 7     $ 0     $ 109     $     0     $ 0     $ 1,607     $ 109  

Corporate Bonds & Notes

 

Banking & Finance

    9,195       200           (2,148     4           265       (298     0       0       7,218       (4

Industrials

        10,253       0       0       14       0       136       0       0           10,403       136  

U.S. Government Agencies

    7,716       0       (142         136       57       369       0       0       8,136       359  

Non-Agency Mortgage-Backed Securities

    1,235       0       0       0       0       77       0           (1,312     0       0  

Common Stocks

 

Energy

    0       1,610       0       0       0           (1,579     0       0       31           (1,579

Financials

    527       3,402       0       0       0       632       0       0       4,561       632  

Warrants

 

Industrials

    0       0       0       0       0       842       0       0       842       842  

Preferred Securities

                   

Industrials

    0       33,284       0       0       0       (817     0       0       32,467       (817
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     28,926     $     39,987     $     (2,290   $     161     $     322     $ (529   $     0     $     (1,312   $     65,265     $ (322
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   53


Schedule of Investments PIMCO High Income Fund (Cont.)

 

July 31, 2017

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and Subcategory   Ending
Balance
at 07/31/2017
     Valuation
Technique
     Unobservable
Inputs
     Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

        

Loan Participations and Assignments

  $ 838        Other Valuation Techniques(2)               —    
    448        Proxy Pricing        Base Price        99.500  
    320        Third Party Vendor        Broker Quote        98.000-100.563  

Corporate Bonds & Notes

          

Banking & Finance

    7,218        Proxy Pricing        Base Price        101.000-114.491  

Industrials

    10,403        Proxy Pricing        Base Price        101.000  

U.S. Government Agencies

    8,136        Proxy Pricing        Base Price        57.000  

Common Stocks

          

Energy

    31        Other Valuation Techniques (2)              —    

Financials

    4,562        Other Valuation Techniques (2)              —    

Warrants

          

Industrials

    842        Other Valuation Techniques (2)              —    

Preferred Securities

          

Industrials

    32,467        Fundamental Valuation        Company Assets        $    551,000.000  
 

 

 

          

Total

  $     65,265           
 

 

 

          

 

(1)

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2017 may be due to an investment no longer held or categorized as Level 3 at period end.

(2)

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

54   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Schedule of Investments PIMCO Income Strategy Fund

 

July 31, 2017

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 128.2%  
LOAN PARTICIPATIONS AND ASSIGNMENTS 5.2%  

Avolon Holdings Ltd.

 

3.478% due 09/20/2020

  $     20     $     20  

3.978% due 03/20/2022

      170         171  

BMC Software Finance, Inc.

 

5.234% due 09/10/2022

      3,559         3,586  

Drillships Ocean Ventures, Inc.

 

7.750% due 07/25/2021

      700         620  

Forbes Energy Services LLC

 

5.000% - 7.000% due 04/13/2021

      164         169  

HD Supply Waterworks Ltd.

 

TBD% due 08/01/2024

      20         20  

iHeartCommunications, Inc.

 

7.984% due 01/30/2019

      8,800         7,183  

Moran Foods LLC

 

7.234% due 12/05/2023

      1,095         1,073  

Parexel International Corp.

 

TBD% due 07/18/2018

      100         99  

Petroleo Global Trading BV

 

TBD% due 02/19/2020

      100         98  

Sequa Mezzanine Holdings LLC

 

6.758% - 6.814% due 11/28/2021

      110         111  

10.314% due 04/28/2022

      40         41  

Sprint Communications, Inc.

 

3.750% due 02/02/2024

      798         801  

Staples, Inc.

 

TBD% due 08/02/2018

      290         288  

Team Health Holdings, Inc.

 

3.984% due 02/06/2024

      100         100  

UPC Financing Partnership

 

3.976% due 04/15/2025

      100         101  

Westmoreland Coal Co.

 

7.796% due 12/16/2020

      992         882  
       

 

 

 

Total Loan Participations and Assignments
(Cost $15,682)

 

        15,363  
       

 

 

 
CORPORATE BONDS & NOTES 58.9%  
BANKING & FINANCE 29.2%  

Ally Financial, Inc.

 

8.000% due 11/01/2031

      2,427         3,024  

Ardonagh Midco PLC

 

8.375% due 07/15/2023

  GBP     300         399  

AssuredPartners, Inc.

 

7.000% due 08/15/2025 (c)

  $     9         9  

Banco Bilbao Vizcaya Argentaria S.A.

 

6.750% due 02/18/2020 (h)

  EUR     1,000         1,268  

Banco do Brasil S.A.

 

6.250% due 04/15/2024 (h)

  $     1,390         1,204  

9.000% due 06/18/2024 (h)

      2,019         2,099  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^

  EUR     3,800         1,394  

4.750% due 01/15/2018 ^

      1,200         440  

Banco Santander S.A.

 

6.250% due 09/11/2021 (h)

      500         639  

Barclays Bank PLC

 

14.000% due 06/15/2019 (h)

  GBP     3,700         5,945  

Barclays PLC

 

6.500% due 09/15/2019 (h)

  EUR     200         250  

Blackstone CQP Holdco LP

 

6.500% due 03/20/2021

  $     2,400         2,494  

BNP Paribas S.A.

 

7.375% due 08/19/2025 (h)(l)

      1,700         1,938  

Brighthouse Financial, Inc.

 

4.700% due 06/22/2047

      48         48  

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (h)

      100         102  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (l)

      3,000         3,362  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

CBL & Associates LP

 

5.950% due 12/15/2026 (l)

  $     1,000     $     1,004  

Co-operative Group Holdings Ltd.

 

7.500% due 07/08/2026

  GBP     3,050         4,918  

Cooperatieve Rabobank UA

 

6.625% due 06/29/2021 (h)

  EUR     400         536  

Credit Agricole S.A.

 

7.875% due 01/23/2024 (h)

  $     1,600         1,809  

Credit Suisse Group AG

 

7.500% due 12/11/2023 (h)

      3,540         4,034  

EPR Properties

 

4.750% due 12/15/2026 (l)

      1,500         1,555  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021

      1,700         1,819  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      1,728         1,976  

Howard Hughes Corp.

 

5.375% due 03/15/2025

      36         37  

HSBC Holdings PLC

 

6.000% due 09/29/2023 (h)

  EUR     1,800         2,438  

Jefferies Finance LLC

 

6.875% due 04/15/2022

  $     3,800         3,838  

7.375% due 04/01/2020

      915         945  

7.500% due 04/15/2021

      200         209  

Lloyds Bank PLC

 

12.000% due 12/16/2024 (h)

      300         408  

Lloyds Banking Group PLC

 

7.875% due 06/27/2029 (h)

  GBP     2,200         3,480  

MPT Operating Partnership LP

 

5.250% due 08/01/2026

  $     618         649  

Nationwide Building Society

 

10.250% due 06/29/2049 (h)

  GBP     6         1,165  

Navient Corp.

 

4.875% due 06/17/2019

  $     200         207  

5.500% due 01/15/2019 (l)

      4,030         4,196  

5.625% due 08/01/2033

      98         84  

Novo Banco S.A.

 

5.000% due 04/04/2019

  EUR     101         96  

5.000% due 04/23/2019

      311         296  

5.000% due 05/14/2019

      206         196  

5.000% due 05/21/2019

      115         110  

5.000% due 05/23/2019

      115         110  

OneMain Financial Holdings LLC

 

6.750% due 12/15/2019

  $     544         572  

7.250% due 12/15/2021

      16         17  

Oppenheimer Holdings, Inc.

 

6.750% due 07/01/2022

      792         801  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      15         16  

Rio Oil Finance Trust

 

9.250% due 07/06/2024

      3,660         3,763  

Royal Bank of Scotland Group PLC

 

7.500% due 08/10/2020 (h)(l)

      1,600         1,694  

8.000% due 08/10/2025 (h)(l)

      3,000         3,291  

8.625% due 08/15/2021 (h)

      800         885  

Santander UK Group Holdings PLC

 

6.750% due 06/24/2024 (h)

  GBP     1,950         2,760  

7.375% due 06/24/2022 (h)

      1,800         2,565  

Spirit Realty LP

 

4.450% due 09/15/2026

  $     700         676  

Springleaf Finance Corp.

 

6.125% due 05/15/2022

      323         340  

8.250% due 10/01/2023

      1,300         1,469  

Tesco Property Finance PLC

 

5.411% due 07/13/2044

  GBP     2,133         3,044  

6.052% due 10/13/2039

      1,240         1,865  

WP Carey, Inc.

 

4.250% due 10/01/2026 (l)

  $     1,400         1,428  
       

 

 

 
            85,916  
       

 

 

 
INDUSTRIALS 22.9%  

Altice Financing S.A.

 

7.500% due 05/15/2026

      1,500         1,667  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

AMC Networks, Inc.

 

4.750% due 08/01/2025

  $     40     $     40  

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

 

9.000% due 10/15/2019 (d)

      2,204         2,212  

Burger King Worldwide, Inc.

 

4.250% due 05/15/2024

      98         99  

Caesars Entertainment Operating Co., Inc.

 

8.500% due 02/15/2020 ^(i)

      590         767  

9.000% due 02/15/2020 ^(i)

      3,792         4,938  

10.000% due 12/15/2018 ^(i)

      2,820           2,690  

Charter Communications Operating LLC

 

5.375% due 05/01/2047

      31         32  

Cheniere Corpus Christi Holdings LLC

 

5.875% due 03/31/2025

      100         109  

Chesapeake Energy Corp.

 

4.554% due 04/15/2019

      62         62  

CommScope Technologies LLC

 

5.000% due 03/15/2027

      2         2  

Community Health Systems, Inc.

 

6.250% due 03/31/2023

      77         79  

Continental Airlines Pass-Through Trust

 

9.798% due 10/01/2022

      665         731  

CSN Resources S.A.

 

6.500% due 07/21/2020

      256         195  

DAE Funding LLC

 

4.000% due 08/01/2020 (c)

      30         31  

4.500% due 08/01/2022 (c)

      30         31  

5.000% due 08/01/2024 (c)

      70         72  

Diamond Resorts International, Inc.

 

10.750% due 09/01/2024

      1,200         1,305  

Dynegy, Inc.

 

8.034% due 02/02/2024

      879         853  

EI Group PLC

 

6.875% due 02/15/2021

  GBP     2,360         3,478  

Exela Intermediate LLC

 

10.000% due 07/15/2023

  $     57         56  

Ferroglobe PLC

 

9.375% due 03/01/2022

      1,000         1,078  

Ford Motor Co.

 

7.700% due 05/15/2097 (l)

      9,030         11,254  

Fresh Market, Inc.

 

9.750% due 05/01/2023 (l)

      3,313         2,725  

HCA, Inc.

 

4.500% due 02/15/2027

      400         410  

5.500% due 06/15/2047

      48         50  

7.500% due 11/15/2095

      1,050         1,085  

iHeartCommunications, Inc.

 

9.000% due 09/15/2022

      1,000         740  

Intelsat Jackson Holdings S.A.

 

7.250% due 10/15/2020

      2,285         2,205  

9.750% due 07/15/2025

      96         100  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021

      5,279         3,405  

8.125% due 06/01/2023

      524         327  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      3,430         3,404  

Kinder Morgan Energy Partners LP

 

6.375% due 03/01/2041 (l)

      200         229  

Kinder Morgan, Inc.

 

7.750% due 01/15/2032 (l)

      800         1,027  

7.800% due 08/01/2031 (l)

      1,600         2,048  

Mallinckrodt International Finance S.A.

 

4.750% due 04/15/2023

      480         427  

5.500% due 04/15/2025

      380         353  

New Albertson’s, Inc.

 

6.570% due 02/23/2028

      2,800         2,149  

Park Aerospace Holdings Ltd.

 

5.250% due 08/15/2022

      6         6  

5.500% due 02/15/2024

      18         18  

Petroleos Mexicanos

 

6.500% due 03/13/2027

      254         280  

6.750% due 09/21/2047

      130         137  

PetSmart, Inc.

 

5.875% due 06/01/2025

      53         51  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   55


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

  $     314     $     351  

QVC, Inc.

 

4.375% due 03/15/2023

      202         208  

5.950% due 03/15/2043

      2,305         2,258  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     700         1,148  

Sabine Pass Liquefaction LLC

 

5.875% due 06/30/2026 (l)

  $     1,200         1,353  

Safeway, Inc.

 

7.250% due 02/01/2031

      470         435  

Scientific Games International, Inc.

 

10.000% due 12/01/2022

      373         417  

Sirius XM Radio, Inc.

 

3.875% due 08/01/2022

      26         27  

Spirit Issuer PLC

 

3.000% due 12/28/2031

  GBP     500         644  

6.582% due 12/28/2027

      700         997  

Symantec Corp.

 

5.000% due 04/15/2025

  $     22         23  

Unique Pub Finance Co. PLC

 

5.659% due 06/30/2027

  GBP     1,862         2,774  

6.542% due 03/30/2021

      504         727  

UPCB Finance Ltd.

 

3.625% due 06/15/2029

  EUR     100         118  

Valeant Pharmaceuticals International, Inc.

 

6.500% due 03/15/2022

  $     42         44  

7.000% due 03/15/2024

      81         87  

Virgin Media Secured Finance PLC

 

5.000% due 04/15/2027

  GBP     200         276  

Westmoreland Coal Co.

 

8.750% due 01/01/2022

  $     3,026         2,644  

Wynn Las Vegas LLC

 

5.250% due 05/15/2027

      29         30  
       

 

 

 
          67,518  
       

 

 

 
UTILITIES 6.8%  

AT&T, Inc.

 

2.215% due 02/14/2023 (c)

      50         50  

2.850% due 02/14/2023 (c)

      100         100  

3.400% due 08/14/2024 (c)

      190         190  

3.900% due 08/14/2027 (c)

      170         170  

4.900% due 08/14/2037 (c)

      176         176  

5.150% due 02/14/2050 (c)

      264         264  

5.300% due 08/14/2058 (c)

      80         80  

Frontier Communications Corp.

 

8.500% due 04/15/2020

      197         201  

Gazprom Neft OAO Via GPN Capital S.A.

 

6.000% due 11/27/2023 (l)

      4,600         5,019  

Northwestern Bell Telephone

 

7.750% due 05/01/2030

      7,000         8,082  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 06/30/2022 ^

      215         134  

Odebrecht Offshore Drilling Finance Ltd.

 

6.625% due 10/01/2023 ^(j)

      1,258         450  

6.750% due 10/01/2023 ^(j)

      1,861         666  

Petrobras Global Finance BV

 

5.375% due 01/27/2021

      1,400         1,442  

6.125% due 01/17/2022

      193         203  

6.625% due 01/16/2034

  GBP     100         133  

6.750% due 01/27/2041

  $     1,200         1,157  

7.250% due 03/17/2044

      120         121  

7.375% due 01/17/2027

      327         355  

Sprint Capital Corp.

 

6.900% due 05/01/2019

      600         640  

TerraForm Power Operating LLC

 

6.375% due 02/01/2023

      300         314  
       

 

 

 
          19,947  
       

 

 

 

Total Corporate Bonds & Notes (Cost $165,619)

 

        173,381  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
CONVERTIBLE BONDS & NOTES 0.7%  
INDUSTRIALS 0.7%  

DISH Network Corp.

 

3.375% due 08/15/2026

  $     1,600     $     1,996  
       

 

 

 

Total Convertible Bonds & Notes (Cost $1,600)

 

      1,996  
       

 

 

 
MUNICIPAL BONDS & NOTES 5.5%  
CALIFORNIA 0.8%  

Riverside County, California Redevelopment Successor Agency Tax Allocation Bonds, Series 2010

 

7.500% due 10/01/2030

      600         644  

Stockton Public Financing Authority, California Revenue Bonds, (BABs), Series 2009

 

7.942% due 10/01/2038

      1,600         1,766  
       

 

 

 
          2,410  
       

 

 

 
ILLINOIS 2.3%  

Chicago, Illinois General Obligation Bonds, (BABs), Series 2010

 

7.517% due 01/01/2040

      6,000         6,407  

Chicago, Illinois General Obligation Bonds, Series 2014

 

6.314% due 01/01/2044

      30         30  

Chicago, Illinois General Obligation Bonds, Series 2017

 

7.045% due 01/01/2029

      60         65  

Illinois State General Obligation Bonds, (BABs), Series 2010

 

6.725% due 04/01/2035

      10         11  

7.350% due 07/01/2035

      10         12  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      120         121  
       

 

 

 
          6,646  
       

 

 

 
VIRGINIA 0.1%  

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

 

6.706% due 06/01/2046

      395         339  
       

 

 

 
WEST VIRGINIA 2.3%  

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

 

0.000% due 06/01/2047 (g)

      21,900         1,139  

7.467% due 06/01/2047

      5,915         5,616  
       

 

 

 
          6,755  
       

 

 

 

Total Municipal Bonds & Notes (Cost $14,978)

 

        16,150  
       

 

 

 
U.S. GOVERNMENT AGENCIES 3.2%  

Fannie Mae

 

3.500% due 12/25/2032 (a)

      714         100  

4.000% due 11/25/2042 (a)

      2,576         426  

4.232% due 10/25/2029

      250         262  

4.782% due 07/25/2029

      420         452  

5.482% due 01/25/2029

      200         224  

6.082% due 10/25/2029

      160         176  

6.982% due 07/25/2029

      570         667  

11.318% due 12/25/2040

      132         186  

Freddie Mac

 

0.000% due 04/25/2045 - 08/25/2046 (b)(g)

      2,799         2,069  

0.100% due 08/25/2046 (a)

      19,649         86  

0.200% due 04/25/2045 (a)

      2,802         7  

6.174% due 11/25/2055

      4,125         2,357  

7.546% due 11/15/2040

      229         227  

8.782% due 12/25/2027

      1,498         1,760  

11.982% due 03/25/2025

      294         399  
       

 

 

 

Total U.S. Government Agencies (Cost $8,884)

 

      9,398  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
NON-AGENCY MORTGAGE-BACKED SECURITIES 15.2%  

Banc of America Alternative Loan Trust

 

6.000% due 01/25/2036 ^

  $     54     $     51  

Banc of America Funding Trust

 

6.000% due 08/25/2036 ^

      1,617         1,590  

BCAP LLC Trust

 

3.285% due 03/27/2036

      1,036         595  

5.045% due 03/26/2037

      500         302  

12.536% due 06/26/2036

      237         111  

Bear Stearns ALT-A Trust

 

1.552% due 06/25/2046 ^

      2,419         2,156  

3.226% due 09/25/2047 ^

      3,426         2,700  

3.268% due 11/25/2036 ^

      265         218  

3.625% due 09/25/2035 ^

      350         286  

Bear Stearns Commercial Mortgage Securities Trust

 

5.713% due 04/12/2038

      100         79  

Bear Stearns Mortgage Funding Trust

 

7.500% due 08/25/2036

      633         621  

Chase Mortgage Finance Trust

 

3.224% due 12/25/2035 ^

      6         6  

6.000% due 02/25/2037 ^

      551         453  

6.000% due 07/25/2037 ^

      378         347  

6.250% due 10/25/2036 ^

      1,092         925  

Citicorp Mortgage Securities Trust

 

5.500% due 04/25/2037

      60         60  

Citigroup/Deutsche Bank Commercial Mortgage Trust

 

5.398% due 12/11/2049

      30         17  

5.688% due 10/15/2048

      4,035         2,165  

Commercial Mortgage Loan Trust

 

6.155% due 12/10/2049

      940         593  

Countrywide Alternative Loan Resecuritization Trust

 

6.000% due 05/25/2036 ^

      1,527         1,288  

6.000% due 08/25/2037 ^

      656         521  

Countrywide Alternative Loan Trust

 

1.582% due 05/25/2037 ^

      231         127  

3.404% due 04/25/2036 ^

      693         614  

5.500% due 03/25/2035

      167         131  

5.500% due 12/25/2035 ^

      1,956           1,720  

5.500% due 03/25/2036 ^

      92         74  

5.750% due 01/25/2035

      222         224  

6.000% due 02/25/2035

      215         219  

6.000% due 08/25/2036 ^

      278         246  

6.000% due 04/25/2037 ^

      720         560  

6.250% due 11/25/2036 ^

      464         414  

6.250% due 12/25/2036 ^

      1,020         756  

6.500% due 08/25/2036 ^

      298         203  

Countrywide Home Loan Mortgage Pass-Through Trust

 

3.355% due 02/20/2035

      27         28  

5.500% due 10/25/2035 ^

      421         379  

6.250% due 09/25/2036 ^

      356         300  

Credit Suisse Commercial Mortgage Trust

 

5.870% due 09/15/2040

      360         360  

Deutsche Mortgage Securities, Inc. Mortgage Loan Trust

 

3.166% due 06/25/2034

      2,030         1,760  

Epic Drummond Ltd.

 

0.000% due 01/25/2022

  EUR     66         78  

GS Mortgage Securities Trust

 

5.622% due 11/10/2039

  $     438         403  

GSR Mortgage Loan Trust

 

5.500% due 05/25/2036 ^

      65         62  

6.000% due 02/25/2036 ^

      2,653         2,145  

HarborView Mortgage Loan Trust

 

1.948% due 01/19/2035

      165         156  

3.569% due 07/19/2035

      35         31  

IndyMac Mortgage Loan Trust

 

6.500% due 07/25/2037 ^

      1,726         1,151  

JPMorgan Alternative Loan Trust

 

3.079% due 03/25/2037 ^

      1,026         917  

3.351% due 03/25/2036 ^

      1,163         936  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.623% due 05/12/2045

      733         631  

JPMorgan Mortgage Trust

 

3.304% due 01/25/2037 ^

      323         318  

3.378% due 02/25/2036 ^

      282         253  
 

 

56   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

LB-UBS Commercial Mortgage Trust

 

5.407% due 11/15/2038

  $     437     $     335  

5.562% due 02/15/2040

      594         427  

Lehman XS Trust

 

1.452% due 06/25/2047

      1,309         1,143  

Merrill Lynch Mortgage Investors Trust

 

3.214% due 03/25/2036 ^

      1,108         812  

Morgan Stanley Capital Trust

 

5.991% due 06/11/2049

      870         873  

Morgan Stanley Mortgage Loan Trust

 

5.962% due 06/25/2036

      2,795         1,419  

Residential Asset Securitization Trust

 

5.750% due 02/25/2036 ^

      612         479  

6.000% due 07/25/2037 ^

      792         601  

6.250% due 09/25/2037 ^

      1,371         1,004  

Residential Funding Mortgage Securities, Inc. Trust

 

4.599% due 08/25/2036 ^

      945         840  

6.000% due 09/25/2036 ^

      141         133  

6.000% due 06/25/2037 ^

      1,731         1,583  

Structured Adjustable Rate Mortgage Loan Trust

 

3.243% due 11/25/2036 ^

      1,039         943  

3.291% due 07/25/2036 ^

      364         289  

3.342% due 03/25/2037 ^

      349         282  

3.391% due 01/25/2036 ^

      931         713  

Suntrust Adjustable Rate Mortgage Loan Trust

 

3.531% due 02/25/2037 ^

      187         168  

3.604% due 04/25/2037 ^

      1,028         879  

WaMu Mortgage Pass-Through Certificates Trust

 

2.145% due 12/25/2046

      333         327  

3.030% due 10/25/2036 ^

      515         458  

3.160% due 02/25/2037 ^

      359         342  

Wells Fargo Mortgage-Backed Securities Trust

 

3.166% due 07/25/2036 ^

      180         181  

5.750% due 03/25/2037 ^

      169         166  

6.000% due 06/25/2037 ^

      91         91  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $40,955)

 

        44,768  
       

 

 

 
ASSET-BACKED SECURITIES 25.2%  

Airspeed Ltd.

 

1.496% due 06/15/2032

      1,528         1,280  

Argent Securities Trust

 

1.422% due 03/25/2036

      7,894         4,231  

Asset-Backed Funding Certificates Trust

 

1.382% due 10/25/2036

      6,656         5,849  

Bear Stearns Asset-Backed Securities Trust

 

6.500% due 10/25/2036 ^

      233         179  

Belle Haven ABS CDO Ltd.

 

1.551% due 07/05/2046

      85,896         1,486  

BlueMountain CLO Ltd.

 

6.754% due 04/13/2027

      1,000         994  

CIFC Funding Ltd.

 

0.000% due 05/24/2026 (g)

      1,200         803  

0.000% due 07/22/2026 (g)

      1,000         655  

Citigroup Mortgage Loan Trust, Inc.

 

1.382% due 12/25/2036

      3,867         2,041  

1.392% due 12/25/2036

      2,050         1,374  

Countrywide Asset-Backed Certificates

 

1.372% due 06/25/2047 ^

      844         658  

1.432% due 06/25/2047

      5,394         4,684  

1.492% due 09/25/2046 ^

      3,189         2,718  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Grosvenor Place CLO BV

 

0.000% due 04/30/2029

  EUR     250     $     234  

GSAMP Trust

 

1.492% due 02/25/2046

  $     4,304         3,644  

2.207% due 03/25/2035 ^

      7,100         5,842  

Highbridge Loan Management Ltd.

 

6.621% due 05/05/2027

      1,000         979  

JPMorgan Mortgage Acquisition Corp.

 

1.522% due 01/25/2036

      373         362  

JPMorgan Mortgage Acquisition Trust

 

1.552% due 04/25/2036

      6,000         5,343  

Lehman XS Trust

 

6.290% due 06/24/2046

      2,210         2,057  

Merrill Lynch Mortgage Investors Trust

 

1.392% due 04/25/2037

      295         166  

Morgan Stanley Mortgage Loan Trust

 

1.352% due 04/25/2037

      3,783         1,837  

6.250% due 07/25/2047 ^

      389         279  

Residential Asset Mortgage Products Trust

 

1.512% due 09/25/2036

      341         300  

Residential Asset Securities Corp. Trust

 

1.702% due 09/25/2035

      13,627         12,596  

Securitized Asset-Backed Receivables LLC Trust

 

1.372% due 05/25/2036

      5,765         3,395  

SLM Student Loan Trust

 

0.000% due 10/28/2029 (g)

      1         1,355  

0.000% due 01/25/2042 (g)

      2         1,752  

SoFi Professional Loan Program LLC

 

0.000% due 05/25/2040 (g)

      2,100         1,096  

0.000% due 09/25/2040 (g)

      846         479  

South Coast Funding Ltd.

 

1.785% due 08/10/2038

      5,915         1,159  

Symphony CLO Ltd.

 

5.904% due 07/14/2026

      1,000         963  

Taberna Preferred Funding Ltd.

 

1.551% due 08/05/2036

      226         170  

1.551% due 08/05/2036 ^

      4,232         3,195  
       

 

 

 

Total Asset-Backed Securities (Cost $69,619)

 

        74,155  
       

 

 

 
SOVEREIGN ISSUES 3.5%  

Argentine Government International Bond

 

2.260% due 12/31/2038

  EUR     304         223  

5.000% due 01/15/2027

      100         110  

7.820% due 12/31/2033

      3,915         4,873  

Autonomous Community of Catalonia

 

4.750% due 06/04/2018

      1,700         2,067  

4.900% due 09/15/2021

      700         882  

Republic of Greece Government International Bond

 

3.800% due 08/08/2017

  JPY     201,000         1,827  

4.750% due 04/17/2019

  EUR     300         363  
       

 

 

 

Total Sovereign Issues (Cost $9,562)

 

      10,345  
       

 

 

 
        SHARES            
COMMON STOCKS 0.2%  
ENERGY 0.0%  

Forbes Energy Services Ltd. (e)(j)

    13,350         143  
       

 

 

 
        SHARES         MARKET
VALUE
(000S)
 
FINANCIALS 0.2%  

TIG FinCo PLC (j)

      383,024     $     505  
       

 

 

 

Total Common Stocks (Cost $1,045)

 

      648  
       

 

 

 
WARRANTS 0.1%  
INDUSTRIALS 0.1%  

Sequa Corp. - Exp. 04/28/2024

      394,000         185  
       

 

 

 
UTILITIES 0.0%  

Dynegy, Inc. - Exp. 02/02/2024

      29,456         5  
       

 

 

 

Total Warrants (Cost $77)

          190  
       

 

 

 
PREFERRED SECURITIES 3.2%  
BANKING & FINANCE 0.8%  

Farm Credit Bank of Texas

 

10.000% due 12/15/2020 (h)

      2,015         2,477  
       

 

 

 
INDUSTRIALS 2.4%  

Sequa Corp.

 

9.000%

      7,299         7,120  
       

 

 

 

Total Preferred Securities (Cost $9,672)

 

      9,597  
       

 

 

 
SHORT-TERM INSTRUMENTS 7.3%  
REPURCHASE AGREEMENTS (k) 6.4%  
      18,865  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
U.S. TREASURY BILLS 0.9%  

0.951% due 08/31/2017 - 01/04/2018 (f)(g)(n)(p)

  $     2,647         2,644  
       

 

 

 
Total Short-Term Instruments (Cost $21,509)         21,509  
       

 

 

 
       
Total Investments in Securities (Cost $359,202)         377,500  
       
Total Investments 128.2%
(Cost $359,202)
    $     377,500  

Financial Derivative
Instruments (m)(o) (0.7)%

(Cost or Premiums, net $(801))

 

 

      (2,007
   
Preferred Shares (17.4)%         (51,275
       
Other Assets and Liabilities, net (10.1)%         (29,693
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%     $       294,525  
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) Principal only security.
(c) When-issued security.
(d) Payment in-kind security.
(e) Security did not produce income within the last twelve months.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   57


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

(f) Coupon represents a weighted average yield to maturity.
(g) Zero coupon security.
(h) Perpetual maturity; date shown, if applicable, represents next contractual call date.
(i) Security is subject to a forbearance agreement entered into by the Fund which forbears the Fund from taking action to, among other things, accelerate and collect payments on the subject note with respect to specified events of default.

 

(j)  RESTRICTED SECURITIES:

 

Issuer Description                Acquisition
Date
    Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

Forbes Energy Services Ltd.

         10/09/2014 - 11/18/2016     $ 532     $ 143       0.05

Odebrecht Offshore Drilling Finance Ltd.

6.625% due 10/01/2023

         04/09/2015 - 07/30/2015       995       450       0.15  

Odebrecht Offshore Drilling Finance Ltd.

6.750% due 10/01/2023

         04/09/2015 - 07/30/2015       1,131       666       0.23  

TIG FinCo PLC

         04/02/2015 - 07/20/2017       513       505       0.17  
        

 

 

   

 

 

   

 

 

 
  $     3,171     $     1,764       0.60
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(k)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
    Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received(1)
 
BPG     1.160     07/31/2017       08/01/2017     $     17,600     U.S. Treasury Bonds 2.500% due 05/15/2046   $ (18,018   $ 17,600     $ 17,601  
SSB     0.200       07/31/2017       08/01/2017       1,265     U.S. Treasury Notes 3.500% due 05/15/2020(2)     (1,291     1,265       1,265  
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

 

    $     (19,309   $     18,865     $     18,866  
           

 

 

   

 

 

   

 

 

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(3)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(3)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.250 )%      06/06/2017       TBD (4)    $ (922   $ (921

BPS

    1.600       05/26/2017       08/28/2017       (3,263     (3,273
    1.610       06/02/2017       08/31/2017       (1,494     (1,498

JML

    1.950       07/31/2017       08/03/2017       (4,250     (4,205
    1.950       08/03/2017       08/18/2017       (4,030     (4,030

RDR

    1.570       05/02/2017       08/02/2017       (1,951     (1,959
    1.590       05/17/2017       08/17/2017       (2,317     (2,325
    1.620       06/12/2017       09/12/2017       (1,597     (1,601

SOG

    1.750       05/17/2017       08/16/2017       (3,848     (3,862
    1.800       06/12/2017       09/12/2017           (2,643     (2,650

UBS

    1.610       06/02/2017       09/05/2017       (4,604     (4,616
    1.700       07/07/2017       10/10/2017       (2,759     (2,762
    1.990       05/26/2017       08/28/2017       (1,330     (1,335
    2.040       06/09/2017       08/23/2017       (1,587     (1,592
    2.140       06/14/2017       09/14/2017       (2,649     (2,656
         

 

 

 

Total Reverse Repurchase Agreements

 

        $     (39,285
         

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral pledged/(received) as of July 31, 2017:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(5)  

Global/Master Repurchase Agreement

            

BCY

  $ 0     $ (921   $ 0      $ (921   $ 1,004     $ 83  

BPG

        17,601       0       0            17,601           (18,018     (417

BPS

    0           (4,771         0        (4,771     4,917       146  

JML

    0       (8,235     0        (8,235     5,237           (2,998

RDR

    0       (5,885     0        (5,885     6,085       200  

SOG

    0       (6,512     0        (6,512     6,921       409  

 

58   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(5)  

SSB

  $ 1,265     $ 0     $ 0      $ 1,265     $ (1,291   $ (26

UBS

    0       (12,961     0            (12,961         14,774           1,813  
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     18,866     $     (39,285   $     0         
 

 

 

   

 

 

   

 

 

        

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

 

Corporate Bonds & Notes

  $ 0     $ (18,551   $ (15,783   $ (921   $ (35,255
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0     $     (18,551   $     (15,783   $     (921   $ (35,255
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements(6)

 

  $     (35,255
         

 

 

 

 

(l) Securities with an aggregate market value of $38,938 have been pledged as collateral under the terms of the above master agreements as of July 31, 2017.

 

(1)

Includes accrued interest.

(2)

Collateral is held in custody by the counterparty.

(3)

The average amount of borrowings outstanding during the period ended July 31, 2017 was $(32,344) at a weighted average interest rate of 1.505%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

(4)

Open maturity reverse repurchase agreement.

(5)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

(6)

Unsettled reverse repurchase agreements liability of $(4,030) is outstanding at period end.

 

(m)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION(1)

 

    Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2017(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
Reference Entity                 Asset     Liability  

Frontier Communications Corp.

    5.000     06/20/2020       6.967   $     2,900     $ (95   $ (34   $     (129   $ 4     $ 0  

Navient Corp.

    5.000       12/20/2021       2.538       300       11       21       32       0       0  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          $     (84   $     (13   $ (97   $     4     $     0  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION(1)

 

Index/Tranches

  Fixed
Receive Rate
    Maturity
Date
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
              Asset     Liability  

CDX.HY-24 5-Year Index

    5.000     06/20/2020     $     4,365     $ 336     $ 42     $ 378     $ 4     $ 0  

CDX.HY-25 5-Year Index

    5.000       12/20/2020       1,607       (6     138       132       1       0  

CDX.HY-26 5-Year Index

    5.000       06/20/2021       396       18       17       35       0       0  

CDX.HY-28 5-Year Index

    5.000       06/20/2022       800       55       11       66       1       0  
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        $     403     $     208     $     611     $     6     $     0  
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value
    Variation Margin  
                Asset     Liability  

Pay

 

3-Month USD-LIBOR

    2.750     06/17/2025       $       70,420     $ 4,237     $ (958   $ 3,279     $ 9     $ 0  

Pay

 

3-Month USD-LIBOR

    2.250       06/15/2026         15,300       724       (644     80       4       0  

Pay(5)

 

3-Month USD-LIBOR

    2.500       12/20/2027         27,400       187       253       440       13       0  

Pay

 

3-Month USD-LIBOR

    3.500       06/19/2044         83,100       (2,711         18,640           15,929           55       0  

Receive

 

3-Month USD-LIBOR

    2.250       12/21/2046         12,600       (1,146     1,945       799       0       (15

Receive

 

3-Month USD-LIBOR

    1.750       06/21/2047             131,700           23,252       628       23,880       0           (122

Pay

 

6-Month AUD-BBR-BBSW

    3.000       12/17/2019       AUD       6,200       89       24       113       3       0  

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   59


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value
    Variation Margin  
                Asset     Liability  

Pay

 

6-Month AUD-BBR-BBSW

    3.500 %       06/17/2025       AUD       3,900     $ 97     $ 87     $ 184     $ 3     $ 0  

Receive(5)

 

6-Month EUR-EURIBOR

    1.000       09/20/2027       EUR       5,200       6       (19     (13     11       0  

Receive(5)

 

6-Month GBP-LIBOR

    1.500       09/20/2027       GBP           15,300       (247     (122     (369     43       0  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            $ 24,488     $ 19,834     $ 44,322     $ 141     $ (137
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $     24,807     $     20,029     $     44,836     $     151     $     (137
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2017:

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
   

Total

          Market Value     Variation Margin
Liability
   

Total

 
     Purchased
Options
    Futures     Swap
Agreements
            Written
Options
    Futures     Swap
Agreements
   

Total Exchange-Traded or Centrally Cleared

  $     0     $     0     $     151     $     151       $     0     $     0     $     (137)     $     (137)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(n) Securities with an aggregate market value of $659 and cash of $7,020 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2017. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4)

The prices and resulting values for credit default swap agreements on credit indices serve as indicators of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(5)

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(o)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

BOA

     08/2017     EUR     586     $     677     $ 0     $ (16
     08/2017     GBP     407         527       0       (10

BPS

     08/2017     EUR     13,658         15,559       0       (610
     08/2017     JPY     202,842         1,814       0       (26

CBK

     08/2017     GBP     2,603         3,365       0       (70

GLM

     08/2017         241         312       0       (6
     08/2017     $     37,067     GBP     28,209       153       0  
     09/2017     GBP     28,209     $     37,108       0       (153

JPM

     08/2017     $     476     GBP     369       10       0  

MSB

     08/2017         17,241     EUR     14,707       169       0  
     09/2017     EUR     14,707     $     17,271       0       (169

TOR

     08/2017     $     1,824     JPY     202,842       16       0  
     09/2017     JPY     202,842     $     1,827       0       (16

UAG

     08/2017     EUR     463         529       0       (19
     08/2017     GBP     25,327         32,488       0       (928
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

  $     348     $     (2,023
            

 

 

   

 

 

 

 

60   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION(1)

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2017(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000     12/20/2024       3.536   $ 500     $ (98   $ 20     $ 0     $ (78
GST  

Petrobras Global Finance BV

    1.000       12/20/2024       3.536       700       (139     31       0       (108
HUS  

Petrobras Global Finance BV

    1.000       12/20/2019       1.407       200       (16     14       0       (2
 

Petrobras Global Finance BV

    1.000       09/20/2020       1.821       20       (3     3       0       0  
 

Petrobras Global Finance BV

    1.000       12/20/2024       3.536       800       (166     42       0       (124
MYC  

Petrobras Global Finance BV

    1.000       12/20/2019       1.407           4,100       (379     345       0       (34
           

 

 

   

 

 

   

 

 

   

 

 

 
          $ (801   $ 455     $     0     $ (346
           

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

    $     (801   $     455     $ 0     $     (346
           

 

 

   

 

 

   

 

 

   

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral pledged as of July 31, 2017:

 

    Financial Derivative Assets           Financial Derivative Liabilities                     
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
Pledged
     Net
Exposure(4)
 

BOA

  $ 0      $ 0      $ 0      $ 0       $ (26   $ 0      $ 0     $ (26   $ (26   $ 0      $ (26

BPS

    0        0        0        0         (636     0        (78     (714      (714      583         (131

CBK

    0        0        0        0         (70     0        0       (70     (70     0        (70

GLM

    153        0        0        153         (159     0        0       (159     (6     0        (6

GST

    0        0        0        0         0       0        (108     (108     (108     278        170  

HUS

    0        0        0        0         0       0        (126     (126     (126     161        35  

JPM

    10        0        0        10         0       0        0       0       10       0        10  

MSB

    169        0        0        169         (169     0        0       (169     0       0        0  

MYC

    0        0        0        0         0       0        (34     (34     (34     229        195  

TOR

    16        0        0        16         (16     0        0       (16     0       0        0  

UAG

    0        0        0        0         (947     0        0       (947     (947     733        (214
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

        

Total Over the Counter

  $  348      $  0      $  0      $  348       $  (2,023   $  0      $  (346   $  (2,369       
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

        

 

(p) Securities with an aggregate market value of $1,984 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2017.

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   61


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 10     $ 0     $ 0     $ 141     $ 151  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 348     $ 0     $ 348  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 10     $ 0     $ 348     $ 141     $ 499  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 0     $ 0     $ 0     $ 137     $ 137  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 2,023     $ 0     $ 2,023  

Swap Agreements

    0       346       0       0       0       346  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 346     $ 0     $ 2,023     $ 0     $ 2,369  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     346     $     0     $     2,023     $     137     $     2,506  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain on Financial Derivative Instruments

 

         

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 392     $ 0     $ 0     $ 21,219     $ 21,611  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 1,452     $ 0     $ 1,452  

Swap Agreements

    0       96       0       0       0       96  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 96     $ 0     $ 1,452     $ 0     $ 1,548  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 488     $ 0     $ 1,452     $ 21,219     $ 23,159  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

 

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 78     $ 0     $ 0     $ (18,744   $ (18,666
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ (1,690   $ 0     $ (1,690

Swap Agreements

    0       809       0       0       0       809  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 809     $ 0     $ (1,690   $ 0     $ (881
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     887     $     0     $     (1,690   $     (18,744   $     (19,547
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2017 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $     0     $     13,924     $     1,439     $     15,363  

Corporate Bonds & Notes

 

Banking & Finance

    0       83,838       2,078       85,916  

Industrials

    0       67,518       0       67,518  

Utilities

    0       19,947       0       19,947  

Convertible Bonds & Notes

 

Industrials

    0       1,996       0       1,996  

Municipal Bonds & Notes

 

California

    0       2,410       0       2,410  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Illinois

  $ 0     $ 6,646     $ 0     $ 6,646  

Virginia

    0       339       0       339  

West Virginia

    0       6,755       0       6,755  

U.S. Government Agencies

    0       7,041       2,357       9,398  

Non-Agency Mortgage-Backed Securities

    0           44,768       0           44,768  

Asset-Backed Securities

    0       69,473           4,682       74,155  

Sovereign Issues

    0       10,345       0       10,345  

Common Stocks

 

Energy

        143       0       0       143  

Financials

    0       0       505       505  
 

 

62   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Warrants

 

Industrials

  $ 0     $ 0     $ 185     $ 185  

Utilities

    5       0       0       5  

Preferred Securities

 

Banking & Finance

    0       2,477       0       2,477  

Industrials

    0       0       7,120       7,120  

Short-Term Instruments

 

Repurchase Agreements

    0       18,865       0       18,865  

U.S. Treasury Bills

    0       2,644       0       2,644  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     148     $     358,986     $     18,366     $     377,500  
 

 

 

   

 

 

   

 

 

   

 

 

 
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

  $ 0     $ 151     $ 0     $ 151  

Over the counter

    0       348       0       348  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 499     $ 0     $ 499  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

    0       (137     0       (137

Over the counter

    0       (2,369     0       (2,369
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (2,506   $ 0     $ (2,506
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ (2,007   $ 0     $ (2,007
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     148     $     356,979     $     18,366     $     375,493  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2017.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2017:

 

Category and Subcategory   Beginning
Balance
at 07/31/2016
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation)(1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2017
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2017(1)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 1,410     $ (6   $ 4     $ 0     $ 31     $ 0     $ 0     $ 1,439     $ 31  

Corporate Bonds & Notes

 

Banking & Finance

    2,656       100       (671     1       84       (92     0       0       2,078       0  

U.S. Government Agencies

    2,235       0       (41     40       16       107       0       0       2,357       104  

Asset-Backed Securities

    3,692       1,575       0       11       0       (596     0       0       4,682       (596

Common Stocks

 

Financials

    58       377       0       0       0       70       0       0       505       70  

Warrants

 

Industrials

    0       0       0       0       0       185       0       0       185       185  

Preferred Securities

 

Industrials

    0       7,299       0       0       0       (179     0       0       7,120       (179
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     8,641     $     10,761     $     (718   $     56     $     100     $     (474   $     0     $     0     $     18,366     $     (385
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and Subcategory   Ending
Balance
at 07/31/2017
     Valuation
Technique
     Unobservable
Inputs
     Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

        

Loan Participations and Assignments

  $ 169        Other Valuation Techniques(2)               —    
    99        Proxy Pricing        Base Price        99.500  
    1,171        Third Party Vendor        Broker Quote        98.000  

Corporate Bonds & Notes

          

Banking & Finance

    2,078        Proxy Pricing        Base Price        101.000-114.491  

U.S. Government Agencies

    2,357        Proxy Pricing        Base Price        57.000  

Asset-Backed Securities

    4,682        Proxy Pricing        Base Price        52.170-100,000.000  

Common Stocks

          

Financials

    505        Other Valuation Techniques(2)               —    

Warrants

          

Industrials

    185        Other Valuation Techniques(2)               —    

Preferred Securities

          

Industrials

    7,120        Fundamental Valuation        Company Assets        $    551,000.000  
 

 

 

          

Total

  $     18,366           
 

 

 

          

 

(1)

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2017 may be due to an investment no longer held or categorized as Level 3 at period end.

(2)

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   63


Schedule of Investments PIMCO Income Strategy Fund II

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 120.6%  
LOAN PARTICIPATIONS AND ASSIGNMENTS 3.9%  

BMC Software Finance, Inc.

 

5.234% due 09/10/2022

  $     7,031     $     7,084  

CD&R Plumb Buyer LLC

 

TBD% due 06/25/2018

      200         199  

CenturyLink, Inc.

 

2.750% due 01/31/2025

      1,000         988  

Diamond BV

 

TBD% due 07/25/2024

  EUR     100         119  

Drillships Ocean Ventures, Inc.

 

7.750% due 07/25/2021

  $     600         531  

Forbes Energy Services LLC

 

5.000% - 7.000% due 04/13/2021

      268         277  

HD Supply Waterworks Ltd.

 

TBD% due 08/01/2024

      40         40  

iHeartCommunications, Inc.

 

7.984% due 01/30/2019

      10,700         8,734  

Lightstone Generation LLC

 

5.734% due 01/30/2024

      1,977         1,960  

Parexel International Corp.

 

TBD% due 07/18/2018

      200         199  

Petroleo Global Trading BV

 

TBD% due 02/19/2020

      200         196  

Sequa Mezzanine Holdings LLC

 

6.758% - 6.814% due 11/28/2021

      230         232  

10.314% due 04/28/2022

      90         92  

Staples, Inc.

 

TBD% due 08/02/2018

      600         596  

Team Health Holdings, Inc.

 

3.984% due 02/06/2024

      299         299  

UPC Financing Partnership

 

3.976% due 04/15/2025

      200         201  

Vistra Operations Co. LLC

 

4.476% - 4.488% due 12/14/2023

      597         602  

Westmoreland Coal Co.

 

7.796% due 12/16/2020

      2,084         1,852  
       

 

 

 

Total Loan Participations and Assignments
(Cost $25,001)

      24,201  
       

 

 

 
CORPORATE BONDS & NOTES 52.8%  
BANKING & FINANCE 26.6%  

AGFC Capital Trust

 

3.054% due 01/15/2067

      1,800         1,071  

Ally Financial, Inc.

 

8.000% due 11/01/2031

      4,610         5,745  

Ardonagh Midco PLC

 

8.375% due 07/15/2023

  GBP     700         931  

AssuredPartners, Inc.

 

7.000% due 08/15/2025 (c)

  $     19         19  

Banco Bilbao Vizcaya Argentaria S.A.

 

6.750% due 02/18/2020 (h)

  EUR     1,600         2,029  

Banco do Brasil S.A.

 

6.250% due 04/15/2024 (h)

  $     3,020         2,616  

9.000% due 06/18/2024 (h)

      3,709         3,856  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^

  EUR     8,100         2,973  

4.750% due 01/15/2018 ^

      2,300         844  

Banco Santander S.A.

 

6.250% due 09/11/2021 (h)

      1,600         2,044  

Barclays Bank PLC

 

7.625% due 11/21/2022

  $     4,400         5,107  

Barclays PLC

 

6.500% due 09/15/2019 (h)

  EUR     1,900         2,377  

7.875% due 09/15/2022 (h)

  GBP     415         607  

8.000% due 12/15/2020 (h)

  EUR     4,100         5,454  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Blackstone CQP Holdco LP

 

6.500% due 03/20/2021

  $     5,000     $     5,196  

BNP Paribas S.A.

 

7.375% due 08/19/2025 (h)(l)

      3,310         3,773  

Brighthouse Financial, Inc.

 

4.700% due 06/22/2047

      102         101  

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (h)

      200         203  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (l)

      8,500         9,526  

CBL & Associates LP

 

5.950% due 12/15/2026 (l)

      2,200         2,210  

Co-operative Group Holdings Ltd.

 

7.500% due 07/08/2026

  GBP     6,150         9,917  

Cooperatieve Rabobank UA

 

6.625% due 06/29/2021 (h)

  EUR     1,200         1,607  

Credit Agricole S.A.

 

7.875% due 01/23/2024 (h)

  $     3,500         3,957  

Credit Suisse Group AG

 

7.500% due 12/11/2023 (h)

      7,243         8,254  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021

      3,500         3,745  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      3,715         4,248  

Howard Hughes Corp.

 

5.375% due 03/15/2025

      74         77  

HSBC Holdings PLC

 

6.000% due 09/29/2023 (h)

  EUR     3,530         4,782  

6.000% due 05/22/2027 (h)

  $     200         210  

Intrum Justitia AB

 

2.750% due 07/15/2022

  EUR     100         120  

3.125% due 07/15/2024

      100         120  

Jefferies Finance LLC

 

6.875% due 04/15/2022 (l)

  $     6,850           6,919  

7.375% due 04/01/2020

      2,890         2,984  

7.500% due 04/15/2021

      347         363  

Jefferies LoanCore LLC

 

6.875% due 06/01/2020

      200         206  

Lloyds Banking Group PLC

 

7.625% due 06/27/2023 (h)

  GBP     2,300         3,424  

7.875% due 06/27/2029 (h)

      250         395  

MPT Operating Partnership LP

 

5.250% due 08/01/2026

  $     1,292         1,357  

Nationwide Building Society

 

10.250% due 06/29/2049 (h)

  GBP     13         2,610  

Navient Corp.

 

4.875% due 06/17/2019

  $     500         518  

5.500% due 01/15/2019

      8,300         8,642  

5.625% due 08/01/2033

      145         124  

Novo Banco S.A.

 

5.000% due 04/04/2019

  EUR     311         296  

5.000% due 04/23/2019

      653         622  

5.000% due 05/14/2019

      431         411  

5.000% due 05/21/2019

      241         230  

5.000% due 05/23/2019

      240         229  

OneMain Financial Holdings LLC

 

6.750% due 12/15/2019

  $     1,353         1,422  

Oppenheimer Holdings, Inc.

 

6.750% due 07/01/2022

      1,616         1,635  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      30         31  

Rio Oil Finance Trust

 

9.250% due 07/06/2024

      2,427         2,495  

Royal Bank of Scotland Group PLC

 

7.500% due 08/10/2020 (h)(l)

      4,080         4,320  

8.000% due 08/10/2025 (h)(l)

      5,190         5,693  

8.625% due 08/15/2021 (h)

      1,700         1,882  

Santander UK Group Holdings PLC

 

6.750% due 06/24/2024 (h)

  GBP     2,025         2,867  

7.375% due 06/24/2022 (h)

      4,100         5,841  

Spirit Realty LP

 

4.450% due 09/15/2026

  $     1,500         1,449  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Springleaf Finance Corp.

 

6.125% due 05/15/2022

  $     674     $     709  

8.250% due 10/01/2023

      1,300         1,469  

Tesco Property Finance PLC

 

5.411% due 07/13/2044

  GBP     4,404         6,283  

6.052% due 10/13/2039

      2,595         3,903  
       

 

 

 
            163,048  
       

 

 

 
INDUSTRIALS 20.0%  

Altice Financing S.A.

 

7.500% due 05/15/2026 (l)

  $     3,200         3,556  

AMC Networks, Inc.

 

4.750% due 08/01/2025

      90         91  

BMC Software Finance, Inc.

 

8.125% due 07/15/2021

      1,800         1,867  

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

 

9.000% due 10/15/2019 (d)

      4,650         4,667  

Burger King Worldwide, Inc.

 

4.250% due 05/15/2024

      205         207  

Caesars Entertainment Operating Co., Inc.

 

8.500% due 02/15/2020 ^(i)

      1,475         1,918  

9.000% due 02/15/2020 ^(i)

      2,262         2,946  

10.000% due 12/15/2018 ^

      6,190         5,904  

Charter Communications Operating LLC

 

5.375% due 05/01/2047

      66         69  

Chesapeake Energy Corp.

 

4.554% due 04/15/2019

      134         133  

CommScope Technologies LLC

 

5.000% due 03/15/2027

      2         2  

Community Health Systems, Inc.

 

6.250% due 03/31/2023

      161         165  

CSN Resources S.A.

 

6.500% due 07/21/2020

      535         408  

DAE Funding LLC

 

4.000% due 08/01/2020 (c)

      60         61  

4.500% due 08/01/2022 (c)

      60         61  

5.000% due 08/01/2024 (c)

      160         164  

Diamond Resorts International, Inc.

 

10.750% due 09/01/2024

      2,500         2,719  

DriveTime Automotive Group, Inc.

 

8.000% due 06/01/2021

      800         806  

Dynegy, Inc.

 

8.034% due 02/02/2024

      1,859         1,803  

Exela Intermediate LLC

 

10.000% due 07/15/2023

      120         117  

Ferroglobe PLC

 

9.375% due 03/01/2022

      2,100         2,263  

Ford Motor Co.

 

7.700% due 05/15/2097 (l)

      10,460         13,036  

Fresh Market, Inc.

 

9.750% due 05/01/2023

      8,000         6,580  

HCA, Inc.

 

4.500% due 02/15/2027

      940         964  

5.500% due 06/15/2047

      101         106  

7.500% due 11/15/2095

      1,200         1,241  

iHeartCommunications, Inc.

 

9.000% due 09/15/2022

      3,450         2,553  

Intelsat Jackson Holdings S.A.

 

7.250% due 10/15/2020

      3,840         3,706  

9.750% due 07/15/2025

      200         207  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021

      6,888         4,443  

8.125% due 06/01/2023

      7,535         4,702  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      7,420         7,364  

Kinder Morgan Energy Partners LP

 

6.375% due 03/01/2041

      400         458  

Kinder Morgan, Inc.

 

7.800% due 08/01/2031 (l)

      3,500         4,481  

Mallinckrodt International Finance S.A.

 

4.750% due 04/15/2023

      300         267  
 

 

64   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

New Albertson’s, Inc.

 

6.570% due 02/23/2028

  $     6,800     $     5,219  

Park Aerospace Holdings Ltd.

 

5.250% due 08/15/2022

      13         13  

5.500% due 02/15/2024

      36         37  

Petroleos Mexicanos

 

6.500% due 03/13/2027

      526         580  

6.750% due 09/21/2047

      280         295  

PetSmart, Inc.

 

5.875% due 06/01/2025

      112         108  

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

      621         695  

QVC, Inc.

 

4.375% due 03/15/2023

      420         432  

5.950% due 03/15/2043

      4,515         4,424  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     1,300         2,131  

Sabine Pass Liquefaction LLC

 

5.875% due 06/30/2026 (l)

  $     2,500         2,819  

Safeway, Inc.

 

7.250% due 02/01/2031

      245         227  

Scientific Games International, Inc.

 

10.000% due 12/01/2022

      779         872  

SFR Group S.A.

 

7.375% due 05/01/2026 (l)

      5,564         6,044  

Sirius XM Radio, Inc.

 

3.875% due 08/01/2022

      57         58  

Spirit Issuer PLC

 

3.000% due 12/28/2031

  GBP     1,000         1,288  

6.582% due 12/28/2027

      1,000         1,424  

Symantec Corp.

 

5.000% due 04/15/2025

  $     45         47  

UCP, Inc.

 

8.500% due 10/21/2017

      2,000         2,020  

Unique Pub Finance Co. PLC

 

5.659% due 06/30/2027

  GBP     3,822         5,692  

6.542% due 03/30/2021

      1,175         1,697  

United Group BV

 

4.375% due 07/01/2022

  EUR     100         119  

4.875% due 07/01/2024

      100         118  

UPCB Finance Ltd.

 

3.625% due 06/15/2029

      190         224  

Valeant Pharmaceuticals International, Inc.

 

6.500% due 03/15/2022

  $     89         94  

7.000% due 03/15/2024

      171         183  

Westmoreland Coal Co.

 

8.750% due 01/01/2022

      6,335         5,535  

Wynn Las Vegas LLC

 

5.250% due 05/15/2027

      62         64  
       

 

 

 
            122,494  
       

 

 

 
UTILITIES 6.2%  

AT&T, Inc.

 

2.215% due 02/14/2023 (c)

      100         100  

2.850% due 02/14/2023 (c)

      200         200  

3.400% due 08/14/2024 (c)

      400         401  

3.900% due 08/14/2027 (c)

      360         360  

4.900% due 08/14/2037 (c)

      366         365  

5.150% due 02/14/2050 (c)

      550         550  

5.300% due 08/14/2058 (c)

      164         164  

Gazprom Neft OAO Via GPN Capital S.A.

 

6.000% due 11/27/2023 (l)

      9,600         10,475  

Northwestern Bell Telephone

 

7.750% due 05/01/2030

      12,625         14,577  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 06/30/2022 ^

      358         223  

Odebrecht Offshore Drilling Finance Ltd.

 

6.625% due 10/01/2023 ^(j)

      3,858         1,379  

6.750% due 10/01/2023 ^(j)

      4,221         1,512  

Petrobras Global Finance BV

 

6.125% due 01/17/2022

      466         491  

6.625% due 01/16/2034

  GBP     100         133  

6.750% due 01/27/2041

  $     2,400         2,313  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

7.250% due 03/17/2044

  $     251     $     253  

7.375% due 01/17/2027

      694         753  

8.375% due 05/23/2021

      2,319         2,620  

Sprint Capital Corp.

 

6.900% due 05/01/2019

      1,100         1,173  
       

 

 

 
          38,042  
       

 

 

 

Total Corporate Bonds & Notes (Cost $311,947)

 

        323,584  
       

 

 

 
CONVERTIBLE BONDS & NOTES 0.7%  
INDUSTRIALS 0.7%  

DISH Network Corp.

 

3.375% due 08/15/2026

      3,400         4,241  
       

 

 

 

Total Convertible Bonds & Notes (Cost $3,400)

 

      4,241  
       

 

 

 
MUNICIPAL BONDS & NOTES 7.3%  
CALIFORNIA 1.2%  

Riverside County, California Redevelopment Successor Agency Tax Allocation Bonds, Series 2010

 

7.500% due 10/01/2030

      1,200         1,289  

San Francisco, California City & County Redevelopment Agency Tax Allocation Bonds, Series 2009

 

8.406% due 08/01/2039

      1,650         2,220  

Stockton Public Financing Authority, California Revenue Bonds, (BABs), Series 2009

 

7.942% due 10/01/2038

      3,500         3,862  
       

 

 

 
          7,371  
       

 

 

 
ILLINOIS 0.2%  

Chicago, Illinois General Obligation Bonds, Series 2015

 

7.375% due 01/01/2033

      180         195  

7.750% due 01/01/2042

      330         346  

Illinois State General Obligation Bonds, (BABs), Series 2010

 

6.725% due 04/01/2035

      35         39  

7.350% due 07/01/2035

      20         23  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      280         281  
       

 

 

 
          884  
       

 

 

 
OHIO 3.5%  

Ohio State University Revenue Bonds, Series 2011

 

4.800% due 06/01/2111

      21,000         21,427  
       

 

 

 
VIRGINIA 0.1%  

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

 

6.706% due 06/01/2046

      835         717  
       

 

 

 
WEST VIRGINIA 2.3%  

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

 

0.000% due 06/01/2047 (g)

      45,700         2,377  

7.467% due 06/01/2047

      12,305         11,682  
       

 

 

 
          14,059  
       

 

 

 

Total Municipal Bonds & Notes (Cost $38,767)

    44,458  
       

 

 

 
U.S. GOVERNMENT AGENCIES 2.6%  

Fannie Mae

 

3.500% due 02/25/2042 (a)

      1,128         150  

4.232% due 10/25/2029

      530         556  

4.500% due 11/25/2042 (a)

      2,960         539  

5.018% due 01/25/2040 (a)

      404         66  

5.482% due 01/25/2029

      400         449  

6.082% due 10/25/2029

      330         362  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Freddie Mac

 

0.000% due 08/25/2046 (b)(g)

  $     3,050     $     1,869  

0.100% due 08/25/2046 (a)

      39,298         172  

3.000% due 02/15/2033 (a)

      2,433         282  

3.500% due 12/15/2032 (a)

      4,063         534  

6.174% due 11/25/2055

      8,741         4,994  

8.727% due 09/15/2035

      776         1,171  

8.782% due 12/25/2027

      2,895         3,403  

11.982% due 03/25/2025

      736         997  

Ginnie Mae

 

3.500% due 06/20/2042 - 10/20/2042 (a)

      886         125  

4.000% due 10/16/2042 - 10/20/2042 (a)

      539         74  
       

 

 

 

Total U.S. Government Agencies (Cost $14,778)

 

        15,743  
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 22.5%  

Banc of America Alternative Loan Trust

 

6.000% due 01/25/2036 ^

      127         119  

Banc of America Funding Corp.

 

6.000% due 01/25/2037

      7,429         5,909  

Banc of America Funding Trust

 

3.578% due 01/20/2047 ^

      1,406         1,328  

BCAP LLC Trust

 

3.278% due 07/26/2037

      11,676         10,465  

3.517% due 08/26/2037

      14,119         9,243  

3.517% due 08/28/2037

      6,895         6,458  

3.548% due 05/26/2036

      113         2  

4.061% due 09/26/2036

      5,272         4,607  

5.045% due 03/26/2037

      1,042         629  

5.750% due 12/26/2035

      5,145         4,405  

6.250% due 11/26/2036

      5,160         4,541  

8.440% due 05/26/2037

      1,756         770  

12.536% due 06/26/2036

      475         222  

Bear Stearns ALT-A Trust

 

1.732% due 01/25/2036 ^

      1,593         1,602  

3.226% due 09/25/2047 ^

      7,240         5,707  

3.268% due 11/25/2036 ^

      530         437  

3.315% due 11/25/2035

      8,437         7,233  

3.625% due 09/25/2035 ^

      731         599  

Chase Mortgage Finance Trust

 

3.224% due 12/25/2035 ^

      12         11  

5.500% due 05/25/2036 ^

      37         34  

Citicorp Mortgage Securities Trust

 

5.500% due 04/25/2037

      120         120  

6.000% due 09/25/2037

      1,428         1,484  

Citigroup/Deutsche Bank Commercial Mortgage Trust

 

5.688% due 10/15/2048

      2,300         1,234  

Commercial Mortgage Loan Trust

 

6.155% due 12/10/2049

      2,161         1,364  

Countrywide Alternative Loan Resecuritization Trust

 

6.000% due 05/25/2036 ^

      3,136         2,644  

6.000% due 08/25/2037 ^

      1,367         1,085  

Countrywide Alternative Loan Trust

 

3.404% due 04/25/2036 ^

      1,430         1,268  

5.500% due 03/25/2035

      344         270  

5.500% due 01/25/2036

      841         715  

5.500% due 03/25/2036 ^

      149         120  

5.750% due 01/25/2035

      462         465  

5.750% due 02/25/2035

      487         466  

5.750% due 12/25/2036 ^

      905         646  

6.000% due 02/25/2035

      447         455  

6.000% due 04/25/2036

      682         531  

6.000% due 04/25/2037 ^

      2,206         1,655  

6.250% due 11/25/2036 ^

      955         852  

6.250% due 12/25/2036 ^

      658         488  

6.500% due 08/25/2036 ^

      596         406  

Countrywide Home Loan Mortgage Pass-Through Trust

 

1.812% due 03/25/2035 ^

      5,721         4,621  

6.000% due 07/25/2037

      2,181         1,772  

6.250% due 09/25/2036 ^

      733         617  

Credit Suisse First Boston Mortgage Securities Corp.

 

6.000% due 11/25/2035 ^

      532         461  

Credit Suisse Mortgage Capital Certificates

 

1.440% due 10/26/2036

      7,033         4,683  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   65


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Credit Suisse Mortgage Capital Mortgage-Backed Trust

 

5.750% due 04/25/2036 ^

  $     200     $     159  

Epic Drummond Ltd.

 

0.000% due 01/25/2022

  EUR     137         162  

First Horizon Alternative Mortgage Securities Trust

 

6.000% due 08/25/2036 ^

  $     1,414         1,191  

First Horizon Mortgage Pass-Through Trust

 

3.000% due 11/25/2035 ^

      477         417  

3.332% due 05/25/2037 ^

      489         406  

GS Mortgage Securities Trust

 

5.622% due 11/10/2039

      1,001         921  

IndyMac Mortgage Loan Trust

 

6.500% due 07/25/2037 ^

      3,648         2,434  

JPMorgan Alternative Loan Trust

 

3.079% due 03/25/2037 ^

      1,411         1,261  

3.351% due 03/25/2036 ^

      2,456         1,976  

3.409% due 05/25/2036 ^

      2,375         1,833  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.623% due 05/12/2045

      1,628         1,402  

JPMorgan Mortgage Trust

 

3.244% due 10/25/2035

      356         345  

3.378% due 02/25/2036 ^

      488         438  

6.500% due 09/25/2035

      128         125  

LB-UBS Commercial Mortgage Trust

 

5.407% due 11/15/2038

      923         707  

5.562% due 02/15/2040

      1,385         997  

Lehman Mortgage Trust

 

6.000% due 07/25/2037 ^

      1,222         1,156  

6.500% due 09/25/2037 ^

      3,080         2,263  

Lehman XS Trust

 

1.452% due 06/25/2047

      2,764         2,414  

MASTR Asset Securitization Trust

 

6.500% due 11/25/2037 ^

      584         435  

Merrill Lynch Mortgage Investors Trust

 

3.214% due 03/25/2036 ^

      2,159         1,582  

Morgan Stanley Capital Trust

 

5.991% due 06/11/2049

      1,741         1,747  

Nomura Asset Acceptance Corp. Alternative Loan Trust

 

4.976% due 05/25/2035 ^

      14         12  

RBSSP Resecuritization Trust

 

1.376% due 02/26/2047

      1,628         1,641  

Residential Accredit Loans, Inc. Trust

 

4.284% due 12/26/2034 ^

      1,376         1,090  

6.000% due 08/25/2036 ^

      433         375  

Residential Asset Securitization Trust

 

5.750% due 02/25/2036 ^

      1,265         992  

6.000% due 07/25/2037 ^

      1,683         1,277  

6.250% due 09/25/2037 ^

      2,925         2,142  

Residential Funding Mortgage Securities, Inc. Trust

 

4.375% due 09/25/2035

      1,019         862  

4.599% due 08/25/2036 ^

      1,644         1,461  

Structured Adjustable Rate Mortgage Loan Trust

 

3.243% due 11/25/2036 ^

      3,051         2,768  

3.291% due 07/25/2036 ^

      740         589  

3.391% due 01/25/2036 ^

      2,793         2,138  

Suntrust Adjustable Rate Mortgage Loan Trust

 

3.531% due 02/25/2037 ^

      374         335  

WaMu Mortgage Pass-Through Certificates Trust

 

3.030% due 10/25/2036 ^

      1,031         916  

3.160% due 02/25/2037 ^

      719         684  

3.161% due 05/25/2037 ^

      1,632         1,515  

3.326% due 07/25/2037 ^

      1,240         1,156  

Wells Fargo Mortgage-Backed Securities Trust

 

3.166% due 07/25/2036 ^

      376         379  

5.750% due 03/25/2037 ^

      337         332  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $127,668)

 

        137,778  
       

 

 

 
ASSET-BACKED SECURITIES 20.6%  

Airspeed Ltd.

 

1.496% due 06/15/2032

      3,205         2,683  

Apidos CLO

 

0.000% due 07/22/2026

      1,500         919  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Argent Securities Trust

 

1.422% due 03/25/2036

  $     4,062     $     2,177  

Bear Stearns Asset-Backed Securities Trust

 

1.372% due 10/25/2036 ^

      5,968         5,905  

6.500% due 10/25/2036 ^

      374         286  

Belle Haven ABS CDO Ltd.

 

1.551% due 07/05/2046

      180,259         3,118  

CIFC Funding Ltd.

 

0.000% due 05/24/2026 (g)

      2,400         1,605  

0.000% due 07/22/2026 (g)

      1,500         983  

Citigroup Mortgage Loan Trust, Inc.

 

1.382% due 12/25/2036

      16,326         8,619  

1.392% due 12/25/2036

      4,324         2,898  

Cork Street CLO Designated Activity Co.

 

0.000% due 11/27/2028

  EUR     2,366         2,466  

3.600% due 11/27/2028

      1,062         1,259  

4.500% due 11/27/2028

      929         1,103  

6.200% due 11/27/2028

      1,150         1,369  

Countrywide Asset-Backed Certificates

 

1.372% due 12/25/2046

  $     16,110         12,150  

1.372% due 06/25/2047 ^

      1,801         1,404  

1.402% due 03/25/2037

      2,545         2,422  

1.432% due 06/25/2047

      11,310         9,821  

Countrywide Asset-Backed Certificates Trust

 

1.982% due 11/25/2035

      4,008         3,796  

Fremont Home Loan Trust

 

1.382% due 01/25/2037

      15,493         8,997  

Grosvenor Place CLO BV

 

0.000% due 04/30/2029

  EUR     500         467  

HSI Asset Securitization Corp. Trust

 

0.000% due 10/25/2036 (g)

  $     3,404         1,426  

IndyMac Home Equity Mortgage Loan Asset-Backed Trust

 

1.392% due 07/25/2037

      3,375         2,130  

JPMorgan Mortgage Acquisition Corp.

 

1.522% due 01/25/2036

      770         746  

Lehman XS Trust

 

6.290% due 06/24/2046

      3,726         3,469  

Long Beach Mortgage Loan Trust

 

1.532% due 01/25/2036

      5,000         3,785  

Merrill Lynch Mortgage Investors Trust

 

1.392% due 04/25/2037

      589         333  

Morgan Stanley Mortgage Loan Trust

 

6.250% due 07/25/2047 ^

      778         557  

SLM Student Loan Trust

 

0.000% due 10/28/2029 (g)

      1         1,439  

0.000% due 01/25/2042 (g)

      4         3,504  

SoFi Professional Loan Program LLC

 

0.000% due 05/25/2040 (g)

      4,400         2,295  

0.000% due 07/25/2040 (g)

      21         1,209  

0.000% due 09/25/2040 (g)

      1,758         995  

South Coast Funding Ltd.

 

1.785% due 08/10/2038

      12,539         2,458  

Specialty Underwriting & Residential Finance Trust

 

1.732% due 09/25/2036

      14,063         11,421  

Taberna Preferred Funding Ltd.

 

1.531% due 12/05/2036

      5,327         4,102  

1.551% due 08/05/2036

      451         341  

1.551% due 08/05/2036 ^

      8,914         6,730  

1.771% due 07/05/2035

      5,846         4,940  
       

 

 

 

Total Asset-Backed Securities (Cost $122,201)

 

        126,327  
       

 

 

 
SOVEREIGN ISSUES 2.6%  

Argentine Government International Bond

 

7.820% due 12/31/2033

  EUR     7,098         8,834  

Autonomous Community of Catalonia

 

4.900% due 09/15/2021

      1,500         1,890  

Autonomous Community of Valencia

 

2.013% due 09/04/2017

      2,500         2,969  

Republic of Greece Government International Bond

 

3.800% due 08/08/2017

  JPY     204,000         1,854  

4.750% due 04/17/2019

  EUR     300         363  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Sri Lanka Government International Bond

 

6.200% due 05/11/2027

  $     200     $     207  
       

 

 

 

Total Sovereign Issues (Cost $15,269)

 

      16,117  
       

 

 

 
        SHARES            
COMMON STOCKS 0.5%  
ENERGY 0.0%  

Forbes Energy Services Ltd. (e)(j)

    21,825         234  
       

 

 

 
FINANCIALS 0.5%  

TIG FinCo PLC (j)

      2,072,442         2,734  
       

 

 

 

Total Common Stocks (Cost $3,720)

 

      2,968  
       

 

 

 
WARRANTS 0.1%  
INDUSTRIALS 0.1%  

Sequa Corp. - Exp. 04/28/2024

      819,000         384  
       

 

 

 
UTILITIES 0.0%  

Dynegy, Inc. - Exp. 02/02/2024

      62,273         12  
       

 

 

 

Total Warrants (Cost $164)

 

      396  
       

 

 

 
PREFERRED SECURITIES 4.3%  
BANKING & FINANCE 1.9%  

Farm Credit Bank of Texas

 

10.000% due 12/15/2020 (h)

      9,150         11,249  
       

 

 

 
INDUSTRIALS 2.4%  

Sequa Corp.

 

9.000%

      15,193         14,820  
       

 

 

 

Total Preferred Securities (Cost $25,967)

 

      26,069  
       

 

 

 
SHORT-TERM INSTRUMENTS 2.7%  
REPURCHASE AGREEMENTS (k) 2.1%  
          13,099  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
U.S. TREASURY BILLS 0.6%  

0.961% due 08/31/2017 - 01/04/2018 (f)(g)(o)

      3,542         3,537  
       

 

 

 
Total Short-Term Instruments (Cost $16,636)         16,636  
       

 

 

 
       
Total Investments in Securities (Cost $705,518)         738,518  
       
Total Investments 120.6% (Cost $705,518)     $     738,518  

Financial Derivative
Instruments (m)(n) (0.7)%

(Cost or Premiums, net $(1,679))

    (4,124

Preferred Shares (15.1)%

          (92,450
Other Assets and Liabilities, net (4.8)%         (29,634
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%     $       612,310  
       

 

 

 
 

 

66   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) Principal only security.
(c) When-issued security.
(d) Payment in-kind security.
(e) Security did not produce income within the last twelve months.
(f) Coupon represents a weighted average yield to maturity.
(g) Zero coupon security.
(h) Perpetual maturity; date shown, if applicable, represents next contractual call date.
(i) Security is subject to a forbearance agreement entered into by the Fund which forbears the Fund from taking action to, among other things, accelerate and collect payments on the subject note with respect to specified events of default.

 

(j)  RESTRICTED SECURITIES:

 

Issuer Description                Acquisition
Date
    Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

Forbes Energy Services Ltd.

         10/09/2014 - 12/03/2014     $ 944     $ 234       0.04

Odebrecht Offshore Drilling Finance Ltd.

6.625% due 10/01/2023

         04/09/2015 - 07/30/2015       3,061       1,379       0.22  

Odebrecht Offshore Drilling Finance Ltd.

6.750% due 10/01/2023

         04/09/2015 - 07/30/2015       2,579       1,512       0.25  

TIG FinCo PLC

         04/02/2015 - 07/20/2017       2,776       2,734       0.45  
        

 

 

   

 

 

   

 

 

 
  $     9,360     $     5,859       0.96
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(k)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
    Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received(1)
 
JPS     1.170     07/31/2017       08/01/2017     $     9,800     Ginnie Mae 3.000% due 08/20/2046   $ (10,130   $ 9,800     $ 9,800  
SSB     0.200       07/31/2017       08/01/2017       3,299     U.S. Treasury Notes 3.500% due 05/15/2020(2)     (3,369     3,299       3,299  
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

 

    $     (13,499   $     13,099     $     13,099  
           

 

 

   

 

 

   

 

 

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(3)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(3)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    0.250     06/16/2017       TBD (4)    $     (1,935   $ (1,936

BPS

    1.610       06/02/2017       08/31/2017       (5,359     (5,373

JML

    1.950       07/14/2017       08/03/2017       (8,760     (8,769
    1.950       08/03/2017       08/18/2017       (8,410     (8,410

RBC

    2.050       02/06/2017       08/07/2017       (5,793     (5,851
    2.050       05/11/2017       08/07/2017       (2,472     (2,483
    2.170       07/10/2017       01/10/2018       (5,502     (5,509

RDR

    1.570       05/02/2017       08/02/2017       (4,268     (4,285
    1.760       08/02/2017       11/02/2017       (4,248     (4,248

SOG

    1.780       06/08/2017       09/07/2017       (3,283     (3,292

UBS

    1.700       07/07/2017       10/10/2017       (8,396     (8,406
    1.990       05/26/2017       08/28/2017       (3,390     (3,403
    2.040       06/09/2017       08/23/2017       (3,092     (3,101
    2.140       06/14/2017       09/14/2017       (4,583     (4,596
         

 

 

 

Total Reverse Repurchase Agreements

 

      $     (69,662
         

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   67


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral pledged/(received) as of July 31, 2017:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net Exposure(5)  

Global/Master Repurchase Agreement

            

BCY

  $ 0     $ (1,936   $ 0      $ (1,936   $ 2,205     $ 269  

BPS

    0       (5,373     0        (5,373     5,491       118  

JML

    0       (17,179     0            (17,179     10,911           (6,268

JPS

    9,800       0       0        9,800           (10,130     (330

RBC

    0       (13,843     0        (13,843     15,782       1,939  

RDR

    0       (8,533     0        (8,533     8,962       429  

SOG

    0       (3,292     0        (3,292     3,556       264  

SSB

    3,299       0       0        3,299       (3,369     (70

UBS

    0       (19,506     0        (19,506     22,510       3,004  
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     13,099     $     (69,662   $     0         
 

 

 

   

 

 

   

 

 

        

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

         

Corporate Bonds & Notes

  $ 0     $ (27,892   $ (21,667   $ (11,693   $ (61,252
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0     $     (27,892   $     (21,667   $     (11,693   $     (61,252
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements (6)

          $ (61,252
         

 

 

 

 

(l) Securities with an aggregate market value of $69,421 have been pledged as collateral under the terms of the above master agreements as of July 31, 2017.

 

(1)

Includes accrued interest.

(2)

Collateral is held in custody by the counterparty.

(3)

The average amount of borrowings outstanding during the period ended July 31, 2017 was $(63,835) at a weighted average interest rate of 1.560%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

(4)

Open maturity reverse repurchase agreement.

(5)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

(6)

Unsettled reverse repurchase agreements liability of $(8,410) is outstanding at period end.

 

(m)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION(1)

 

     Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2017(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
                  Asset     Liability  
 

Frontier Communications Corp.

    5.000%       06/20/2020       6.967%       $    6,500     $     (215   $     (75   $     (290   $     9     $     0  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION(1)

 

Index/Tranches   Fixed
Receive Rate
    Maturity
Date
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
              Asset     Liability  

CDX.HY-24 5-Year Index

    5.000     06/20/2020     $     8,827     $ 681     $ 84     $ 765     $ 8     $ 0  

CDX.HY-25 5-Year Index

    5.000       12/20/2020       7,575       (19     641       622       4       0  

CDX.HY-26 5-Year Index

    5.000       06/20/2021       1,287       58       57       115       1       0  

CDX.HY-28 5-Year Index

    5.000       06/20/2022       2,900       204       34       238       2       0  
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        $     924     $     816     $     1,740     $     15     $     0  
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

68   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value
    Variation Margin  
                Asset     Liability  

Pay

 

3-Month USD-LIBOR

    2.750     06/17/2025       $    149,020     $ 9,092     $ (2,153   $ 6,939     $ 19     $ 0  

Pay

 

3-Month USD-LIBOR

    2.250       06/15/2026       26,800       1,267       (1,126     141       7       0  

Pay(5)

 

3-Month USD-LIBOR

    2.500       12/20/2027       48,400       333       445       778       22       0  

Pay

 

3-Month USD-LIBOR

    3.500       06/19/2044       201,500       (6,574     45,197       38,623       134       0  

Receive

 

3-Month USD-LIBOR

    2.250       12/21/2046       31,900       (2,902     4,925       2,023       0       (39

Receive

 

3-Month USD-LIBOR

    1.750       06/21/2047           313,100       55,281       1,489       56,770       0       (289

Pay

 

6-Month  AUD-BBR-BBSW

    3.000       12/17/2019       AUD      12,900       185       51       236       5       0  

Pay

 

6-Month  AUD-BBR-BBSW

    3.500       06/17/2025       8,100       201       182       383       6       0  

Receive(5)

 

6-Month EUR-EURIBOR

    1.000       09/20/2027       EUR      12,600       15       (47     (32     28       0  

Receive(5)

 

6-Month GBP-LIBOR

    1.500       09/20/2027       GBP      24,000       (388     (191     (579     68       0  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          $ 56,510     $ 48,772     $ 105,282     $ 289     $ (328
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $     57,219     $     49,513     $     106,732     $     313     $     (328
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2017:

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
   

Total

          Market Value     Variation Margin
Liability
   

Total

 
     Purchased
Options
    Futures     Swap
Agreements
            Written
Options
    Futures     Swap
Agreements
   

Total Exchange-Traded or Centrally Cleared

  $     0     $     0     $     313     $     313       $     0     $     0     $     (328)     $     (328)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

Cash of $16,638 has been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2017. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4)

The prices and resulting values for credit default swap agreements on credit indices serve as indicators of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(5)

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(n)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

AZD

     08/2017     AUD     494     $     375     $ 0     $ (21

BOA

     08/2017     EUR     1,172         1,355       0       (33
     08/2017     GBP     1,683         2,180       0       (40

BPS

     08/2017     EUR     37,289         42,310       0       (1,832
     08/2017     JPY     204,255         1,827       0       (26

CBK

     08/2017     EUR     207         241       0       (4
     08/2017     GBP     203         262       0       (5

GLM

     08/2017         395         510       0       (11
     08/2017     $     52,022     GBP     39,591       214       0  
     09/2017     GBP     39,591     $     52,080       0       (214

HUS

     08/2017     AUD     172         131       0       (6

JPM

     08/2017     EUR     154         176       0       (7
     08/2017     $     852     GBP     660       18       0  

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   69


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

MSB

     08/2017     $     46,435     EUR     39,611     $ 456     $ 0  
     09/2017     EUR     39,611     $     46,518       0       (456

TOR

     08/2017     $     1,837     JPY     204,255       16       0  
     09/2017     JPY     204,255     $     1,839       0       (16

UAG

     08/2017     EUR     789         902       0       (32
     08/2017     GBP     37,970         48,706       0       (1,392
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

  $     704     $     (4,095
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION(1)

 

Counterparty

 

Reference Entity

  Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2017(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000     12/20/2024       3.536     $    1,000     $ (195   $ 40     $ 0     $ (155
GST  

Petrobras Global Finance BV

    1.000       09/20/2020       1.821       10       (1     1       0       0  
 

Petrobras Global Finance BV

    1.000       12/20/2021       2.538       100       (16     10       0       (6
 

Petrobras Global Finance BV

    1.000       12/20/2024       3.536       1,400       (278     61       0       (217
HUS  

Petrobras Global Finance BV

    1.000       12/20/2019       1.407       300       (25     22       0       (3
 

Petrobras Global Finance BV

    1.000       09/20/2020       1.821       40       (6     5       0       (1
 

Petrobras Global Finance BV

    1.000       12/20/2024       3.536       1,700       (353     89       0       (264
MYC  

Petrobras Global Finance BV

    1.000       12/20/2019       1.407           8,700       (805     733       0       (72
           

 

 

   

 

 

   

 

 

   

 

 

 
          $ (1,679   $ 961     $ 0     $ (718
           

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

    $     (1,679   $     961     $     0     $     (718
           

 

 

   

 

 

   

 

 

   

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral pledged/(received) as of July 31, 2017:

 

    Financial Derivative Assets            Financial Derivative Liabilities                    
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
            Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
Pledged/
(Received)
    Net
Exposure(4)
 

AZD

  $ 0      $ 0      $ 0      $ 0        $ (21   $ 0      $ 0     $ (21   $ (21   $ 0     $ (21

BOA

    0        0        0        0          (73     0        0       (73     (73     0       (73

BPS

    0        0        0        0          (1,858     0        (155     (2,013      (2,013      1,684        (329

CBK

    0        0        0        0          (9     0        0       (9     (9     0       (9

GLM

    214        0        0        214          (225     0        0       (225     (11     0       (11

GST

    0        0        0        0          0       0        (223     (223     (223     305       82  

HUS

    0        0        0        0          (6     0        (268     (274     (274     377       103  

JPM

    18        0        0        18          (7     0        0       (7     11       0       11  

MSB

    456        0        0        456          (456     0        0       (456     0       0       0  

MYC

    0        0        0        0          0       0        (72     (72     (72     (38     (110

TOR

    16        0        0        16          (16     0        0       (16     0       0       0  

UAG

    0        0        0        0          (1,424     0        0       (1,424     (1,424     1,101       (323
 

 

 

    

 

 

    

 

 

    

 

 

      

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $  704      $  0      $  0      $  704        $  (4,095   $  0      $  (718   $  (4,813      
 

 

 

    

 

 

    

 

 

    

 

 

      

 

 

   

 

 

    

 

 

   

 

 

       

 

(o) Securities with an aggregate market value of $3,537 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2017.

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as indicators of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 8, Master Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

70   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2017

 

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 24     $ 0     $ 0     $ 289     $ 313  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 704     $ 0     $ 704  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 24     $ 0     $ 704     $ 289     $ 1,017  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 0     $ 0     $ 0     $ 328     $ 328  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 4,095     $ 0     $ 4,095  

Swap Agreements

    0       718       0       0       0       718  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 718     $ 0     $ 4,095     $ 0     $ 4,813  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     718     $     0     $     4,095     $     328     $     5,141  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2017:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain on Financial Derivative Instruments

 

         

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 1,092     $ 0     $ 0     $ 50,049     $ 51,141  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 2,089     $ 0     $ 2,089  

Swap Agreements

    0       220       0       0       0       220  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 220     $ 0     $ 2,089     $ 0     $ 2,309  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 1,312     $ 0     $ 2,089     $ 50,049     $ 53,450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

 

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0     $ 252     $ 0     $ 0     $ (42,848   $ (42,596
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ (3,144   $ 0     $ (3,144

Swap Agreements

    0       1,690       0       0       0       1,690  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 1,690     $ 0     $ (3,144   $ 0     $ (1,454
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     1,942     $     0     $     (3,144   $     (42,848   $     (44,050
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2017 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Investments in Securities, at Value

       

Loan Participations and Assignments

  $     0     $ 23,330     $ 871     $ 24,201  

Corporate Bonds & Notes

       

Banking & Finance

    0           158,597           4,451           163,048  

Industrials

    0       120,474       2,020       122,494  

Utilities

    0       38,042       0       38,042  

Convertible Bonds & Notes

       

Industrials

    0       4,241       0       4,241  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Municipal Bonds & Notes

       

California

  $     0     $ 7,371     $ 0     $ 7,371  

Illinois

    0       884       0       884  

Ohio

    0           21,427       0       21,427  

Virginia

    0       717       0       717  

West Virginia

    0       14,059       0       14,059  

U.S. Government Agencies

    0       10,749           4,994           15,743  

Non-Agency Mortgage-Backed Securities

    0       137,778       0       137,778  

Asset-Backed Securities

    0       116,885       9,442       126,327  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2017   71


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

July 31, 2017

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Sovereign Issues

  $ 0     $ 16,117     $ 0     $ 16,117  

Common Stocks

       

Energy

    234       0       0       234  

Financials

    0       0       2,734       2,734  

Warrants

       

Industrials

    0       0       384       384  

Utilities

    12       0       0       12  

Preferred Securities

       

Banking & Finance

    0       11,249       0       11,249  

Industrials

    0       0       14,820       14,820  

Short-Term Instruments

       

Repurchase Agreements

    0       13,099       0       13,099  

U.S. Treasury Bills

    0       3,537       0       3,537  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     246     $     698,556     $     39,716     $     738,518  
 

 

 

   

 

 

   

 

 

   

 

 

 
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2017
 

Financial Derivative Instruments - Assets

 

     

Exchange-traded or centrally cleared

  $ 0     $ 313     $ 0     $ 313  

Over the counter

    0       704       0       704  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 1,017     $ 0     $ 1,017  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

   

Exchange-traded or centrally cleared

    0       (328     0       (328

Over the counter

    0       (4,813     0       (4,813
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (5,141   $ 0     $ (5,141
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ (4,124   $ 0     $ (4,124
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     246     $     694,432     $     39,716     $     734,394  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2017.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2017:

 

Category and Subcategory   Beginning
Balance
at 07/31/2016
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation)(1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2017
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2017(1)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 831     $ 0     $ 1     $ 0     $ 39     $ 0     $ 0     $ 871     $ 39  

Corporate Bonds & Notes

                   

Banking & Finance

    5,517       200       (1,249     2       153       (172     0       0       4,451       (1

Industrials

    1,991       0       0       3       0       26       0       0       2,020       26  

U.S. Government Agencies

    4,736       0       (87     85       35       225       0       0       4,994       219  

Asset-Backed Securities

    5,917       4,499       0       23       0       (997     0       0       9,442       (997

Common Stocks

                   

Financials

    316       2,040       0       0       0       378       0       0       2,734       378  

Warrants

                   

Industrials

    0       0       0       0       0       384       0       0       384       384  

Preferred Securities

                   

Industrials

    0       15,193       0       0       0       (373     0       0       14,820       (373
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     18,477     $     22,763     $     (1,336   $     114     $     188     $     (490   $     0     $     0     $     39,716     $     (325
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and Subcategory   Ending
Balance
at 07/31/2017
    Valuation
Technique
     Unobservable
Inputs
    Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

      

Loan Participations and Assignments

  $ 277       Other Valuation Techniques(2)              —    
    398       Proxy Pricing        Base Price       99.500  
    196       Third Party Vendor        Broker Quote       98.000  

Corporate Bonds & Notes

        

Banking & Finance

    4,451       Proxy Pricing        Base Price       101.000-114.491  

Industrials

    2,020       Proxy Pricing        Base Price       101.000  

U.S. Government Agencies

    4,994       Proxy Pricing        Base Price       57.000  

Asset-Backed Securities

    9,442       Proxy Pricing        Base Price       52.170-100,000.000  

Common Stocks

        

Financials

    2,734       Other Valuation Techniques(2)              —    

Warrants

        

Industrials

    384       Other Valuation Techniques(2)              —    

Preferred Securities

        

Industrials

    14,820       Fundamental Valuation        Company Assets       $    551,000.000  
 

 

 

        

Total

  $     39,716         
 

 

 

        

 

(1)

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2017 may be due to an investment no longer held or categorized as Level 3 at period end.

(2)

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

72   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Notes to Financial Statements

 

July 31, 2017

 

1. ORGANIZATION

 

PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, PIMCO High Income Fund, PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II (each a “Fund” and collectively the “Funds”) are organized as closed-end management investment companies registered under the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (the “Act”). Each Fund was organized as a Massachusetts business trust on the dates shown in the table below. Pacific Investment Management Company LLC (“PIMCO” or the “Manager”) serves as the Funds’ investment manager.

 

Fund Name         Formation Date  

PIMCO Corporate & Income Opportunity Fund

      September 13, 2002  

PIMCO Corporate & Income Strategy Fund

      October 17, 2001  

PIMCO High Income Fund

      February 18, 2003  

PIMCO Income Strategy Fund

      June 19, 2003  

PIMCO Income Strategy Fund II

      June 30, 2004  

 

Each Fund has authorized an unlimited number of Common Shares at a par value of $0.00001 per share.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

The following is a summary of significant accounting policies consistently followed by each Fund in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Each Fund is treated as an investment company under the reporting requirements of U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

 

(a) Securities Transactions and Investment Income  Securities transactions are recorded as of the trade date for financial reporting purposes. Realized gains (losses) from securities sold are recorded on the identified cost basis. Securities purchased or sold on a when-issued or delayed-delivery basis may be settled beyond a standard settlement period for the security after the trade date. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, which are recorded as soon as a Fund is informed of the ex-dividend date. Interest income, adjusted for the accretion of discounts and amortization of premiums, is recorded on the accrual basis from settlement date, with the exception of securities with a forward starting effective date, where interest income is recorded on the accrual basis from effective date. For convertible securities, premiums attributable to

the conversion feature are not amortized. Estimated tax liabilities on certain foreign securities are recorded on an accrual basis and are reflected as components of interest income or net change in unrealized appreciation (depreciation) on investments on the Statements of Operations, as appropriate. Tax liabilities realized as a result of such security sales are reflected as a component of net realized gain (loss) on investments on the Statements of Operations. Paydown gains (losses) on mortgage-related and other asset-backed securities, if any, are recorded as components of interest income on the Statements of Operations. Income or short-term capital gain distributions received from registered investment companies, if any, are recorded as dividend income. Long-term capital gain distributions received from registered investment companies, if any, are recorded as realized gains.

 

Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivable when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is probable.

 

(b) Cash and Foreign Currency  The functional and reporting currency for the Funds is the U.S. dollar. The market values of foreign securities, currency holdings and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the current exchange rates each business day. Purchases and sales of securities and income and expense items denominated in foreign currencies, if any, are translated into U.S. dollars at the exchange rate in effect on the transaction date. The Funds do not separately report the effects of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized gain (loss) and net change in unrealized appreciation (depreciation) from investments on the Statements of Operations. The Funds may invest in foreign currency-denominated securities and may engage in foreign currency transactions either on a spot (cash) basis at the rate prevailing in the currency exchange market at the time or through a forward foreign currency contract. Realized foreign exchange gains (losses) arising from sales of spot foreign currencies, currency gains (losses) realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid are included in net realized gain (loss) on foreign currency transactions on the Statements of Operations. Net unrealized foreign exchange gains (losses) arising from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period are included in net change in unrealized appreciation (depreciation) on foreign currency assets and liabilities on the Statements of Operations.

 

 

  ANNUAL REPORT   JULY 31, 2017   73


Notes to Financial Statements (Cont.)

 

 

(c) Distributions — Common Shares  The following table shows the anticipated frequency of distributions from net investment income and gains from the sale of portfolio securities and other sources to common shareholders.

 

          Distribution Frequency  
Fund Name         Declared     Distributed  

PIMCO Corporate & Income Opportunity Fund

      Monthly       Monthly  

PIMCO Corporate & Income Strategy Fund

      Monthly       Monthly  

PIMCO High Income Fund

      Monthly       Monthly  

PIMCO Income Strategy Fund

      Monthly       Monthly  

PIMCO Income Strategy Fund II

      Monthly       Monthly  

 

Net realized capital gains earned by each Fund, if any, will be distributed no less frequently than once each year.

 

A Fund may engage in investment strategies, including the use of derivatives, to, among other things, generate current, distributable income even if such strategies could potentially result in declines in the Fund’s net asset value (“NAV”). A Fund’s income and gain-generating strategies, including certain derivatives strategies, may generate current income and gains taxable as ordinary income sufficient to support monthly distributions even in situations when the Fund has experienced a decline in net assets due to, for example, adverse changes in the broad U.S. or non-U.S. equity markets or the Fund’s debt investments, or arising from its use of derivatives. A Fund may enter into opposite sides of interest rate swap and other derivatives for the principal purpose of generating distributable gains on the one side (characterized as ordinary income for tax purposes) that are not part of the Fund’s duration or yield curve management strategies (“paired swap transactions”), and with a substantial possibility that the Fund will experience a corresponding capital loss and decline in NAV with respect to the opposite side transaction (to the extent it does not have corresponding offsetting capital gains). Consequently, common shareholders may receive distributions and owe tax at a time when their investment in a Fund has declined in value, which tax may be at ordinary income rates, and which may be economically similar to a taxable return of capital. The tax treatment of certain derivatives may be open to different interpretations. Any recharacterization of payments made or received by a Fund pursuant to derivatives potentially could affect the amount, timing or character of Fund distributions. In addition, the tax treatment of such investment strategies may be changed by regulation or otherwise.

 

Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from U.S. GAAP. Differences between tax regulations and U.S. GAAP may cause timing differences between income and capital gain recognition. Further, the character of investment income and capital gains may be different for certain transactions under the two methods of accounting.

As a result, income distributions and capital gain distributions declared during a fiscal period may differ significantly from the net investment income (loss) and realized gains (losses) reported on each Fund’s annual financial statements presented under U.S. GAAP.

 

If a Fund estimates that a portion of one of its dividend distributions may be comprised of amounts from sources other than net investment income in accordance with its policies and good accounting practices, the Fund will notify shareholders of record of the estimated composition of such distribution through a Section 19 Notice. For these purposes, a Fund estimates the source or sources from which a distribution is paid, to the close of the period as of which it is paid, in reference to its internal accounting records and related accounting practices. If, based on such accounting records and practices, it is estimated that a particular distribution does not include capital gains or paid-in surplus or other capital sources, a Section 19 Notice generally would not be issued. It is important to note that differences exist between a Fund’s daily internal accounting records and practices, a Fund’s financial statements presented in accordance with U.S. GAAP, and recordkeeping practices under income tax regulations. For instance, a Fund’s internal accounting records and practices may take into account, among other factors, tax-related characteristics of certain sources of distributions that differ from treatment under U.S. GAAP. Examples of such differences may include, among others, the treatment of paydowns on mortgage-backed securities purchased at a discount and periodic payments under interest rate swap contracts. Accordingly, among other consequences, it is possible that a Fund may not issue a Section 19 Notice in situations where the Fund’s financial statements prepared later and in accordance with U.S. GAAP and/or the final tax character of those distributions might later report that the sources of those distributions included capital gains and/or a return of capital. Please visit www.pimco.com for the most recent Section 19 Notice, if applicable, for additional information regarding the estimated composition of distributions. Final determination of a distribution’s tax character will be reported on Form 1099 DIV sent to shareholders for the calendar year.

 

Distributions classified as a tax basis return of capital, if any, are reflected on the Statements of Changes in Net Assets and have been recorded to paid in capital. In addition, other amounts have been reclassified between undistributed (overdistributed) net investment income (loss), accumulated undistributed (overdistributed) net realized gain (loss) and/or paid in capital to more appropriately conform U.S. GAAP to tax characterizations of distributions.

 

(d) New Accounting Pronouncements  In August 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”), ASU 2014-15 requiring management to evaluate whether there are conditions or events, considered in the aggregate,

 

 

74   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

that raise substantial doubt about the entity’s ability to continue as a going concern. The ASU is effective prospectively for annual periods ending after December 15, 2016, and interim periods thereafter. The Funds have adopted the ASU. The implementation of the ASU did not have an impact on the Funds’ financial statements.

 

In May 2015, the FASB issued ASU 2015-07 which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. The ASU also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. The ASU is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. The Funds have adopted the ASU. The implementation of the ASU did not have an impact on the Funds’ financial statements.

 

In March 2016, the FASB issued ASU 2016-05 which provides guidance related to the impact of derivative contract novations on certain relationships under Accounting Standards Codification (“ASC”) 815. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. At this time, management is evaluating the implications of these changes on the financial statements.

 

In August 2016, the FASB issued ASU 2016-15 which amends ASC 230 to clarify guidance on the classification of certain cash receipts and cash payments in the Statement of Cash Flows. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. At this time, management is evaluating the implications of these changes on the financial statements.

 

In October 2016, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules and forms, and amendments to certain current rules and forms, to modernize reporting and disclosure of information by registered investment companies. The amendments to Regulation S-X will require standardized, enhanced disclosure about derivatives in investment company financial statements, and will also change the rules governing the form and content of such financial statements. The compliance date for these amendments is August 1, 2017. Compliance is based on reporting period-end date. At this time, management is assessing the anticipated impact of these regulatory developments.

 

In November 2016, the FASB issued ASU 2016-18 which amends ASC 230 to provide guidance on the classification and presentation of changes in restricted cash and restricted cash equivalents on the Statement of Cash Flows. The ASU is effective for annual periods

beginning after December 15, 2017, and interim periods within those annual periods. At this time, management is evaluating the implications of these changes on the financial statements.

 

In March 2017, the FASB issued ASU 2017-08 which provides guidance related to the amortization period for certain purchased callable debt securities held at a premium. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Funds have adopted the ASU. The implementation of the ASU did not have an impact on the Funds’ financial statements.

 

3. INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS

 

(a) Investment Valuation Policies  The NAV of a Fund’s shares is determined by dividing the total value of portfolio investments and other assets attributable to that Fund less any liabilities by the total number of shares outstanding of that Fund.

 

On each day that the New York Stock Exchange (“NYSE”) is open, Fund shares are ordinarily valued as of the close of regular trading (“NYSE Close”). Information that becomes known to the Funds or their agents after the time as of which NAV has been calculated on a particular day will not generally be used to retroactively adjust the price of a security or the NAV determined earlier that day. Each Fund reserves the right to change the time as of which its respective NAV is calculated if the Fund closes earlier, or as permitted by the SEC.

 

For purposes of calculating NAV, portfolio securities and other assets for which market quotes are readily available are valued at market value. Market value is generally determined on the basis of official closing prices or the last reported sales prices, or if no sales are reported, based on quotes obtained from established market makers or prices (including evaluated prices) supplied by the Funds’ approved pricing services, quotation reporting systems and other third-party sources (together, “Pricing Services”). The Funds will normally use pricing data for domestic equity securities received shortly after the NYSE Close and do not normally take into account trading, clearances or settlements that take place after the NYSE Close. If market value pricing is used, a foreign (non-U.S.) equity security traded on a foreign exchange or on more than one exchange is typically valued using pricing information from the exchange considered by PIMCO to be the primary exchange. A foreign (non-U.S.) equity security will be valued as of the close of trading on the foreign exchange, or the NYSE Close, if the NYSE Close occurs before the end of trading on the foreign exchange. Domestic and foreign (non-U.S.) fixed income securities, non-exchange traded derivatives, and equity options are normally valued on the basis of quotes obtained from brokers and dealers or Pricing Services using data reflecting the earlier closing of the principal markets for those securities. Prices obtained from Pricing Services may

 

 

  ANNUAL REPORT   JULY 31, 2017   75


Notes to Financial Statements (Cont.)

 

be based on, among other things, information provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain fixed income securities purchased on a delayed-delivery basis are marked to market daily until settlement at the forward settlement date. Exchange-traded options, except equity options, futures and options on futures are valued at the settlement price determined by the relevant exchange. Swap agreements are valued on the basis of bid quotes obtained from brokers and dealers or market-based prices supplied by Pricing Services. A Fund’s investments in open-end management investment companies, other than exchange-traded funds (“ETFs”), are valued at the NAVs of such investments.

 

If a foreign (non-U.S.) equity security’s value has materially changed after the close of the security’s primary exchange or principal market but before the NYSE Close, the security may be valued at fair value based on procedures established and approved by the Board of Trustees (the “Board”). Foreign (non-U.S.) equity securities that do not trade when the NYSE is open are also valued at fair value. With respect to foreign (non-U.S.) equity securities, a Fund may determine the fair value of investments based on information provided by Pricing Services and other third-party vendors, which may recommend fair value or adjustments with reference to other securities, indices or assets. In considering whether fair valuation is required and in determining fair values, a Fund may, among other things, consider significant events (which may be considered to include changes in the value of U.S. securities or securities indices) that occur after the close of the relevant market and before the NYSE Close. A Fund may utilize modeling tools provided by third-party vendors to determine fair values of non-U.S. securities. Foreign exchanges may permit trading in foreign (non-U.S.) equity securities on days when a Fund is not open for business, which may result in a Fund’s portfolio investments being affected when shareholders are unable to buy or sell shares.

 

Senior secured floating rate loans for which an active secondary market exists to a reliable degree will be valued at the mean of the last available bid/ask prices in the market for such loans, as provided by a Pricing Service. Senior secured floating rate loans for which an active secondary market does not exist to a reliable degree will be valued at fair value, which is intended to approximate market value. In valuing a senior secured floating rate loan at fair value, the factors considered may include, but are not limited to, the following: (a) the creditworthiness of the borrower and any intermediate participants, (b) the terms of the loan, (c) recent prices in the market for similar loans, if any, and (d) recent prices in the market for instruments of similar quality, rate, period until next interest rate reset and maturity.

 

Investments valued in currencies other than the U.S. dollar are converted to the U.S. dollar using exchange rates obtained from Pricing

Services. As a result, the value of such investments and, in turn, the NAV of a Fund’s shares may be affected by changes in the value of currencies in relation to the U.S. dollar. The value of investments traded in markets outside the United States or denominated in currencies other than the U.S. dollar may be affected significantly on a day that a Fund is not open for business. As a result, to the extent that a Fund holds foreign (non-U.S.) investments, the value of those investments may change at times when shareholders are unable to buy or sell shares and the value of such investments will be reflected in the Fund’s next calculated NAV.

 

Investments for which market quotes or market based valuations are not readily available are valued at fair value as determined in good faith by the Board or persons acting at their direction. The Board has adopted methods for valuing securities and other assets in circumstances where market quotes are not readily available, and has delegated to PIMCO the responsibility for applying the fair valuation methods. In the event that market quotes or market based valuations are not readily available, and the security or asset cannot be valued pursuant to a Board approved valuation method, the value of the security or asset will be determined in good faith by the Valuation Oversight Committee of the Board (“Valuation Oversight Committee”), generally based on recommendations provided by the Manager. Market quotes are considered not readily available in circumstances where there is an absence of current or reliable market-based data (e.g., trade information, bid/ask information, indicative market quotations (“Broker Quotes”), Pricing Services’ prices), including where events occur after the close of the relevant market, but prior to the NYSE Close, that materially affect the values of a Fund’s securities or assets. In addition, market quotes are considered not readily available when, due to extraordinary circumstances, the exchanges or markets on which the securities trade do not open for trading for the entire day and no other market prices are available. The Board has delegated to the Manager the responsibility for monitoring significant events that may materially affect the values of a Fund’s securities or assets and for determining whether the value of the applicable securities or assets should be reevaluated in light of such significant events.

 

When a Fund uses fair valuation to determine the value of a portfolio security or other asset for purposes of calculating its NAV, such investments will not be priced on the basis of quotes from the primary market in which they are traded, but rather may be priced by another method that the Board or persons acting at their direction believe reflects fair value. Fair valuation may require subjective determinations about the value of a security. While the Funds’ policy is intended to result in a calculation of a Fund’s NAV that fairly reflects security values as of the time of pricing, the Funds cannot ensure that fair values determined by the Board or persons acting at their direction would

 

 

76   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

accurately reflect the price that a Fund could obtain for a security if it were to dispose of that security as of the time of pricing (for instance, in a forced or distressed sale). The prices used by a Fund may differ from the value that would be realized if the securities were sold.

 

(b) Fair Value Hierarchy  U.S. GAAP describes fair value as the price that a Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy that prioritizes inputs to valuation methods and requires disclosure of the fair value hierarchy, separately for each major category of assets and liabilities, that segregates fair value measurements into levels (Level 1, 2, or 3). The inputs or methodology used for valuing securities are not necessarily an indication of the risks associated with investing in those securities. Levels 1, 2, and 3 of the fair value hierarchy are defined as follows:

 

   

Level 1 — Quoted prices in active markets or exchanges for identical assets and liabilities.

 

   

Level 2 — Significant other observable inputs, which may include, but are not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.

 

   

Level 3 — Significant unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available, which may include assumptions made by the Board or persons acting at their direction that are used in determining the fair value of investments.

 

Assets or liabilities categorized as Level 2 or 3 as of period end have been transferred between Levels 2 and 3 since the prior period due to changes in the method utilized in valuing the investments. Transfers from Level 3 to Level 2 are a result of the availability of current and reliable market-based data provided by Pricing Services or other valuation techniques which utilize significant observable inputs. In accordance with the requirements of U.S. GAAP, the amounts of transfers between Levels 1 and 2 and transfers into and out of Level 3, if material, are disclosed in the Notes to Schedule of Investments for each respective Fund.

 

For fair valuations using significant unobservable inputs, U.S. GAAP requires a reconciliation of the beginning to ending balances for reported fair values that presents changes attributable to realized gain (loss), unrealized appreciation (depreciation), purchases and sales, accrued discounts (premiums), and transfers into and out of the Level 3 category during the period. The end of period value is used for the

transfers between Levels of a Fund’s assets and liabilities. Additionally, U.S. GAAP requires quantitative information regarding the significant unobservable inputs used in the determination of fair value of assets or liabilities categorized as Level 3 in the fair value hierarchy. In accordance with the requirements of U.S. GAAP, a fair value hierarchy, and if material, a Level 3 reconciliation and details of significant unobservable inputs, have been included in the Notes to Schedule of Investments for each respective Fund.

 

(c) Valuation Techniques and the Fair Value Hierarchy

Level 1 and Level 2 trading assets and trading liabilities, at fair value  The valuation methods (or “techniques”) and significant inputs used in determining the fair values of portfolio securities or other assets and liabilities categorized as Level 1 and Level 2 of the fair value hierarchy are as follows:

 

Fixed income securities including corporate, convertible and municipal bonds and notes, U.S. government agencies, U.S. treasury obligations, sovereign issues, bank loans, convertible preferred securities and non-U.S. bonds are normally valued on the basis of quotes obtained from brokers and dealers or Pricing Services that use broker-dealer quotations, reported trades or valuation estimates from their internal pricing models. The Pricing Services’ internal models use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar assets. Securities that use similar valuation techniques and inputs as described above are categorized as Level 2 of the fair value hierarchy.

 

Fixed income securities purchased on a delayed-delivery basis or as a repurchase commitment in a sale-buyback transaction are marked to market daily until settlement at the forward settlement date and are categorized as Level 2 of the fair value hierarchy.

 

Mortgage-related and asset-backed securities are usually issued as separate tranches, or classes, of securities within each deal. These securities are also normally valued by Pricing Services that use broker-dealer quotations, reported trades or valuation estimates from their internal pricing models. The pricing models for these securities usually consider tranche-level attributes, current market data, estimated cash flows and market-based yield spreads for each tranche, and incorporate deal collateral performance, as available. Mortgage-related and asset-backed securities that use similar valuation techniques and inputs as described above are categorized as Level 2 of the fair value hierarchy.

 

Common stocks, ETFs, exchange-traded notes and financial derivative instruments, such as futures contracts, rights and warrants, or options on futures that are traded on a national securities exchange, are stated at the last reported sale or settlement price on the day of valuation. To

 

 

  ANNUAL REPORT   JULY 31, 2017   77


Notes to Financial Statements (Cont.)

 

the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level 1 of the fair value hierarchy.

 

Valuation adjustments may be applied to certain securities that are solely traded on a foreign exchange to account for the market movement between the close of the foreign market and the NYSE Close. These securities are valued using Pricing Services that consider the correlation of the trading patterns of the foreign security to the intraday trading in the U.S. markets for investments. Securities using these valuation adjustments are categorized as Level 2 of the fair value hierarchy. Preferred securities and other equities traded on inactive markets or valued by reference to similar instruments are also categorized as Level 2 of the fair value hierarchy.

 

Equity exchange-traded options and over the counter financial derivative instruments, such as forward foreign currency contracts, options contracts, or swap agreements, derive their value from underlying asset prices, indices, reference rates, and other inputs or a combination of these factors. Other than swap agreements, which are valued using a broker-dealer bid quotation or on market-based prices provided by Pricing Services, these contracts are normally valued on the basis of quotes obtained from a quotation reporting system, established market makers or Pricing Services (normally determined as of the NYSE Close). Depending on the product and the terms of the transaction, financial derivative instruments can be valued by Pricing Services using a series of techniques, including simulation pricing models. The pricing models use inputs that are observed from actively quoted markets such as quoted prices, issuer details, indices, bid/ask spreads, interest rates, implied volatilities, yield curves, dividends and exchange rates. Financial derivative instruments that use similar valuation techniques and inputs as described above are categorized as Level 2 of the fair value hierarchy.

 

Centrally cleared swaps and over the counter swaps derive their value from underlying asset prices, indices, reference rates, and other inputs or a combination of these factors. They are valued using a broker-dealer bid quotation based on market-based prices provided by Pricing Services (normally determined as of the NYSE close). Centrally cleared swaps and over the counter swaps can be valued by Pricing Services using a series of techniques, including simulation pricing models. The pricing models may use inputs that are observed from actively quoted markets such as the overnight index swap rate (“OIS”), London Interbank Offered Rate (“LIBOR”) forward rate, interest rates, yield curves and credit spreads. These securities are categorized as Level 2 of the fair value hierarchy.

 

Level 3 trading assets and trading liabilities, at fair value  When a fair valuation method is applied by PIMCO that uses significant

unobservable inputs, investments will be priced by a method that the Board or persons acting at their direction believe reflects fair value and are categorized as Level 3 of the fair value hierarchy. The valuation techniques and significant inputs used in determining the fair values of portfolio assets and liabilities categorized as Level 3 of the fair value hierarchy are as follows:

 

Proxy pricing procedures set the base price of a fixed income security and subsequently adjust the price proportionally to market value changes of a pre-determined security deemed to be comparable in duration, generally a U.S. Treasury or sovereign note based on country of issuance. The base price may be a broker-dealer quote, transaction price, or an internal value as derived by analysis of market data. The base price of the security may be reset on a periodic basis based on the availability of market data and procedures approved by the Valuation Oversight Committee. Significant changes in the unobservable inputs of the proxy pricing process (the base price) would result in direct and proportional changes in the fair value of the security. These securities are categorized as Level 3 of the fair value hierarchy.

 

If third-party evaluated vendor pricing is not available or not deemed to be indicative of fair value, the Manager may elect to obtain Broker Quotes directly from the broker-dealer or passed through from a third-party vendor. In the event that fair value is based upon a single sourced Broker Quote, these securities are categorized as Level 3 of the fair value hierarchy. Broker Quotes are typically received from established market participants. Although independently received, the Manager does not have the transparency to view the underlying inputs which support the market quotation. Significant changes in the Broker Quote would have direct and proportional changes in the fair value of the security.

 

Fundamental analysis valuation estimates fair value by using an internal model that utilizes financial statements of the non-public underlying company. Significant changes in the unobservable inputs would result in direct and proportional changes in the fair value of the security. These securities are categorized as Level 3 of the fair value hierarchy.

 

Short-term debt instruments (such as commercial paper) having a remaining maturity of 60 days or less may be valued at amortized cost, so long as the amortized cost value of such short-term debt instruments is approximately the same as the fair value of the instrument as determined without the use of amortized cost valuation. These securities are categorized as Level 2 or Level 3 of the fair value hierarchy depending on the source of the base price.

 

 

 

78   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

4. SECURITIES AND OTHER INVESTMENTS

 

(a) Investments in Securities

Loan Participations, Assignments and Originations  Certain Funds may invest in direct debt instruments which are interests in amounts owed to lenders or lending syndicates by corporate, governmental, or other borrowers. A Fund’s investments in loans may be in the form of direct investments, participations in loans or assignments of all or a portion of loans from third parties or exposure to investments in or originations of loans through investments in a mutual fund or other pooled investment vehicle. A loan is often administered by a bank or other financial institution (the “agent”) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. A Fund may invest in multiple series or tranches of a loan, which may have varying terms and carry different associated risks. A Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, a Fund may be subject to the credit risk of both the borrower and the agent that is selling the loan agreement.

 

In the event of the insolvency of the agent selling a participation, a Fund may be treated as a general creditor of the agent and may not benefit from any set-off between the agent and the borrower. When a Fund purchases assignments from agents it acquires direct rights against the borrowers of the loans. These loans may include participations in bridge loans, which are loans taken out by borrowers for a short period (typically less than one year) pending arrangement of more permanent financing through, for example, the issuance of bonds, frequently high yield bonds issued for the purpose of acquisitions.

 

Investments in loans are generally subject to risks similar to those of investments in other types of debt obligations, including, among others, credit risk, interest rate risk, variable and floating rate securities risk, and risks associated with mortgage-related securities. In addition, in many cases loans are subject to the risks associated with below-investment grade securities. The Funds may be subject to heightened or additional risks and potential liabilities and costs by investing in mezzanine and other subordinated loans or acting as an originator of loans, including those arising under bankruptcy, fraudulent conveyance, equitable subordination, lender liability, environmental and other laws and regulations, and risks and costs associated with debt servicing and taking foreclosure actions associated with the loans. To the extent that a Fund originates a loan, it may be responsible for all or a substantial portion of the expenses associated with initiating the loan. This may include significant legal and due diligence expenses, which will be indirectly borne by a Fund and its shareholders. A Fund may pay fees and expenses associated with originating a loan, including significant legal and due diligence expenses, irrespective of whether the loan transaction is ultimately consummated or closed.

Additionally, because loans are not ordinarily registered with the SEC or any state securities commission or listed on any securities exchange, there is usually less publicly available information about such instruments. In addition, loans may not be considered “securities” for purposes of the anti-fraud provisions under the federal securities laws and, as a result, as a purchaser of these instruments, a Fund may not be entitled to the anti-fraud protections of the federal securities laws. In the course of investing in such instruments, a Fund may come into possession of material nonpublic information and, because of prohibitions on trading in securities of issuers while in possession of such information, the Fund may be unable to enter into a transaction in a publicly-traded security of that issuer when it would otherwise be advantageous for the Fund to do so. Alternatively, a Fund may choose not to receive material nonpublic information about an issuer of such loans, with the result that the Fund may have less information about such issuers than other investors who transact in such assets.

 

The types of loans and related investments in which the Funds may invest include, among others, senior loans, subordinated loans (including second lien loans, B-Notes and mezzanine loans), whole loans, commercial real estate and other commercial loans and structured loans. The Funds may originate loans or acquire direct interests in loans through primary loan distributions and/or in private transactions. In the case of subordinated loans, there may be significant indebtedness ranking ahead of the borrower’s obligation to the holder of such a loan, including in the event of the borrower’s insolvency. Mezzanine loans are typically secured by a pledge of an equity interest in the mortgage borrower that owns the real estate rather than an interest in a mortgage.

 

Investments in loans may include unfunded loan commitments, which are contractual obligations for future funding. Unfunded loan commitments may include revolving credit facilities, which may obligate a Fund to supply additional cash to the borrower on demand. Unfunded loan commitments represent a future obligation in full, even though a percentage of the committed amount may not be utilized by the borrower. When investing in a loan participation, a Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the agent selling the loan agreement and only upon receipt of payments by the agent from the borrower. Because investing in unfunded loan commitments creates a future obligation for a Fund to provide funding to a borrower upon demand in exchange for a fee, the Fund will segregate or earmark liquid assets with the Fund’s custodian in amounts sufficient to satisfy any such future obligations. A Fund may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a loan. In certain circumstances, a Fund may receive a penalty fee upon the prepayment of a loan by a borrower. Fees earned or paid are recorded as a component of interest income or interest expense, respectively, on the Statements of Operations. As of July 31, 2017,

 

 

  ANNUAL REPORT   JULY 31, 2017   79


Notes to Financial Statements (Cont.)

 

PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, PIMCO High Income Fund, PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II had $1,700,488, $983,572, $1,311,237, $387,292, and $993,497, respectively, in unfunded loan commitments outstanding.

 

Mortgage-Related and Other Asset-Backed Securities  Certain Funds may invest in mortgage-related and other asset-backed securities that directly or indirectly represent a participation in, or are secured by and payable from, loans on real property. Mortgage-related securities are created from pools of residential or commercial mortgage loans, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial banks and others. These securities typically provide a monthly payment which consists of both principal and interest. Interest may be determined by fixed or adjustable rates. In times of declining interest rates, there is a greater likelihood that a Fund’s higher yielding securities will be pre-paid with the Fund being unable to reinvest the proceeds in an investment with as great a yield. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective duration of the security relative to what was anticipated at the time of purchase. Interest-only and principal-only securities are especially sensitive to interest rate changes, which can affect not only their prices but can also change the income flows and repayment assumptions about those investments. The timely payment of principal and interest of certain mortgage-related securities is guaranteed with the full faith and credit of the U.S. Government. Pools created and guaranteed by non-governmental issuers, including government-sponsored corporations, may be supported by various forms of insurance or guarantees, but there can be no assurance that private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Many of the risks of investing in mortgage-related securities secured by commercial mortgage loans (“CMBS”) reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make lease payments, and the ability of a property to attract and retain tenants. These securities may be less liquid and may exhibit greater price volatility than other types of mortgage-related or other asset-backed securities. Other asset-backed securities are created from many types of assets, including without limitation, auto loans, credit card receivables, home equity loans, and student loans. The Funds may invest in any level of the capital structure of an issuer of

mortgage-backed or asset-backed securities, including the equity or “first loss” tranche.

 

Collateralized Debt Obligations  (“CDOs”) include Collateralized Bond Obligations (“CBOs”), Collateralized Loan Obligations (“CLOs”) and other similarly structured securities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust which is typically backed by a

diversified pool of high risk, below investment grade fixed income securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. For both CBOs and CLOs, the cash flows from the trust are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the “equity” tranche which bears the bulk of defaults from the bonds or loans in the trust and serves to protect the other, more senior tranches from default in all but the most severe circumstances. Since it is partially protected from defaults, a senior tranche from a CBO trust or CLO trust typically has higher ratings and lower yields than the underlying securities, and can be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults and aversion to CBO or CLO securities as a class. The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which a Fund invests. CDOs carry additional risks including, but not limited to, (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments, (ii) the collateral may decline in value or default, (iii) a Fund may invest in CDOs that are subordinate to other classes, and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.

 

Collateralized Mortgage Obligations  (“CMOs”) are debt obligations of a legal entity that are collateralized by whole mortgage loans or private mortgage bonds and divided into classes. CMOs are structured into multiple classes, often referred to as “tranches”, with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. CMOs may be less liquid and may exhibit greater price volatility than other types of mortgage-related or asset-backed securities.

 

As CMOs have evolved, some classes of CMO bonds have become more common. For example, a Fund may invest in parallel-pay and planned amortization class (“PAC”) CMOs and multi-class pass-through certificates. Parallel-pay CMOs and multi-class pass-through certificates are structured to provide payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class, which, as with other CMO and multi-class pass-through structures, must be retired by its stated maturity date or final distribution date but may be retired earlier. PACs generally require payments of a specified amount of principal on each payment date. PACs are parallel-pay CMOs with the required principal amount

 

 

80   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

on such securities having the highest priority after interest has been paid to all classes. Any CMO or multi-class pass-through structure that includes PAC securities must also have support tranches — known as support bonds, companion bonds or non-PAC bonds — which lend or absorb principal cash flows to allow the PAC securities to maintain their stated maturities and final distribution dates within a range of actual prepayment experience. These support tranches are subject to a higher level of maturity risk compared to other mortgage-related securities, and usually provide a higher yield to compensate investors. If principal cash flows are received in amounts outside a pre-determined range such that the support bonds cannot lend or absorb sufficient cash flows to the PAC securities as intended, the PAC securities are subject to heightened maturity risk. A Fund may invest in various tranches of CMO bonds, including support bonds and equity or “first loss” tranches (see “Collateralized Debt Obligations” above).

 

Stripped Mortgage-Backed Securities  (“SMBS”) are derivative multi-class mortgage securities. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. SMBS will have one class that will receive all of the interest (the interest-only or “IO” class), while the other class will receive the entire principal (the principal-only or “PO” class). IOs and POs can be extremely volatile in response to changes in interest rates. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. POs perform best when prepayments on the underlying mortgages rise since this increases both the rate at which the principal is returned and the yield to maturity on the PO. When payments on mortgages underlying a PO are slower than anticipated, the life of the PO is lengthened and the yield to maturity is reduced. The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a Fund’s yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Funds may fail to recoup some or all of its initial investment in these securities even if the security is in one of the highest rating categories.

 

Payments received for IOs are included in interest income on the Statements of Operations. Because no principal will be received at the maturity of an IO, adjustments are made to the cost of the security on a monthly basis until maturity. These adjustments are included in interest income on the Statements of Operations. Payments received for POs are treated as reductions to the cost and par value of the securities.

 

Payment In-Kind Securities  Certain Funds may invest in payment in-kind securities (“PIKs”). PIKs may give the issuer the option at each interest payment date of making interest payments in either cash or

additional debt securities. Those additional debt securities usually have the same terms, including maturity dates and interest rates, and associated risks as the original bonds. The daily market quotations of the original bonds may include the accrued interest (referred to as a dirty price) and require a pro rata adjustment from the unrealized appreciation (depreciation) on investments to interest receivable on the Statements of Assets and Liabilities.

 

Restricted Securities  Certain Funds may invest in securities that are subject to legal or contractual restrictions on resale. These securities may generally be sold privately, but are required to be registered or exempted from such registration before being sold to the public. Private placement securities are generally considered to be restricted except for those securities traded between qualified institutional investors under the provisions of Rule 144A of the Securities Act of 1933. Disposal of restricted securities may involve time-consuming negotiations and expenses, and prompt sale at an acceptable price may be difficult to achieve. Restricted securities held by the Funds at July 31, 2017 are disclosed in the Notes to Schedules of Investments.

 

U.S. Government Agencies or Government-Sponsored Enterprises   Certain Funds may invest in securities of U.S. Government agencies or government-sponsored enterprises. U.S. Government securities are obligations of and, in certain cases, guaranteed by, the U.S. Government, its agencies or instrumentalities. Some U.S. Government securities, such as Treasury bills, notes and bonds, and securities guaranteed by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), are supported by the full faith and credit of the U.S. Government; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Department of the Treasury (the “U.S. Treasury”); and others, such as those of the Federal National Mortgage Association (“FNMA” or “Fannie Mae”), are supported by the discretionary authority of the U.S. Government to purchase the agency’s obligations. U.S. Government securities may include zero coupon securities. Zero coupon securities do not distribute interest on a current basis and tend to be subject to a greater risk than interest-paying securities.

 

Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). FNMA is a government-sponsored corporation. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the U.S. Government. FHLMC issues Participation

 

 

  ANNUAL REPORT   JULY 31, 2017   81


Notes to Financial Statements (Cont.)

 

Certificates (“PCs”), which are pass-through securities, each representing an undivided interest in a pool of residential mortgages. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the U.S. Government.

 

Warrants  Certain Funds may receive warrants. Warrants are securities that are usually issued together with a debt security or preferred stock and that give the holder the right to buy a proportionate amount of common stock at a specified price. Warrants are freely transferable and are often traded on major exchanges. Warrants normally have a life that is measured in years and entitle the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued. Warrants may entail greater risks than certain other types of investments. Generally, warrants do not carry the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. If the market price of the underlying stock does not exceed the exercise price during the life of the warrant, the warrant will expire worthless. Warrants may increase the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities. Similarly, the percentage increase or decrease in the value of an equity security warrant may be greater than the percentage increase or decrease in the value of the underlying common stock. Warrants may relate to the purchase of equity or debt securities. Debt obligations with warrants attached to purchase equity securities have many characteristics of convertible securities and their prices may, to some degree, reflect the performance of the underlying stock. Debt obligations also may be issued with warrants attached to purchase additional debt securities at the same coupon rate. A decline in interest rates would permit a Fund to sell such warrants at a profit. If interest rates rise, these warrants would generally expire with no value.

 

When-Issued Transactions   Certain Funds may purchase or sell securities on a when-issued basis. These transactions are made conditionally because a security, although authorized, has not yet been issued in the market. Transactions to purchase or sell securities on a when-issued basis involve a commitment by a Fund to purchase or sell these securities for a predetermined price or yield, with payment and delivery taking place beyond the customary settlement period. A Fund may sell when-issued securities before they are delivered, which may result in a realized gain (loss).

5. BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

The following disclosures contain information on a Fund’s ability to lend or borrow cash or securities to the extent permitted under the Act, which may be viewed as borrowing or financing transactions by a Fund. The location of these instruments in each Fund’s financial statements is described below. For a detailed description of credit and counterparty risks that can be associated with borrowings and other financing transactions, please see Note 7, Principal Risks.

 

(a) Repurchase Agreements  Certain Funds may engage in repurchase agreements. Under the terms of a typical repurchase agreement, a Fund purchases an underlying debt obligation (collateral) subject to an obligation of the seller to repurchase, and a Fund to resell, the obligation at an agreed-upon price and time. In an open maturity repurchase agreement, there is no pre-determined repurchase date and the agreement can be terminated by a Fund or counterparty at any time. The underlying securities for all repurchase agreements are held by a Fund’s custodian or designated subcustodians under tri-party repurchase agreements and in certain instances will remain in custody with the counterparty. The market value of the collateral must be equal to or exceed the total amount of the repurchase obligations, including interest. Repurchase agreements, if any, including accrued interest, are included on the Statements of Assets and Liabilities. Interest earned is recorded as a component of interest income on the Statements of Operations. In periods of increased demand for collateral, a Fund may pay a fee for the receipt of collateral, which may result in interest expense to the Fund.

 

(b) Reverse Repurchase Agreements  Certain Funds may enter into reverse repurchase agreements. In a reverse repurchase agreement, a Fund delivers a security in exchange for cash to a financial institution, the counterparty, with a simultaneous agreement to repurchase the same or substantially the same security at an agreed upon price and date. In an open maturity reverse repurchase agreement, there is no pre-determined repurchase date and the agreement can be terminated by the Fund or counterparty at any time. A Fund is entitled to receive principal and interest payments, if any, made on the security delivered to the counterparty during the term of the agreement. Cash received in exchange for securities delivered plus accrued interest payments to be made by a Fund to counterparties are reflected as a liability on the Statements of Assets and Liabilities. Interest payments made by a Fund to counterparties are recorded as a component of interest expense on the Statements of Operations. In periods of increased demand for the security, a Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, a Fund’s use of the proceeds of

 

 

82   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities. Reverse repurchase agreements involve leverage risk and also the risk that the market value of the securities to be repurchased may decline below the repurchase price, please see Note 7, Principal Risks.

 

6. FINANCIAL DERIVATIVE INSTRUMENTS

 

The following disclosures contain information on how and why the Funds may use financial derivative instruments, the credit-risk-related contingent features in certain financial derivative instruments and how financial derivative instruments affect the Funds’ financial position, results of operations and cash flows. The location and fair value amounts of these instruments on the Statements of Assets and Liabilities and of the realized appreciation (depreciation) and changes in unrealized appreciation (depreciation) related to such instruments on the Statements of Operations, each categorized by type of financial derivative contract and related risk exposure, are included in a table in the Notes to Schedules of Investments. The financial derivative instruments outstanding as of period end and the amounts of realized and changes in unrealized appreciation (depreciation) on financial derivative instruments during the period, as disclosed in the Notes to Schedules of Investments, serve as indicators of the volume of financial derivative activity for the Funds.

 

PIMCO Corporate & Income Opportunity Fund is subject to regulation as a commodity pool under the Commodity Exchange Act pursuant to recent rule changes by the Commodity Futures Trading Commission (the “CFTC”). The Manager has registered with the CFTC as a Commodity Pool Operator and a Commodity Trading Adviser with respect to the Fund, and is a member of the National Futures Association. As a result, additional CFTC-mandated disclosure, reporting and recordkeeping obligations apply to PIMCO Corporate & Income Opportunity Fund. Compliance with the CFTC’s regulatory requirements could increase PIMCO Corporate & Income Opportunity Fund’s expenses, adversely affecting its total return.

 

(a ) Forward Foreign Currency Contracts  Certain Funds may enter into forward foreign currency contracts in connection with settling planned purchases or sales of securities, to hedge the currency exposure associated with some or all of a Fund’s securities or as a part of an investment strategy. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward foreign currency contract fluctuates with changes in foreign currency exchange rates. Forward foreign currency contracts are marked to market daily, and the change in value is recorded by a Fund as an unrealized gain (loss). Realized gains (losses) are equal to the difference between the value of the contract at the time it was opened and the value at the time it was

closed and are recorded upon delivery or receipt of the currency. The contractual obligations of a buyer or seller of a forward foreign currency contract may generally be satisfied by taking or making physical delivery of the underlying currency, establishing an opposite position in the contract and recognizing the profit or loss on both positions simultaneously on the delivery date or, in some instances, paying a cash settlement before the designated date of delivery. These contracts may involve market risk in excess of the unrealized gain (loss) reflected on the Statements of Assets and Liabilities. Although forwards may be intended to minimize the risk of loss due to a decline in the value of the hedged currencies, at the same time, they tend to limit any potential gain which might result should the value of such currencies increase. In addition, a Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. To mitigate such risk, cash or securities may be exchanged as collateral pursuant to the terms of the underlying contracts.

 

(b) Swap Agreements  Certain Funds may invest in swap agreements. Swap agreements are bilaterally negotiated agreements between a Fund and a counterparty to exchange or swap investment cash flows, assets, foreign currencies or market-linked returns at specified, future intervals. Swap agreements may be privately negotiated in the over the counter market (“OTC swaps”) or may be cleared through a third party, known as a central counterparty or derivatives clearing organization (“Centrally Cleared Swaps”). A Fund may enter into asset, credit default, cross-currency, interest rate, total return, variance and other forms of swap agreements to manage its exposure to credit, currency, interest rate, commodity, equity and inflation risk. In connection with these agreements, securities or cash may be identified as collateral or margin in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default or bankruptcy/insolvency.

 

Centrally Cleared Swaps are marked to market daily based upon valuations as determined from the underlying contract or in accordance with the requirements of the central counterparty or derivatives clearing organization. Changes in market value, if any, are reflected as a component of net change in unrealized appreciation (depreciation) on the Statements of Operations. Daily changes in valuation of centrally cleared swaps, if any, are recorded as variation margin on the Statements of Assets and Liabilities. OTC swap payments received or paid at the beginning of the measurement period are included on the Statements of Assets and Liabilities and represent premiums paid or received upon entering into the swap agreement to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors). Upfront premiums received (paid) are initially recorded as liabilities (assets) and subsequently

 

 

  ANNUAL REPORT   JULY 31, 2017   83


Notes to Financial Statements (Cont.)

 

marked to market to reflect the current value of the swap. These upfront premiums are recorded as realized gain (loss) on the Statements of Operations upon termination or maturity of the swap. A liquidation payment received or made at the termination of the swap is recorded as realized gain (loss) on the Statements of Operations. Net periodic payments received or paid by a Fund are included as part of realized gain (loss) on the Statements of Operations.

 

For purposes of applying a Fund’s investment policies and restrictions, swap agreements are generally valued by a Fund at market value. In the case of a credit default swap, in applying certain of a Fund’s investment policies and restrictions, the Funds will value the credit default swap at its notional value or its full exposure value (i.e., the sum of the notional amount for the contract plus the market value), but may value the credit default swap at market value for purposes of applying certain of a Fund’s other investment policies and restrictions. For example, a Fund may value credit default swaps at full exposure value for purposes of a Fund’s credit quality guidelines (if any) because such value in general better reflects a Fund’s actual economic exposure during the term of the credit default swap agreement. As a result, a Fund may, at times, have notional exposure to an asset class (before netting) that is greater or lesser than the stated limit or restriction noted in a Fund’s prospectus. In this context, both the notional amount and the market value may be positive or negative depending on whether a Fund is selling or buying protection through the credit default swap. The manner in which certain securities or other instruments are valued by a Fund for purposes of applying investment policies and restrictions may differ from the manner in which those investments are valued by other types of investors.

 

Entering into swap agreements involves, to varying degrees, elements of interest, credit, market and documentation risk in excess of the amounts recognized on the Statements of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements and that there may be unfavorable changes in interest rates or the asset upon which the swap is based.

 

A Fund’s maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from the counterparty over the contract’s remaining life, to the extent that amount is positive. The risk may be mitigated by having a master netting arrangement between a Fund and the counterparty and by the posting of collateral to a Fund to cover a Fund’s exposure to the counterparty. To the extent a Fund has a policy to limit the net amount owed to or to be received from a single counterparty under existing swap agreements, such limitation only applies to counterparties to OTC swaps and does not apply to centrally cleared swaps where the

counterparty is a central counterparty or derivatives clearing organization.

 

Credit Default Swap Agreements  Certain Funds may use credit default swaps on corporate, loan, sovereign, U.S. municipal or U.S. Treasury issues to provide a measure of protection against defaults of the issuers (i.e., to reduce risk where a Fund owns or has exposure to the referenced obligation) or to take an active long or short position with respect to the likelihood of a particular issuer’s default. Credit default swap agreements involve one party making a stream of payments (referred to as the buyer of protection) to another party (the seller of protection) in exchange for the right to receive a specified return in the event that the referenced entity, obligation or index, as specified in the swap agreement, undergoes a certain credit event. As a seller of protection on credit default swap agreements, a Fund will generally receive from the buyer of protection a fixed rate of income throughout the term of the swap provided that there is no credit event. As the seller, a Fund would effectively add leverage to its portfolio because, in addition to its total net assets, a Fund would be subject to investment exposure on the notional amount of the swap.

 

If a Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, a Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation, other deliverable obligations or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index. If a Fund is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, a Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation, other deliverable obligations or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index. Recovery values are estimated by market makers considering either industry standard recovery rates or entity specific factors and considerations until a credit event occurs. If a credit event has occurred, the recovery value is determined by a facilitated auction whereby a minimum number of allowable broker bids, together with a specified valuation method, are used to calculate the settlement value. The ability to deliver other obligations may result in a cheapest-to-deliver option (the buyer of protection’s right to choose the deliverable obligation with the lowest value following a credit event).

 

 

 

84   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

Credit default swap agreements on corporate or sovereign issues involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default or other credit event. If a credit event occurs and cash settlement is not elected, a variety of other deliverable obligations may be delivered in lieu of the specific referenced obligation. The ability to deliver other obligations may result in a cheapest-to-deliver option (the buyer of protection’s right to choose the deliverable obligation with the lowest value following a credit event).

 

Credit default swap agreements on credit indices involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a write-down, principal shortfall, interest shortfall or default of all or part of the referenced entities comprising the credit index. A credit index is a basket of credit instruments or exposures designed to be representative of some part of the credit market as a whole. These indices are made up of reference credits that are judged by a poll of dealers to be the most liquid entities in the credit default swap market based on the sector of the index. Components of the indices may include, but are not limited to, investment grade securities, high yield securities, asset-backed securities, emerging markets, and/or various credit ratings within each sector. Credit indices are traded using credit default swaps with standardized terms including a fixed spread and standard maturity dates. An index credit default swap references all the names in the index, and if there is a default, the credit event is settled based on that name’s weight in the index. The composition of the indices changes periodically, usually every six months, and for most indices, each name has an equal weight in the index. Credit default swaps on credit indices may be used to hedge a portfolio of credit default swaps or bonds, which is less expensive than it would be to buy many credit default swaps to achieve a similar effect or to take an active long or short position with respect to the likelihood of a particular referenced obligation’s default. Credit default swaps on indices are instruments often used to attempt to protect investors owning bonds against default, but may also be used for speculative purposes.

 

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate, loan, sovereign, U.S. municipal or U.S. Treasury issues as of period end, if any, are disclosed in the Notes to Schedules of Investments. They serve as an indicator of the current status of payment/performance risk and represent the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of

default or other credit event occurring as defined under the terms of the agreement. For credit default swap agreements on asset-backed securities and credit indices, the quoted market prices and resulting values serve as the indicator of the current status of the payment/performance risk. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

 

The maximum potential amount of future payments (undiscounted) that a Fund as a seller of protection could be required to make under a credit default swap agreement equals the notional amount of the agreement. Notional amounts of each individual credit default swap agreement outstanding as of period end for which a Fund is the seller of protection are disclosed in the Notes to Schedules of Investments. These potential amounts would be partially offset by any recovery values of the respective referenced obligations, upfront payments received upon entering into the agreement, or net amounts received from the settlement of buy protection credit default swap agreements entered into by a Fund for the same referenced entity or entities.

 

Interest Rate Swap Agreements  Certain Funds are subject to interest rate risk exposure in the normal course of pursuing their investment objectives. The value of the fixed rate bonds that the Funds hold may decrease if interest rates rise. To help hedge against this risk and to maintain its ability to generate income at prevailing market rates, a Fund may enter into interest rate swap agreements. Interest rate swap agreements involve the exchange by a Fund with another party for their respective commitment to pay or receive interest on the notional amount of principal. Certain forms of interest rate swap agreements may include: (i) interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”, (ii) interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor”, (iii) interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels, (iv) callable interest rate swaps, under which the buyer pays an upfront fee in consideration for the right to early terminate the swap transaction in whole, at zero cost and at a predetermined date and time prior to the maturity date, (v) spreadlocks, which allow the interest rate swap users to lock in the forward differential (or spread) between the interest rate swap rate and a specified benchmark, or (vi) basis swaps, under which two parties can exchange variable interest rates based on different segments of money markets.

 

 

 

  ANNUAL REPORT   JULY 31, 2017   85


Notes to Financial Statements (Cont.)

 

Asset Segregation  Certain of the transactions described above can be viewed as constituting a form of borrowing or financing transaction by a Fund. In such event, a Fund may but is not required to cover its commitment under such transactions by segregating or “earmarking” assets in accordance with procedures adopted by the Board, in which case such transactions will not be considered “senior securities” by the Fund. With respect to forwards, futures contracts, options and swaps that are contractually permitted or required to cash settle (i.e., where physical delivery of the underlying reference asset is not required), a Fund (other than PIMCO Corporate & Income Opportunity Fund) is permitted to segregate or earmark liquid assets equal to the Fund’s daily marked-to-market net obligation under the derivative instrument, if any, rather than the derivative’s full notional value. By segregating or earmarking liquid assets equal to only its net marked-to-market obligation under derivatives that are required to cash settle, a Fund will have the ability to employ leverage to a greater extent than if a Fund were to segregate or earmark liquid assets equal to the full notional value of the derivative. For PIMCO Corporate & Income Opportunity Fund, with respect to forwards and futures contracts and interest rate swaps that are contractually required to cash settle (i.e., where physical delivery of the underlying reference asset is not permitted or physical settlement is not otherwise involved), the Fund is permitted to segregate or earmark liquid assets equal to the Fund’s daily marked-to-market net obligation under the derivative instrument, if any, rather than the derivative’s full notional value, but will segregate full notional value, as applicable, with respect to other derivative instruments (including written credit default swaps, written total return swaps and written options) that contractually require or permit physical delivery of securities or other underlying assets.

 

7. PRINCIPAL RISKS

 

In the normal course of business, the Funds trade financial instruments and enter into financial transactions where risk of potential loss exists due to such things as changes in the market (market risk) or failure or inability of the other party to a transaction to perform (credit and counterparty risk). See below for a detailed description of select principal risks. For a more comprehensive list of potential risks the Funds may be subject to, please see the Important Information About the Funds.

 

Market Risks  A Fund’s investments in financial derivative instruments and other financial instruments expose the Fund to various risks such as, but not limited to, interest rate, foreign (non-U.S.) currency, equity and commodity risks.

 

Interest rate risk is the risk that fixed income securities and other instruments held by a Fund will decline in value because of changes in interest rates. As nominal interest rates rise, the value of certain fixed income securities held by a Fund is likely to decrease. A nominal

interest rate can be described as the sum of a real interest rate and an expected inflation rate. Interest rate changes can be sudden and unpredictable, and a Fund may lose money if these changes are not anticipated by the Fund’s management. A Fund may not be able to hedge against changes in interest rates or may choose not to do so for cost or other reasons. In addition, any hedges may not work as intended.

 

Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations. Duration is a measure used to determine the sensitivity of a security’s price to changes in interest rates that incorporates a security’s yield, coupon, final maturity and call features, among other characteristics. Duration is useful primarily as a measure of the sensitivity of a fixed income security’s market price to interest rate (i.e. yield) movements. All other things remaining equal, for each one percentage point increase in interest rates, the value of a portfolio of fixed income investments would generally be expected to decline by one percent for every year of the portfolio’s average duration above zero. For example, the value of a portfolio of fixed income securities with an average duration of three years would generally be expected to decline by approximately 3% if interest rates rose by one percentage point. Convexity is an additional measure used to understand a security’s interest rate sensitivity. Convexity measures the rate of change of duration in response to changes in interest rates and may be positive or negative Securities with negative convexity may experience greater losses during periods of rising interest rates, and accordingly Funds holding such securities may be subject to a greater risk of losses in periods of rising interest rates. A wide variety of factors can cause interest rates to rise (e.g., central bank monetary policies, inflation rates, general economic conditions, etc.). Under current economic conditions, interest rates are near historically low levels. Thus, the Funds currently face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and has begun, and may continue, to raise interest rates. To the extent the Federal Reserve Board continues to raise interest rates, there is a risk that rates across the financial system may rise. During periods of very low or negative interest rates, a Fund may be unable to maintain positive returns. Changing interest rates, including rates that fall below zero, may have unpredictable effects on markets, may result in heightened market volatility and may detract from Fund performance to the extent a Fund is exposed to such interest rates. Rising interest rates may result in a decline in value of a Fund’s fixed-income investments and in periods of volatility. Further, while U.S. bond markets have steadily grown over the past three decades, dealer “market making” ability has remained relatively stagnant. As a result, dealer inventories of certain types of bonds and similar instruments, which provide a core indication of the ability of financial

 

 

86   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

intermediaries to “make markets,” are at or near historic lows in relation to market size. Because market makers provide stability to a market through their intermediary services, the significant reduction in dealer inventories could potentially lead to decreased liquidity and increased volatility in the fixed income markets. Such issues may be exacerbated during periods of economic uncertainty. All of these factors, collectively and/or individually, could cause a Fund to lose value.

 

Foreign (non-U.S.) securities in this report are classified by the country of incorporation of a holding. In certain instances, a security’s country of incorporation may be different from its country of economic exposure. If a Fund invests directly in foreign (non-U.S.) currencies or in securities that trade in, and receive revenues in, foreign (non-U.S.) currencies, or in financial derivatives that provide exposure to foreign (non-U.S.) currencies, it will be subject to the risk that those currencies will decline in value relative to the base currency of the Fund, or, in the case of hedging positions, that the Fund’s base currency will decline in value relative to the currency being hedged. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates, intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International Monetary Fund, or by the imposition of currency controls or other political developments in the United States or abroad. As a result, a Fund’s investments in foreign currency denominated securities may reduce the Fund’s returns.

 

The market values of a Fund’s investments may decline due to general market conditions which are not specifically related to a particular company or issuer, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment. They may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. Equity securities and equity related investments generally have greater market price volatility than fixed income securities, although under certain market conditions fixed income securities may have comparable or greater price volatility. Credit ratings downgrades may also negatively affect securities held by a Fund. Even when markets perform well, there is no assurance that the investments held by a Fund will increase in value along with the broader market. In addition, market risk includes the risk that geopolitical events will disrupt the economy on a national or global level.

 

Credit and Counterparty Risks  A Fund will be exposed to credit risk to parties with whom it trades and will also bear the risk of settlement default. A Fund seeks to minimize concentrations of credit risk by undertaking transactions with a large number of counterparties on

recognized and reputable exchanges, where applicable. Over the counter (“OTC”) derivative transactions are subject to the risk that a counterparty to the transaction will not fulfill its contractual obligations to the other party, as many of the protections afforded to centrally cleared derivative transactions might not be available for OTC derivative transactions. For derivatives traded on an exchange or through a central counterparty, credit risk resides with the Fund’s clearing broker, or the clearinghouse itself, rather than with a counterparty in an OTC derivative transaction. A Fund could lose money if the issuer or guarantor of a fixed income security, or the counterparty to a financial derivatives contract, repurchase agreement or a loan of portfolio securities, is unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. Securities are subject to varying degrees of credit risk, which are often reflected in credit ratings.

 

Similar to credit risk, a Fund may be exposed to counterparty risk, or the risk that an institution or other entity with which a Fund has unsettled or open transactions will default. PIMCO, as the Manager, seeks to minimize counterparty risks to the Funds through a number of ways. Prior to entering into transactions with a new counterparty, the PIMCO Counterparty Risk Committee conducts an extensive credit review of such counterparty and must approve the use of such counterparty. Furthermore, pursuant to the terms of the underlying contract, to the extent that unpaid amounts owed to a Fund exceed a predetermined threshold, such counterparty is required to advance collateral to the Fund in the form of cash or securities equal in value to the unpaid amount owed to the Fund. A Fund may invest such collateral in securities or other instruments and will typically pay interest to the counterparty on the collateral received. If the unpaid amount owed to a Fund subsequently decreases, the Fund would be required to return to the counterparty all or a portion of the collateral previously advanced. PIMCO’s attempts to minimize counterparty risk may, however, be unsuccessful.

 

All transactions in listed securities are settled/paid for upon delivery using approved counterparties. The risk of default is considered minimal, as delivery of securities sold is only made once a Fund has received payment. Payment is made on a purchase once the securities have been delivered by the counterparty. The trade will fail if either party fails to meet its obligation.

 

To the extent a Fund has a policy to limit the net amount owed to or to be received from a single counterparty under existing swap agreements, such limitation only applies to counterparties to OTC swaps and does not apply to centrally cleared swaps where the counterparty is a central counterparty or derivatives clearing organization.

 

 

 

  ANNUAL REPORT   JULY 31, 2017   87


Notes to Financial Statements (Cont.)

 

8. MASTER ARRANGEMENTS

 

The Funds may be subject to various netting arrangements with select counterparties (“Master Agreements”). Master Agreements govern the terms of certain transactions, and are intended to reduce the counterparty risk associated with relevant transactions by specifying credit protection mechanisms and providing standardization that is intended to improve legal certainty. Each type of Master Agreement governs certain types of transactions. Different types of transactions may be traded out of different legal entities or affiliates of a particular organization, resulting in the need for multiple agreements with a single counterparty. As the Master Agreements are specific to unique operations of different asset types, they allow a Fund to close out and net its total exposure to a counterparty in the event of a default with respect to all the transactions governed under a single Master Agreement with a counterparty. For financial reporting purposes the Statements of Assets and Liabilities generally present derivative assets and liabilities on a gross basis, which reflects the full risks and exposures prior to netting.

 

Master Agreements can also help limit counterparty risk by specifying collateral posting arrangements at pre-arranged exposure levels. Under most Master Agreements, collateral is routinely transferred if the total net exposure to certain transactions (net of existing collateral already in place) governed under the relevant Master Agreement with a counterparty in a given account exceeds a specified threshold, which typically ranges from zero to $250,000 depending on the counterparty and the type of Master Agreement. United States Treasury Bills and U.S. dollar cash are generally the preferred forms of collateral, although other forms of AAA rated paper or sovereign securities may be used depending on the terms outlined in the applicable Master Agreement. Securities and cash pledged as collateral are reflected as assets on the Statements of Assets and Liabilities as either a component of Investments at value (securities) or Deposits with counterparty. Cash collateral received is not typically held in a segregated account and as such is reflected as a liability on the Statements of Assets and Liabilities as Deposits from counterparty. The market value of any securities received as collateral is not reflected as a component of NAV. A Fund’s overall exposure to counterparty risk can change substantially within a short period, as it is affected by each transaction subject to the relevant Master Agreement.

 

Master Repurchase Agreements and Global Master Repurchase Agreements (individually and collectively “Master Repo Agreements”) govern repurchase, reverse repurchase, and sale-buyback transactions between a Fund and select counterparties. Master Repo Agreements maintain provisions for, among other things, initiation, income payments, events of default, and maintenance of collateral. The market value of transactions under the Master Repo Agreement, collateral

pledged or received, and the net exposure by counterparty as of period end are disclosed in the Notes to Schedules of Investments.

 

Master Securities Forward Transaction Agreements (“Master Forward Agreements”) govern certain forward settling transactions, such as To-Be-Announced (“TBA”) securities, delayed-delivery or sale-buyback transactions by and between a Fund and select counterparties. The Master Forward Agreements maintain provisions for, among other things, transaction initiation and confirmation, payment and transfer, events of default, termination, and maintenance of collateral. The market value of forward settling transactions, collateral pledged or received, and the net exposure by counterparty as of period end is disclosed in the Notes to Schedules of Investments.

 

Customer Account Agreements and related addenda govern cleared derivatives transactions such as futures, options on futures, and cleared OTC derivatives. Cleared derivatives transactions require posting of initial margin as determined by each relevant clearing agency which is segregated at a broker account registered with the CFTC, or the applicable regulator. In the United States, counterparty risk may be reduced as creditors of a futures broker do not have a claim to Fund assets in the segregated account. Portability of exposure reduces risk to the Funds. Variation margin, or changes in market value, are exchanged daily, but may not be netted between futures and cleared OTC derivatives unless the parties have agreed to a separate arrangement in respect of portfolio margining. The market value or accumulated unrealized appreciation (depreciation), initial margin posted, and any unsettled variation margin as of period end is disclosed in the Notes to Schedule of Investments.

 

Prime Broker Arrangements may be entered into to facilitate execution and/or clearing of listed equity option transactions or short sales of equity securities between a Fund and selected counterparties. The arrangements provide guidelines surrounding the rights, obligations, and other events, including, but not limited to, margin, execution, and settlement. These agreements maintain provisions for, among other things, payments, maintenance of collateral, events of default, and termination. Margin and other assets delivered as collateral are typically in the possession of the prime broker and would offset any obligations due to the prime broker. The market values of listed options and securities sold short and related collateral are disclosed in the Notes to Schedules of Investments.

 

International Swaps and Derivatives Association, Inc. Master Agreements and Credit Support Annexes (“ISDA Master Agreements”) govern bilateral OTC derivative transactions entered into by a Fund with select counterparties. ISDA Master Agreements maintain provisions for general obligations, representations, agreements, collateral posting and events of default or termination. Events of termination include conditions that may entitle counterparties to elect

 

 

88   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

to terminate early and cause settlement of all outstanding transactions under the applicable ISDA Master Agreement. Any election to terminate early could be material to the financial statements. In limited circumstances, the ISDA Master Agreement may contain additional provisions that add counterparty protection beyond coverage of existing daily exposure if the counterparty has a decline in credit quality below a predefined level. These amounts, if any, may be segregated with a third-party custodian. The market value of OTC financial derivative instruments, collateral received or pledged, and net exposure by counterparty as of period end are disclosed in the Notes to Schedules of Investments.

 

9. FEES AND EXPENSES

 

(a) Management Fee  Pursuant to the Investment Management Agreement with PIMCO (the “Agreement”), and subject to the supervision of the Board, PIMCO is responsible for providing to each Fund investment guidance and policy direction in connection with the management of the Fund, including oral and written research, analysis, advice, and statistical and economic data and information. In addition, pursuant to the Agreement and subject to the general supervision of the Board, PIMCO, at its expense, provides or causes to be furnished most other supervisory and administrative services the Funds require, including but not limited to, expenses of most third-party service providers (e.g., audit, custodial, legal, transfer agency, printing) and other expenses, such as those associated with insurance, proxy solicitations and mailings for shareholder meetings, NYSE listing and related fees, tax services, valuation services and other services the Funds require for their daily operations.

 

Pursuant to the Agreement, PIMCO receives an annual fee, payable monthly, at the annual rates shown in the table below:

 

Fund Name         Annual
Rate
 

PIMCO Corporate & Income Opportunity Fund

      0.65% (1) 

PIMCO Corporate & Income Strategy Fund

      0.81% (1) 

PIMCO High Income Fund

      0.76% (1) 

PIMCO Income Strategy Fund

      0.86% (2) 

PIMCO Income Strategy Fund II

      0.83% (2) 

 

(1)

Management fees calculated based on the Fund’s average daily NAV (including daily net assets attributable to any preferred shares of the Fund that may be outstanding).

(2) 

Management fees calculated based on the Fund’s average weekly “total managed assets”. Total managed assets includes total assets of each Fund (including any assets attributable to any preferred shares or other forms of leverage that may be outstanding) minus accrued liabilities (other than liabilities representing leverage).

 

(b) Fund Expenses  Each Fund bears other expenses, which may vary and affect the total level of expenses paid by shareholders, such as (i) salaries and other compensation or expenses, including travel expenses of any of the Fund’s executive officers and employees, if any, who are not officers, directors, shareholders, members, partners or employees of PIMCO or its subsidiaries or affiliates; (ii) taxes and

governmental fees, if any, levied against the Fund; (iii) brokerage fees and commissions and other portfolio transaction expenses incurred by or for the Fund (including, without limitation, fees and expenses of outside legal counsel or third-party consultants retained in connection with reviewing, negotiating and structuring specialized loan and other investments made by the Fund, subject to specific or general authorization by the Fund’s Board); (iv) expenses of the Fund’s securities lending (if any), including any securities lending agent fees, as governed by a separate securities lending agreement; (v) costs, including interest expense, of borrowing money or engaging in other types of leverage financing, including, without limitation, through the use by the Fund of reverse repurchase agreements, tender option bonds, bank borrowings and credit facilities; (vi) costs, including dividend and/or interest expenses and other costs (including, without limitation, offering and related legal costs, fees to brokers, fees to auction agents, fees to transfer agents, fees to ratings agencies and fees to auditors associated with satisfying ratings agency requirements for preferred shares or other securities issued by the Fund and other related requirements in the Fund’s organizational documents) associated with the Fund’s issuance, offering, redemption and maintenance of preferred shares, commercial paper or other senior securities for the purpose of incurring leverage; (vii) fees and expenses of any underlying funds or other pooled investment vehicles in which the Fund invests; (viii) dividend and interest expenses on short positions taken by the Fund; (ix) fees and expenses, including travel expenses, and fees and expenses of legal counsel retained for their benefit, of Trustees who are not officers, employees, partners, shareholders or members of PIMCO or its subsidiaries or affiliates; (x) extraordinary expenses, including extraordinary legal expenses, that may arise, including expenses incurred in connection with litigation, proceedings, other claims, and the legal obligations of the Fund to indemnify its Trustees, officers, employees, shareholders, distributors, and agents with respect thereto; (xi) organizational and offering expenses of the Fund, including with respect to share offerings, such as rights offerings and shelf offerings, following the Fund’s initial offering, and expenses associated with tender offers and other share repurchases and redemptions; and (xii) expenses of the Fund which are capitalized in accordance with U.S. GAAP.

 

Each of the Trustees of the Funds who is not an “interested person” under Section 2(a)(19) of the Act, (the “Independent Trustees”) also serves as a trustee of a number of other closed-end funds for which PIMCO serves as investment manager (together with the Funds, the “PIMCO Closed-End Funds”), as well as PIMCO Flexible Credit Income

Fund, a closed end management investment company managed by PIMCO that is operated as an “interval fund” (“PFLEX”), and PIMCO Managed Accounts Trust, an open-end investment company with multiple series for which PIMCO serves as investment adviser and

 

 

  ANNUAL REPORT   JULY 31, 2017   89


Notes to Financial Statements (Cont.)

 

administrator (“PMAT” and, together with the PIMCO Closed-End Funds and PFLEX the “PIMCO-Managed Funds”). In addition, each of the Independent Trustees also serves as a trustee of certain investment companies (together, the “Allianz-Managed Funds”), for which Allianz Global Investors U.S. LLC (“AllianzGI U.S.”), an affiliate of PIMCO, serves as investment adviser. Prior to the close of business on September 5, 2014, a predecessor entity of AllianzGI U.S. served as investment manager of PMAT and the PIMCO Closed-End Funds.

 

Each Independent Trustee currently receives annual compensation of $225,000 for his or her service on the Boards of the PIMCO-Managed Funds, payable quarterly. The Independent Chairman of the Boards receives an additional $75,000 per year, payable quarterly. The Audit Oversight Committee Chairman receives an additional $50,000 annually, payable quarterly. Trustees are also reimbursed for meeting-related expenses.

 

Each Trustee’s compensation for his or her service as a Trustee on the Boards of the PIMCO Managed Funds and other costs in connection with joint meetings of such Funds are allocated among the PIMCO-Managed Funds, as applicable, on the basis of fixed percentages between PMAT, PFLEX and the PIMCO Closed-End Funds. Trustee compensation and other costs will then be further allocated pro rata among the individual PIMCO-Managed Funds within each grouping based on each such PIMCO-Managed Fund’s relative net assets.

 

10. RELATED PARTY TRANSACTIONS

 

The Manager is a related party. Fees payable to this party are disclosed in Note 9, Fees and Expenses, and the accrued related party fee amounts are disclosed on the Statements of Assets and Liabilities.

 

Certain Funds are permitted to purchase or sell securities from or to certain related affiliated funds under specified conditions outlined in procedures adopted by the Board. The procedures have been designed to ensure that any purchase or sale of securities by the Funds from or to another fund or portfolio that are, or could be, considered an affiliate, or an affiliate of an affiliate, by virtue of having a common investment adviser (or affiliated investment advisers), common Trustees and/or common officers complies with Rule 17a-7 under the Act.

Further, as defined under the procedures, each transaction is effected at the current market price. During the period ended July 31, 2017, the Funds below engaged in purchases and sales of securities pursuant to Rule 17a-7 under the Act (amounts in thousands):

 

Fund Name         Purchases     Sales  

PIMCO Corporate & Income Opportunity Fund

    $   68,393     $   106,067  

PIMCO Corporate & Income Strategy Fund

      16,086       69,074  

PIMCO High Income Fund

      21,486       117,157  

PIMCO Income Strategy Fund

      14,236       31,521  

PIMCO Income Strategy Fund II

      16,025       30,284  

 

11. GUARANTEES AND INDEMNIFICATIONS

 

Under each Fund’s organizational documents, each Trustee and officer is indemnified, to the extent permitted by the Act, against certain liabilities that may arise out of performance of their duties to the Funds. Additionally, in the normal course of business, the Funds enter into contracts that contain a variety of indemnification clauses. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, the Funds have not had prior claims or losses pursuant to these contracts.

 

12. PURCHASES AND SALES OF SECURITIES

 

The length of time a Fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by a Fund is known as “portfolio turnover.” Each Fund may engage in frequent and active trading of portfolio securities to achieve its investment objective, particularly during periods of volatile market movements. High portfolio turnover may involve correspondingly greater transaction costs to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales may also result in realization of taxable capital gains, including short-term capital gains (which are generally taxed at ordinary income tax rates). The transaction costs and tax effects associated with portfolio turnover may adversely affect a Fund’s performance. The portfolio turnover rates are reported in the Financial Highlights.

 

 

Purchases and sales of securities (excluding short-term investments) for the period ended July 31, 2017, were as follows (amounts in thousands):

 

          U.S. Government/Agency     All Other  
Fund Name         Purchases     Sales     Purchases     Sales  

PIMCO Corporate  & Income Opportunity Fund

    $   23,727     $   8,195     $   803,973     $   489,288  

PIMCO Corporate  & Income Strategy Fund

      13,427       5,438       290,539       257,495  

PIMCO High Income Fund

      10,495       6,472       331,347       371,020  

PIMCO Income Strategy Fund

      4,503       2,270       157,191       134,173  

PIMCO Income Strategy Fund II

      4,557       7,167       226,694       175,132  

 

90   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

 

13. COMMON SHARES OFFERING

 

On March 23, 2017, the SEC declared effective a registration statement filed using the “shelf” registration process for PIMCO Corporate & Income Opportunity Fund. Pursuant to the shelf registration, PIMCO Corporate & Income Opportunity Fund may offer and sell, from time to time, in one or more offerings, up to 14,500,000 of its Common Shares, par value $0.00001 per share. The aggregate sale proceeds for the sales of the PIMCO Corporate & Income Opportunity Fund Common Shares are subject to an aggregate cap of $229,680,000. The Fund may not sell any Common Shares at a price below the current NAV of such common shares, exclusive of any distributing commission or discount. Sales of the Common Shares, if any, may be made in negotiated transactions or transactions that are deemed to be “at the

market”, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange. During the fiscal year ended July 31, 2017, the Fund sold 4,605,942 Common Shares. Proceeds from the offerings during the fiscal year ended July 31, 2017 (net of commissions and fees) were $74,137,916.

 

14. AUCTION-RATE PREFERRED SHARES

 

Each series of Auction-Rate Preferred Shares (“ARPS”) outstanding of each Fund has a liquidation preference of $25,000 per share plus any accumulated, unpaid dividends. Dividends are accumulated daily at an annual rate that is typically reset every seven days through auction procedures (or through default procedures in the event of failed auctions). Distributions of net realized capital gains, if any, are paid at least annually.

 

 

For the period ended July 31, 2017, the annualized dividend rates on the ARPS ranged from:

 

Fund Name         Shares
Issued and
Outstanding
    High     Low     As of
July 31, 2017
 

PIMCO Corporate & Income Opportunity Fund

         

Series M

      1,884       2.342%       0.662%       2.322%  

Series T

      1,770       2.322%       0.722%       2.302%  

Series W

      1,847       2.322%       0.622%       2.322%  

Series TH

      2,033       2.362%       0.682%       2.302%  

Series F

      1,984       2.362%       0.582%       2.302%  

PIMCO Corporate & Income Strategy Fund

         

Series M

      406       1.757%       0.497%       1.742%  

Series T

      449       1.742%       0.542%       1.727%  

Series W

      473       1.742%       0.467%       1.742%  

Series TH

      434       1.772%       0.512%       1.727%  

Series F

      459       1.772%       0.437%       1.727%  

PIMCO High Income Fund

         

Series M

      688       1.874%       0.530%       1.858%  

Series T

      958       1.858%       0.578%       1.842%  

Series W

      738       1.858%       0.498%       1.858%  

Series TH

      757       1.890%       0.546%       1.842%  

Series F

      938       1.890%       0.466%       1.842%  

PIMCO Income Strategy Fund

         

Series T

      766       2.444%       1.689%       2.444%  

Series W

      699       2.444%       1.689%       2.444%  

Series TH

      586       2.444%       1.689%       2.444%  

PIMCO Income Strategy Fund II

         

Series M

      721       2.447%       1.687%       2.447%  

Series T

      881       2.444%       1.689%       2.444%  

Series W

      671       2.444%       1.689%       2.444%  

Series TH

      753       2.444%       1.689%       2.444%  

Series F

      672       2.445%       1.691%       2.444%  

 

Each Fund is subject to certain limitations and restrictions while ARPS are outstanding. Failure to comply with these limitations and restrictions could preclude a Fund from declaring or paying any dividends or distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of ARPS at their liquidation preference plus any accumulated, unpaid dividends.

 

  ANNUAL REPORT   JULY 31, 2017   91


Notes to Financial Statements (Cont.)

 

 

Preferred shareholders of each Fund, who are entitled to one vote per share, generally vote together with the common shareholders of the Fund but vote separately as a class to elect two Trustees of the Fund and on certain matters adversely affecting the rights of the ARPS.

 

Since mid-February 2008, holders of ARPS issued by the Funds have been directly impacted by a lack of liquidity, which has similarly affected ARPS holders in many of the nation’s closed-end funds. Since then, regularly scheduled auctions for ARPS issued by the Funds have consistently “failed” because of insufficient demand (bids to buy shares) to meet the supply (shares offered for sale) at each auction. In a failed auction, ARPS holders cannot sell all, and may not be able to sell any, of their shares tendered for sale. While repeated auction failures have affected the liquidity for ARPS, they do not constitute a default or automatically alter the credit quality of the ARPS, and ARPS holders have continued to receive dividends at the defined “maximum rate,” as defined for the Funds in the table below:

 

Fund Name              Applicable %              Reference Rate            Maximum Rate  

PIMCO Corporate & Income Opportunity Fund

           200%        x      7-day “AA” Financial Composite
Commercial Paper Rates
     =        Maximum Rate for PTY  

PIMCO Corporate & Income Strategy Fund

           150%        x      7-day “AA” Financial Composite
Commercial Paper Rates
     =        Maximum Rate for PCN  

PIMCO High Income Fund

           160%        x      7-day “AA” Financial Composite
Commercial Paper Rates
     =        Maximum Rate for PHK  

PIMCO Income Strategy Fund

  The higher of       

150%

 

1.25%

 

 

    

x

 

+

 

 

   7-Day USD LIBOR

OR
7-Day USD LIBOR

    

=

 

=

 

 

     Maximum Rate for PFL  

PIMCO Income Strategy Fund II

  The higher of       

150%

 

1.25%

 

 

    

x

 

+

 

 

   7-Day USD LIBOR

OR
7-Day USD LIBOR

    

=

 

=

 

 

     Maximum Rate for PFN  

 

The maximum rate is a function of short-term interest rates and is typically higher than the rate that would have otherwise been set through a successful auction. If the Funds’ ARPS auctions continue to fail and the “maximum rate” payable on the ARPS rises as a result of changes in short-term interest rates, returns for the Fund’s common shareholders could be adversely affected.

 

15. REGULATORY AND LITIGATION MATTERS

 

The Funds are not named as defendants in any material litigation or arbitration proceedings and are not aware of any material litigation or claim pending or threatened against them.

 

The foregoing speaks only as of the date of the preparation of this report.

 

16. FEDERAL INCOME TAX MATTERS

 

Each Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code (the “Code”) and distribute all of its taxable income and net realized gains, if applicable,

to shareholders. Accordingly, no provision for Federal income taxes has been made.

 

The Funds may be subject to local withholding taxes, including those imposed on realized capital gains. Any applicable foreign capital gains tax is accrued daily based upon net unrealized gains, and may be payable following the sale of any applicable investments.

 

In accordance with U.S. GAAP, the Manager has reviewed the Funds’ tax positions for all open tax years. As of July 31, 2017, the Funds have recorded no liability for net unrecognized tax benefits relating to uncertain income tax positions they have taken or expect to take in future tax returns.

 

The Funds file U.S. tax returns. While the statute of limitations remains open to examine the Funds’ U.S. tax returns filed for the fiscal years ending in 2013-2016, no examinations are in progress or anticipated at this time. The Funds are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.

 

 

92   PIMCO CLOSED-END FUNDS     


 

July 31, 2017

 

 

As of July 31, 2017, the components of distributable taxable earnings are as follows (amounts in thousands):

 

         

Undistributed

Ordinary

Income(1)

   

Undistributed

Long-Term

Capital Gains

   

Net Tax Basis

Unrealized

Appreciation/

(Depreciation)(2)

   

Other

Book-to-Tax

Accounting

Differences(3)

   

Accumulated

Capital

Losses(4)

   

Qualified

Late-Year
Loss

Deferral -

Capital(5)

   

Qualified

Late-Year
Loss

Deferral -

Ordinary(6)

 

PIMCO Corporate & Income Opportunity Fund

    $ 0     $   0     $   177,293     $   (12,175   $   (133,313   $   0     $   0  

PIMCO Corporate & Income Strategy Fund

      0       0       109,529       (6,203     (79,525     0       0  

PIMCO High Income Fund

      0       0       49,625       (12,773     (145,036     0       0  

PIMCO Income Strategy Fund

      1,503       0       38,145       (3,084     (140,583     0       0  

PIMCO Income Strategy Fund II

        8,944       0       85,345       (5,915     (361,122     0       0  

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

(1) 

Includes undistributed short-term capital gains, if any.

(2) 

Adjusted for open wash sale loss deferrals and accelerated recognition of unrealized gain or loss on certain forward contracts for federal income tax purposes. Also adjusted for differences between book and tax realized and unrealized gain/loss on swap contracts, market discount and premium amortization, passive foreign investment companies (PFIC), partnership adjustments, convertible preferred securities, and Lehman securities.

(3) 

Represents differences in income tax regulations and financial accounting principles generally accepted in the United States of America, mainly for straddle loss deferrals and distributions payable at fiscal year-end.

(4) 

Capital losses available to offset future net capital gains expire in varying amounts as shown below.

(5) 

Capital losses realized during the period November 1, 2016 through July 31, 2017 which the Funds elected to defer to the following taxable year pursuant to income tax regulations.

(6) 

Specified losses realized during the period November 1, 2016 through July 31, 2017 and Ordinary losses realized during the period January 1, 2017 through July 31, 2017, which the Funds elected to defer to the following taxable year pursuant to income tax regulations.

 

As of July 31, 2017, the Funds had accumulated capital losses expiring in the following years (amounts in thousands).

 

The Funds will resume capital gain distributions in the future to the extent gains are realized in excess of accumulated capital losses.

 

          Expiration of
Accumulated Capital Losses
 
          7/31/2018     7/31/2019  

PIMCO Corporate & Income Opportunity Fund

    $ 0     $   0  

PIMCO Corporate & Income Strategy Fund

      0       0  

PIMCO High Income Fund

      0       0  

PIMCO Income Strategy Fund

      106,315       0  

PIMCO Income Strategy Fund II

        277,492       0  

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

Under the Regulated Investment Company Modernization Act of 2010, a fund is permitted to carry forward any new capital losses for an unlimited period. Additionally, such capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term under previous law.

 

As of July 31, 2017, the Funds had the following post-effective capital losses with no expiration (amounts in thousands):

 

          Short-Term     Long-Term  

PIMCO Corporate & Income Opportunity Fund

    $   133,313     $ 0  

PIMCO Corporate & Income Strategy Fund

      73,783       5,742  

PIMCO High Income Fund

      75,480         69,556  

PIMCO Income Strategy Fund

      33,725       543  

PIMCO Income Strategy Fund II

      78,989       4,641  

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

  ANNUAL REPORT   JULY 31, 2017   93


Notes to Financial Statements (Cont.)

 

July 31, 2017

 

 

As of July 31, 2017, the aggregate cost and the net unrealized appreciation/(depreciation) of investments for federal income tax purposes are as follows (amounts in thousands):

 

          

Federal

Tax Cost

    

Unrealized

Appreciation

    

Unrealized

(Depreciation)

    

Net Unrealized

Appreciation/

(Depreciation)(7)

 

PIMCO Corporate & Income Opportunity Fund

     $   1,489,965      $   114,873      $   (27,376    $   87,497  

PIMCO Corporate & Income Strategy Fund

       683,144        60,594        (20,392      40,202  

PIMCO High Income Fund

       1,064,275        94,021        (45,909      48,112  

PIMCO Income Strategy Fund

       359,992        27,179        (9,671      17,508  

PIMCO Income Strategy Fund II

       703,851        57,131        (22,464      34,667  

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

(7) 

Primary differences, if any, between book and tax net unrealized appreciation/(depreciation) on investments are attributable to open wash sale loss deferrals, market discount and premium amortization, convertible preferred securities, passive foreign investment companies (PFIC), partnership adjustments, and Lehman securities for federal income tax purposes.

 

For the fiscal years ended July 31, 2017 and July 31, 2016, respectively, the Funds made the following tax basis distributions (amounts in thousands):

 

          July 31, 2017     July 31, 2016  
         

Ordinary

Income

Distributions(8)

   

Long-Term

Capital Gain

Distributions

   

Return of

Capital(9)

   

Ordinary

Income

Distributions(8)

   

Long-Term

Capital Gain

Distributions

   

Return of

Capital(9)

 

PIMCO Corporate & Income Opportunity Fund

    $   118,069     $   0     $   10,356     $   114,208     $   0     $ 0  

PIMCO Corporate & Income Strategy Fund

      68,668       0       834       53,284       0       0  

PIMCO High Income Fund

      117,877       0       24,148       150,015       0         9,562  

PIMCO Income Strategy Fund

      28,374       0       0       28,121       0       0  

PIMCO Income Strategy Fund II

      58,627       0       0       62,313       0       0  
             

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

(8) 

Includes short-term capital gains distributed, if any.

(9) 

A portion of the distributions made represents a tax return of capital. Return of capital distributions have been reclassified from undistributed net investment income to paid-in capital to more appropriately conform financial accounting to tax accounting.

 

17. SUBSEQUENT EVENTS

 

In preparing these financial statements, the Funds’ management has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

 

On August 1, 2017, the following distributions were declared to common shareholders payable September 1, 2017 to shareholders of record on August 11, 2017:

 

PIMCO Corporate & Income Opportunity Fund

    $ 0.130000 per common share  

PIMCO Corporate & Income Strategy Fund

    $ 0.112500 per common share  

PIMCO High Income Fund

    $   0.080699 per common share  

PIMCO Income Strategy Fund

    $ 0.090000 per common share  

PIMCO Income Strategy Fund II

    $ 0.080000 per common share  

 

On September 6, 2017, the following distributions were declared to common shareholders payable October 2, 2017 to shareholders of record on September 11, 2017:

 

PIMCO Corporate & Income Opportunity Fund

    $ 0.130000 per common share  

PIMCO Corporate & Income Strategy Fund

    $ 0.112500 per common share  

PIMCO High Income Fund

    $   0.080699 per common share  

PIMCO Income Strategy Fund

    $ 0.090000 per common share  

PIMCO Income Strategy Fund II

    $ 0.080000 per common share  

 

There were no other subsequent events identified that require recognition or disclosure.

 

 

94   PIMCO CLOSED-END FUNDS     


Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Trustees of PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, PIMCO High Income Fund, PIMCO Income Strategy Fund, and PIMCO Income Strategy Fund II

 

In our opinion, the (i) accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations, of changes in net assets, and of cash flows and the financial highlights present fairly, in all material respects, the financial position of the PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, and PIMCO High Income Fund as of July 31, 2017, the results of each of their operations and each of their cash flows for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, and (ii) accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II Funds as of July 31, 2017, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, (hereafter referred to as the “Funds”), in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities as of July 31, 2017 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

Kansas City, Missouri

 

September 27, 2017

 

  ANNUAL REPORT   JULY 31, 2017   95


Glossary: (abbreviations that may be used in the preceding statements)

 

(Unaudited)

 

Counterparty Abbreviations:

AZD  

Australia and New Zealand Banking Group

  GLM  

Goldman Sachs Bank USA

 

NOM

 

Nomura Securities International Inc.

BCY  

Barclays Capital, Inc.

  GST  

Goldman Sachs International

 

RBC

 

Royal Bank of Canada

BOA  

Bank of America N.A.

  HUS  

HSBC Bank USA N.A.

 

RDR

 

RBC Capital Markets

BPG  

BNP Paribas Securities Corp.

  JML  

JP Morgan Securities Plc

 

RTA

 

Bank of New York Mellon Corp.

BPS  

BNP Paribas S.A.

  JPM  

JPMorgan Chase Bank N.A.

 

SAL

 

Citigroup Global Markets, Inc.

BRC  

Barclays Bank PLC

  JPS  

JPMorgan Securities, Inc.

 

SOG

 

Societe Generale

CBK  

Citibank N.A.

  MEI  

Merrill Lynch International

 

SSB

 

State Street Bank and Trust Co.

DEU  

Deutsche Bank Securities, Inc.

  MSB  

Morgan Stanley Bank, N.A

 

TOR

 

Toronto Dominion Bank

DUB  

Deutsche Bank AG

  MSC  

Morgan Stanley & Co., Inc.

 

UAG

 

UBS AG Stamford

FBF  

Credit Suisse International

  MYC  

Morgan Stanley Capital Services, Inc.

 

UBS

 

UBS Securities LLC

FOB  

Credit Suisse Securities (USA) LLC

  NGF  

Nomura Global Financial Products, Inc.

   

Currency Abbreviations:

       
AUD  

Australian Dollar

  EUR  

Euro

 

JPY

 

Japanese Yen

BRL  

Brazilian Real

  GBP  

British Pound

 

USD

 

USD (or $)

Exchange Abbreviations:

OTC  

Over the counter

       

Index/Spread Abbreviations:

ABX.HE  

Asset-Backed Securities Index - Home Equity

  CDX.IG  

Credit Derivatives Index - Investment Grade

 

CMBX

 

Commercial Mortgage-Backed Index

CDX.HY  

Credit Derivatives Index - High Yield

       

Municipal Bond or Agency Abbreviations:

AGM  

Assured Guaranty Municipal

       

Other Abbreviations:

ABS  

Asset-Backed Security

  CDI  

Brazil Interbank Deposit Rate

 

LIBOR

 

London Interbank Offered Rate

ALT  

Alternate Loan Trust

  CDO  

Collateralized Debt Obligation

 

PIK

 

Payment-in-Kind

BABs  

Build America Bonds

  CLO  

Collateralized Loan Obligation

 

TBD

 

To-Be-Determined

BBR  

Bank Bill Rate

  DAC  

Designated Activity Company

 

TBD%

 

Interest rate to be determined when loan settles

BBSW  

Bank Bill Swap Reference Rate

  EURIBOR  

Euro Interbank Offered Rate

   

 

96   PIMCO CLOSED-END FUNDS     


Federal Income Tax Information

 

(Unaudited)

 

As required by the Internal Revenue Code (“Code”) and Treasury Regulations, if applicable, shareholders must be notified within 60 days of the Funds’ fiscal year end regarding the status of qualified dividend income and the dividend received deduction.

 

Dividend Received Deduction.  Corporate shareholders are generally entitled to take the dividend received deduction on the portion of a Fund’s dividend distribution that qualifies under tax law. The percentage of the following Funds’ fiscal 2017 ordinary income dividend that qualifies for the corporate dividend received deduction is set forth below.

 

Qualified Dividend Income.  Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “Act”), the following percentage of ordinary dividends paid during the calendar year was designated as “qualified dividend income”, as defined in the Act, subject to reducted tax rates in 2017 is set forth in the table below.

 

Qualified Interest Income and Qualified Short-Term Capital Gain (for non-U.S. resident shareholders only).  Under the American Jobs Creation Act of 2004, the following amounts of ordinary dividends paid during the fiscal year ended July 31, 2017 are considered to be derived from “qualified interest income,” as defined in Section 871(k)(1)(E) of the Code, and therefore are designated as interest-related dividends, as defined in Section 871(k)(1)(C) of the Code. Further, the following amounts of ordinary dividends paid during the fiscal year ended July 31, 2017 are considered to be derived from “qualified short-term capital gain,” as defined in Section 871(k)(2)(D) of the Code, and therefore are designated as qualified short-term gain dividends, as defined by Section 871(k)(2)(C) of the Code are also set forth in the table below.

 

           

Dividend

Received

Deduction %

    

Qualified

Dividend

Income %

    

Qualified

Interest

Income

(000s)

    

Qualified

Short-Term

Capital Gain

(000s)

 

PIMCO Corporate & Income Opportunity Fund

        0.00%        0.58%      $   52,941      $   0  

PIMCO Corporate & Income Strategy Fund

        0.00%        1.11%        27,404        0  

PIMCO High Income Fund

        0.00%        0.16%        46,648        0  

PIMCO Income Strategy Fund

        0.00%        1.02%        12,109        0  

PIMCO Income Strategy Fund II

        0.00%        1.93%        25,457        0  

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

Shareholders are advised to consult their own tax advisor with respect to the tax consequences of their investment in the Trust. In January 2018, you will be advised on IRS Form 1099-DIV as to the federal tax status of the dividends and distributions received by you in calendar year 2017.

 

  ANNUAL REPORT   JULY 31, 2017   97


Shareholder Meeting Results

 

(Unaudited)

 

Annual Shareholder Meeting Results

 

PIMCO Corporate & Income Opportunity Fund and PIMCO Corporate & Income Strategy Fund held their annual meetings of shareholders on April 28, 2017. Shareholders voted as indicated below:

 

PIMCO Corporate & Income Opportunity Fund         Affirmative     Withheld
Authority
 

Re-election of Bradford K. Gallagher — Class II to serve until the annual meeting held during the 2019-2020 fiscal year

      62,078,692       2,006,698  

Re-election of James A. Jacobson* — Class II to serve until the annual meeting held during the 2019-2020 fiscal year

      4,237       51  

 

The other members of the Board of Trustees at the time of the meeting, namely, Ms. Deborah A. DeCotis and Messrs. Craig A. Dawson, Hans W. Kertess, John C. Maney, William B. Ogden, IV and Alan Rappaport continued to serve as Trustees of the Fund.

 

* Preferred Shares Trustee

 

PIMCO Corporate & Income Strategy Fund         Affirmative     Withheld
Authority
 

Re-election of Bradford K. Gallagher — Class III to serve until the annual meeting for the 2019-2020 fiscal year

      33,891,141       953,859  

Election of William B. Ogden, IV — Class III to serve until the annual meeting held during the 2019-2020 fiscal year

      33,763,462       1,081,538  

Re-election of Craig A. Dawson — Class III to serve until the annual meeting held during the 2019-2020 fiscal year

      33,947,327       897,673  

Election of John C. Maney — Class I to serve until the annual meeting held during the 2017-2018 fiscal year

      33,947,914       897,086  

 

The other members of the Board of Trustees at the time of the meeting, namely, Ms. Deborah A. DeCotis and Messrs. Hans W. Kertess, James A. Jacobson and Alan Rappaport continued to serve as Trustees of the Fund.

 

 

Interested Trustee

 

PIMCO Income Strategy Fund, PIMCO Income Strategy Fund II and PIMCO High Income Fund held their annual meetings of shareholders on June 30, 2017. Shareholders voted as indicated below.

 

PIMCO Income Strategy Fund         Affirmative     Withheld
Authority
 

Re-election of William B. Ogden, IV — Class I to serve until the annual meeting held during the 2019-2020 fiscal year

      21,711,000       524,118  

Re-election of Hans W. Kertess* — Class I to serve until the annual meeting held during the 2019-2020 fiscal year

      1,968       28  

 

The other members of the Board of Trustees at the time of the meeting, namely, Ms. Deborah A. DeCotis and Messrs. Craig A. Dawson, Bradford K. Gallagher, James A. Jacobson, John C. Maney and Alan Rappaport continued to serve as Trustees of the Fund.

 

* Preferred Shares Trustee

 

PIMCO High Income Fund         Affirmative     Withheld
Authority
 

Re-election of Bradford K. Gallagher — Class II to serve until the annual meeting held during the 2019-2020 fiscal year

      103,373,109       5,079,265  

Re-election of Craig A. Dawson — Class II to serve until the annual meeting held during the 2019-2020 fiscal year

      103,472,112       4,980,262  

Re-election of James A. Jacobson* — Class II to serve until the annual meeting held during the 2019-2020 fiscal year

      2,838       267  

 

The other members of the Board of Trustees at the time of the meeting, namely, Ms. Deborah A. DeCotis and Messrs. Hans W. Kertess, John C. Maney, William B. Ogden, IV and Alan Rappaport continued to serve as Trustees of the Fund.

 

 

Interested Trustee

* Preferred Shares Trustee

 

PIMCO Income Strategy Fund II         Affirmative     Withheld
Authority
 

Re-election of Hans W. Kertess — Class III to serve until the annual meeting held during the 2019-2020 fiscal year

      50,397,781       852,296  

Re-election of James A. Jacobson — Class III to serve until the annual meeting held during the 2019-2020 fiscal year

      50,391,343       858,734  

Re-election of John C. Maney — Class III to serve until the annual meeting held during the 2019-2020 fiscal year

      50,469,276       780,801  

 

The other members of the Board of Trustees at the time of the meeting, namely, Ms. Deborah A. DeCotis and Messrs. Craig A. Dawson, Bradford K. Gallagher, William B. Ogden, IV and Alan Rappaport continued to serve as Trustees of the Fund.

 

 

Interested Trustee

 

98   PIMCO CLOSED-END FUNDS     


Changes to Boards of Trustees

 

(Unaudited)

 

Effective April 28, 2017, Mr. William B. Ogden, IV, who was previously a Class I Trustee of PCN, became a Class III Trustee of PCN. Effective April 28, 2017, Mr. John C. Maney, who was previously a Class III Trustee of PCN, became a Class I Trustee of PCN.

 

 

  ANNUAL REPORT   JULY 31, 2017   99


Dividend Reinvestment Plan

 

Each Fund has adopted a Dividend Reinvestment Plan (the “Plan”) which allows common shareholders to reinvest Fund distributions in additional common shares of the Fund. American Stock Transfer & Trust Company, LLC (the “Plan Agent”) serves as agent for common shareholders in administering the Plan. It is important to note that participation in the Plan and automatic reinvestment of Fund distributions does not ensure a profit, nor does it protect against losses in a declining market.

 

Automatic enrollment/voluntary participation  Under the Plan, common shareholders whose shares are registered with the Plan Agent (“registered shareholders”) are automatically enrolled as participants in the Plan and will have all Fund distributions of income, capital gains and returns of capital (together, “distributions”) reinvested by the Plan Agent in additional common shares of a Fund, unless the shareholder elects to receive cash. Registered shareholders who elect not to participate in the Plan will receive all distributions in cash paid by check and mailed directly to the shareholder of record (or if the shares are held in street or other nominee name, to the nominee) by the Plan Agent. Participation in the Plan is voluntary. Participants may terminate or resume their enrollment in the Plan at any time without penalty by notifying the Plan Agent online at www.astfinancial.com, by calling (844) 33-PIMCO (844-337-4626), by writing to the Plan Agent, American Stock Transfer & Trust Company, LLC, at P.O. Box 922, Wall Street Station, New York, NY 10269-0560, or, as applicable, by completing and returning the transaction form attached to a Plan statement. A proper notification will be effective immediately and apply to each Fund’s next distribution if received by the Plan Agent at least three (3) days prior to the record date for the distribution; otherwise, a notification will be effective shortly following the Fund’s next distribution and will apply to the Fund’s next succeeding distribution thereafter. If you withdraw from the Plan and so request, the Plan Agent will arrange for the sale of your shares and send you the proceeds, minus a transaction fee and brokerage commissions.

 

How shares are purchased under the Plan  For each Fund distribution, the Plan Agent will acquire common shares for participants either (i) through receipt of newly issued common shares from each Fund (“newly issued shares”) or (ii) by purchasing common shares of the Fund on the open market (“open market purchases”). If, on a distribution payment date, the net asset value per common share of a Fund (“NAV”) is equal to or less than the market price per common share plus estimated brokerage commissions (often referred to as a “market premium”), the Plan Agent will invest the distribution amount on behalf of participants in newly issued shares at a price equal to the greater of (i) NAV or (ii) 95% of the market price per common share on the payment date. If the NAV is greater than the

market price per common shares plus estimated brokerage commissions (often referred to as a “market discount”) on a distribution payment date, the Plan agent will instead attempt to invest the distribution amount through open market purchases. If the Plan Agent is unable to invest the full distribution amount in open market purchases, or if the market discount shifts to a market premium during the purchase period, the Plan Agent will invest any un-invested portion of the distribution in newly issued shares at a price equal to the greater of (i) NAV or (ii) 95% of the market price per share as of the last business day immediately prior to the purchase date (which, in either case, may be a price greater or lesser than the NAV per common shares on the distribution payment date). No interest will be paid on distributions awaiting reinvestment. Under the Plan, the market price of common shares on a particular date is the last sales price on the exchange where the shares are listed on that date or, if there is no sale on the exchange on that date, the mean between the closing bid and asked quotations for the shares on the exchange on that date.

 

The NAV per common share on a particular date is the amount calculated on that date (normally at the close of regular trading on the New York Stock Exchange) in accordance with each Fund’s then current policies.

 

Fees and expenses  No brokerage charges are imposed on reinvestments in newly issued shares under the Plan. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. There are currently no direct service charges imposed on participants in the Plan, although each Fund reserves the right to amend the Plan to include such charges. The Plan Agent imposes a transaction fee (in addition to brokerage commissions that are incurred) if it arranges for the sale of your common shares held under the Plan.

 

Shares held through nominees  In the case of a registered shareholder such as a broker, bank or other nominee (together, a “nominee”) that holds common shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of common shares certified by the nominee/record shareholder as representing the total amount registered in such shareholder’s name and held for the account of beneficial owners who are to participate in the Plan. If your common shares are held through a nominee and are not registered with the Plan Agent, neither you nor the nominee will be participants in or have distributions reinvested under the Plan. If you are a beneficial owner of common shares and wish to participate in the Plan, and your nominee is unable or unwilling to become a registered shareholder and a Plan participant on your behalf, you may request that your nominee arrange to have all or a portion of your shares re-registered with the Plan Agent in your

 

 

100   PIMCO CLOSED-END FUNDS     


(Unaudited)

 

name so that you may be enrolled as a participant in the Plan. Please contact your nominee for details or for other possible alternatives. Participants whose shares are registered with the Plan Agent in the name of one nominee firm may not be able to transfer the shares to another firm and continue to participate in the Plan.

 

Tax consequences  Automatically reinvested dividends and distributions are taxed in the same manner as cash dividends and distributions — i.e., automatic reinvestment in additional shares does not relieve shareholders of, or defer the need to pay, any income tax that may be payable (or that is required to be withheld) on Fund dividends and distributions. The Funds and the Plan Agent reserve the right to amend or terminate the Plan. Additional information about the Plan, as well as a copy of the full Plan itself, may be obtained from the Plan Agent, American Stock Transfer & Trust Company, LLC, at P.O. Box 922, Wall Street Station, New York, NY 10269-0560; telephone number: (844) 33-PIMCO (844-337-4626); website: www.astfinancial.com.

 

 

  ANNUAL REPORT   JULY 31, 2017   101


Management of the Funds

 

The chart below identifies Trustees and Officers of the Funds. Unless otherwise indicated, the address of all persons below is c/o Pacific Investment Management Company LLC, 1633 Broadway, New York, New York 10019.

 

Trustees

 

Name And
Year of Birth
  Position(s)
Held
with the
Funds
  Term of
Office and
Length of
Time Served
  Principal Occupation(s) During the Past 5 Years   Number
of Portfolios
in Fund
Complex
Overseen by
Trustee
   Other
Directorships
Held by
Trustee
During the
Past 5 Years
Independent Trustees

Hans W. Kertess

1939

  Chairman of the Board, Trustee   Trustee of PHK, PTY and PFL since 2003, Trustee of PCN since 2002 and Trustee of PFN since 2004, expected to stand for re-election at the annual meeting of shareholders held during the 2017-2018 fiscal year for PCN, the 2018-2019 fiscal year for PTY and PHK and the 2019-2020 fiscal year for PFL and PFN.   President, H. Kertess & Co., a financial advisory company; and Senior Adviser (formerly Managing Director), Royal Bank of Canada Capital Markets (since 2004).   88    None

Deborah A. DeCotis

1952

  Trustee   Trustee of each Fund since 2011, expected to stand for re-election at the annual meeting of shareholders held during the 2017-2018 fiscal year for PHK, PTY and PFL and the 2018-2019 fiscal year for PFN and PCN.   Advisory Director, Morgan Stanley & Co., Inc. (since 1996); Member, Circle Financial Group (since 2009); and Member, Council on Foreign Relations (since 2013); Trustee, Smith College (since 2017); and Director, Watford Re (since 2017). Formerly, Co-Chair Special Projects Committee, Memorial Sloan Kettering (2005-2015); Trustee, Stanford University (2010-2015); Principal, LaLoop LLC, a retail accessories company (1999-2014); Director, Helena Rubenstein Foundation (1997-2010); and Director, Armor Holdings (2002-2010).   88    None

Bradford K. Gallagher

1944

  Trustee   Trustee of each Fund since 2010, expected to stand for re-election at the annual meeting of shareholders held during the 2018-2019 fiscal year for PFL and PFN and the 2019-2020 fiscal year for PHK, PTY and PCN.   Retired. Founder, Spyglass Investments LLC, a private investment vehicle (since 2001). Formerly, Chairman and Trustee, The Common Fund (2005-2014); Partner, New Technology Ventures Capital Management LLC, a venture capital fund (2011-2013); Chairman and Trustee, Atlantic Maritime Heritage Foundation (2007-2012); and Founder, President and CEO, Cypress Holding Company and Cypress Tree Investment Management Company (1995-2001).   88    Formerly, Chairman and Trustee of Grail Advisors ETF Trust (2009- 2010); and Trustee of Nicholas- Applegate Institutional Funds (2007-2010).

James A. Jacobson

1945

  Trustee   Trustee of PCN, PTY and PHK since 2009, Trustee of PFL since 2012 and Trustee of PFN since 2013, expected to stand for re-election at the annual meeting of shareholders held during the 2017-2018 fiscal year for PFL, the 2018-2019 fiscal year for PCN and the 2019-2020 fiscal year for PHK, PTY and PFN.   Retired. Trustee (since 2002) and Chairman of Investment Committee (since 2007), Ronald McDonald House of New York; and Trustee, New Jersey City University (since 2014). Formerly, Vice Chairman and Managing Director, Spear, Leeds & Kellogg Specialists, LLC, a specialist firm on the New York Stock Exchange (2003-2008).   88    Formerly, Trustee, Alpine Mutual Funds Complex consisting of 18 funds.

William B. Ogden, IV

1945

  Trustee   Trustee of each Fund since 2006, expected to stand for re-election at the annual meeting of shareholders held during the 2017-2018 fiscal year for PFN, the 2018-2019 fiscal year for PHK and PTY and the 2019-2020 fiscal year for PFL and PCN.   Retired. Formerly, Asset Management Industry Consultant; and Managing Director, Investment Banking Division of Citigroup Global Markets Inc.   88    None

Alan Rappaport

1953

  Trustee   Trustee of each Fund (except PFL and PFN) since 2010 of PFN since 2012 and of PFL since 2014, expected to stand for re-election at the annual meeting of shareholders held during the 2017-2018 fiscal year for PCN, PFN and PFL and the 2018-2019 fiscal year for PHK and PTY.   Advisory Director (formerly Vice Chairman), Roundtable Investment Partners (since 2009); Adjunct Professor, New York University Stern School of Business (since 2011); Lecturer, Stanford University Graduate School of Business (since 2013); and Director, Victory Capital Holdings, Inc., an asset management firm (since 2013). Formerly, Member of Board of Overseers, NYU Langone Medical Center (2015-2016); Trustee, American Museum of Natural History (2005-2015); Trustee, NYU Langone Medical Center (2007-2015); Vice Chairman (formerly Chairman and President), U.S. Trust (formerly Private Bank of Bank of America, the predecessor entity of U.S. Trust) (2001-2008).   88    None

 

102   PIMCO CLOSED-END FUNDS     


 

(Unaudited)

 

Name And
Year of Birth
  Position(s)
Held
with the
Funds
  Term of
Office and
Length of
Time Served
  Principal Occupation(s) During the Past 5 Years   Number
of Portfolios
in Fund
Complex
Overseen by
Trustee
   Other
Directorships
Held by
Trustee
During the
Past 5 Years
Interested Trustees

Craig A. Dawson*

1968

  Trustee   Trustee of each Fund since 2014, expected to stand for re-election at the annual meeting of shareholders held during the 2017-2018 fiscal year for PTY and PFN, the 2018-2019 fiscal year for PFL and the 2019-2020 fiscal year for PHK and PCN.   Managing Director and Head of PIMCO Europe, Middle East and Africa (since 2016). Director of a number of PIMCO’s European investment vehicles and affiliates (since 2008). Formerly, Head of Strategic Business Management, PIMCO (2014-2016), head of PIMCO’s Munich office and head of European product management for PIMCO.   26    None

John C. Maney**

1959

  Trustee   Trustee of each Fund since 2006, expected to stand for re-election at the annual meeting of shareholders held during the 2017-2018 fiscal year for PHK, PTY and PCN, the 2018-2019 fiscal year for PFL and the 2019-2020 fiscal year for PFN.   Managing Director of Allianz Asset Management of America L.P. (since January 2005) and a member of the Management Board and Chief Operating Officer of Allianz Asset Management of America L.P. (since November 2006). Formerly, Member of the Management Board of Allianz Global Investors Fund Management LLC (2007-2014) and Managing Director of Allianz Global Investors Fund Management LLC (2011-2014).   26    None

 

* Mr. Dawson is an “interested person” of the Funds, as defined in Section 2(a)(19) of the Act, due to his affiliation with PIMCO and its affiliates. Mr. Dawson’s address is 650 Newport Center Drive, Newport Beach, CA 92660.
** Mr. Maney is an “interested person” of the Funds, as defined in Section 2(a)(19) of the Act, due to his affiliation with Allianz Asset Management of America L.P. and its affiliates. Mr. Maney’s address is 650 Newport Center Drive, Newport Beach, CA 92660.

 

  ANNUAL REPORT   JULY 31, 2017   103


Management of the Funds (Cont.)

 

(Unaudited)

 

 

Officers

 

Name, Address and
Year of Birth
   Position(s)
Held
with Fund
   Term of Office
and Length
of Time Served
   Principal Occupation(s) During the Past 5 Years

Peter G. Strelow1

1970

   President    Since 2014    Managing Director and Chief Administrative Officer, PIMCO. President, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

Youse Guia1

1972

   Chief Compliance Officer    Since 2014    Senior Vice President and Deputy Chief Compliance Officer, PIMCO. Chief Compliance Officer, PIMCO-Managed Funds. Formerly, Head of Compliance, Allianz Global Investors U.S. Holdings LLC and Chief Compliance Officer of the Allianz Funds, Allianz Multi-Strategy Trust, Allianz Global Investors Sponsored Closed-End Funds, Premier Multi-Series VIT and The Korea Fund, Inc.

Joshua D. Ratner2

1976

   Vice President, Secretary and Chief Legal Officer    Since 2014    Executive Vice President and Senior Counsel, PIMCO. Chief Legal Officer, PIMCO Investments LLC. Vice President, Secretary and Chief Legal Officer, PIMCO-Managed Funds. Vice President - Senior Counsel, Secretary, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

Ryan Leshaw1

1980

   Assistant Secretary    Since 2014    Senior Vice President and Senior Counsel, PIMCO. Assistant Secretary, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT. Formerly, Associate, Willkie Farr & Gallagher LLP.

Wu-Kwan Kit1

1981

   Assistant Secretary    Since March 2017    Vice President and Counsel, PIMCO. Assistant Secretary, PIMCO-Managed Funds. Formerly, Assistant General Counsel, VanEck.

Stacie D. Anctil1

1969

   Vice President    Since 2015    Executive Vice President, PIMCO. Vice President, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

Eric D. Johnson2

1970

   Vice President    Since 2014    Executive Vice President, PIMCO. Vice President, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

Bijal Parikh1

1978

   Vice President    Since March 2017    Senior Vice President, PIMCO. Vice President, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust and PIMCO Equity Series.

William G. Galipeau1

1974

   Treasurer    Since 2014    Executive Vice President, PIMCO. Treasurer, PIMCO-Managed Funds. Vice President, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

Erik C. Brown1

1967

   Assistant Treasurer    Since 2015    Executive Vice President, PIMCO. Assistant Treasurer, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

Christopher M. Morin1

1980

   Assistant Treasurer    Since 2016    Vice President, PIMCO. Assistant Treasurer, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT. Formerly, Vice President of Operations, Standard Life Investments USA; Assistant Vice President, Brown Brothers Harriman.

Jason J. Nagler2

1982

   Assistant Treasurer    Since 2015    Vice President, PIMCO. Assistant Treasurer, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT. Formerly, Head of Mutual Fund Reporting, GMO, and Assistant Treasurer, GMO Trust and GMO Series Trust Funds.

Trent W. Walker1

1974

   Assistant Treasurer    Since 2014    Executive Vice President, PIMCO. Assistant Treasurer, PIMCO-Managed Funds. Treasurer, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

Laura Melman2

1966

   Assistant Treasurer    Since March 2017    Senior Vice President, PIMCO. Assistant Treasurer, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

Colleen Miller2

1980

   Assistant Treasurer    Since March 2017    Vice President, PIMCO. Assistant Treasurer, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT. Formerly, Vice President Cohen & Steers Capital Management.

 

1 

The address of these officers is Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, California 92660.

2 

The address of these officers is Pacific Investment Management Company LLC, 1633 Broadway, New York, New York 10019.

 

104   PIMCO CLOSED-END FUNDS     


Approval of Investment Management Agreement

 

(Unaudited)

 

At an in-person meeting held on June 13, 2017 (the “Approval Meeting”), the Board of Trustees or Directors (for purposes of this disclosure, all Board members are hereinafter referred to as “Trustees”) of the Funds (the “Board”), including the Trustees who are not interested persons (as that term is defined in the Investment Company Act of 1940) of the Funds or PIMCO (the “Independent Trustees”), formally considered and unanimously approved the continuation of the Investment Management Agreement between each Fund and PIMCO (the “Agreement”) for an additional one-year period commencing on August 1, 2017. Prior to the Approval Meeting, the Contracts Review Committee of the Board of each Fund (together, the “Committee”) held an in-person meeting on June 13, 2017 (the “Committee Meeting”) and formally considered and recommended to the Board the continuation of the Agreement for each Fund. Prior to the Approval Meeting, on May 15, 2017, the Chair of the Committee participated in a conference call with members of management and PIMCO personnel and counsel to the Independent Trustees (“Independent Counsel”) to discuss the process for the Board’s review of the Agreement and to consider certain information relating to the Funds, including, among other information, information relating to PIMCO’s estimated profitability with respect to the Agreement, comparative fees and expenses and Fund performance. On May 16, 2017, PIMCO provided materials to the Committee for its consideration of the Agreement in response to a request from Independent Counsel (the “Manager Request Letter”), as well as other materials and information PIMCO believed was useful in evaluating the continuation of the Agreement.

 

On May 25, 2017, the Committee held a meeting via conference call (collectively with the May 15, 2017 conference call, the Committee Meeting and the Approval Meeting, the “Contract Renewal Meetings”), at which the members of the Committee, all of whom are Independent Trustees, considered the materials and information provided by PIMCO bearing on the continuation of the Agreement. The Committee also received and reviewed a memorandum from counsel to the Funds regarding the Trustees’ responsibilities in evaluating the Agreement, which they discussed with Independent Counsel.

 

Following the presentation at the Committee Meeting, the Independent Trustees met separately in executive session with Independent Counsel to review and discuss all relevant information, including, but not limited to, information provided in response to the Manager Request Letter and information presented and discussed at the prior Contract Renewal Meetings.

 

In connection with their deliberations regarding the proposed continuation of the Agreement for each Fund, the Trustees, including the Independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees also considered the nature, quality and extent of the various investment management,

administrative and other services performed by PIMCO under the Agreement.

 

It was noted that, in connection with their Contract Renewal Meetings, the Trustees relied upon materials provided by PIMCO which included, among other items: (i) information provided by Broadridge Financial Solutions, Inc./Lipper Inc. (“Lipper”), an independent third party, on the total return investment performance (based on net asset value and common share market price) of each Fund for various time periods, presented through comparisons to the investment performance of a group of funds identified by Lipper with investment classifications/objectives comparable to those of the Fund (for each Fund, its “Lipper Performance Universe”), (ii) information provided by Lipper on each Fund’s management fees and other expenses under the Agreement and the management fees and other expenses of a smaller sample of comparable funds identified by Lipper (for each Fund, its “Lipper Expense Group”) as well as of a larger sample of comparable funds identified by Lipper (for each Fund, its “Lipper Expense Universe”), (iii) information regarding the market value performance of each Fund’s common shares and related share price premium and/or discount information, (iv) information regarding the investment performance and fees for other funds and accounts managed by PIMCO, if any, with similar investment strategies to those of the Funds, (v) the estimated profitability to PIMCO with respect to each Fund for the one-year period ended December 31, 2016, (vi) descriptions of various functions performed by PIMCO for the Funds, such as portfolio management, compliance monitoring and portfolio trading practices, (vii) information regarding PIMCO’s compliance policies applicable to the Funds, (viii) information regarding the Funds’ use of leverage, (ix) summaries assigning a quadrant placement to each Fund based on an average of certain measures of performance and fees/expenses versus Lipper peer group medians (the “Fund Scoring Summaries”), (x) fact cards for each Fund that included summary information regarding each Fund, (xi) information regarding the comparative yields of the Funds, (xii) information regarding the risk-adjusted returns of the Funds, (xiii) possible “fall-out” benefits to PIMCO from its relationship with the Funds, and (xiv) information regarding the overall organization of PIMCO, including information regarding senior management, portfolio managers and other personnel providing investment management, administrative, compliance and other services to the Funds.

 

The Trustees’ conclusions as to the continuation of the Agreement were based on a comprehensive consideration of all information provided to the Trustees and were not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, attributing different weights to various factors.

 

 

  ANNUAL REPORT   JULY 31, 2017   105


Approval of Investment Management Agreement (Cont.)

 

 

As part of their review, the Trustees examined PIMCO’s abilities to provide high-quality investment management and other services to the Funds. Among other information, the Trustees considered the investment philosophy and research and decision-making processes of PIMCO; the experience of key advisory personnel of PIMCO responsible for portfolio management of the Funds; the ability of PIMCO to attract and retain capable personnel; and the capabilities of the senior management and staff of PIMCO. In addition, the Trustees reviewed the quality of PIMCO’s services with respect to regulatory compliance and compliance with the investment policies of the Funds; the nature and quality of the supervisory and administrative services PIMCO is responsible for providing to the Funds; and conditions that might affect PIMCO’s ability to provide high-quality services to the Funds in the future under the Agreement, including PIMCO’s financial condition and operational stability. Based on the foregoing, the Trustees concluded that PIMCO’s investment process, research capabilities and philosophy were well suited to the Funds given their investment objectives and policies, and that PIMCO would be able to continue to meet any reasonably foreseeable obligations under the Agreement.

 

In assessing the reasonableness of each Fund’s fees under the Agreement, the Trustees considered, among other information, the Fund’s management fee and its total expense ratio as a percentage of average net assets attributable to common shares and as a percentage of average managed assets (including assets attributable to common shares and leverage outstanding combined), and the management fee and total expense ratios of the Lipper Expense Group and Lipper Expense Universe for each Fund. In each case, the total expense ratio information was provided both inclusive and exclusive of interest and borrowing expenses. Fund-specific comparative fees/expenses reviewed by the Trustees are discussed below. The Fund-specific fee and expense results discussed below were prepared and provided by Lipper and were not independently verified by the Trustees.

 

The Trustees specifically took note of how each Fund compared to its Lipper peers as to performance, management fee expense and total expense ratio. The Trustees noted that, while the Funds are not currently charged a separate administration fee (recognizing that their management fees include a component for administrative services under the unitary fee arrangements), it was not clear in all cases whether the peer funds in the Lipper categories were separately charged such a fee by their investment managers, so that the total expense ratio, as opposed to any individual expense component, represented the most relevant comparison. The Trustees also considered that the total expense ratio seems to provide a more apt comparison than management fee expense because the Funds’ unitary fee arrangements cover Operating Expenses (defined below) that are typically paid for or incurred by peer funds directly in addition to their management fees as discussed below. It was noted that the total

expense ratio comparisons reflect the effect of expense waivers/reimbursements, if any. The Trustees considered total expense ratio comparisons both including and excluding interest and borrowing expenses. The Trustees noted that only leveraged closed-end funds were considered for inclusion in the Lipper Expense Groups and Lipper Expense Universes presented for comparison with the Funds.

 

The Trustees noted that, for each Fund, the contractual management fee rate for the Fund under its unitary fee arrangement was at or below the median contractual management fees of the other funds in its Lipper Expense Group, calculated both on average net assets and on average managed assets, with the exception of PFL, whose contractual management fee rate was above the median in both cases. The Trustees took into account that each Fund’s unitary fee arrangement covers substantially all of the Fund’s other supervisory and administrative services required by the Fund that are typically paid for or incurred by closed-end funds directly in addition to a fund’s management fee (such fees and expenses, “Operating Expenses”) and therefore would tend to be higher than the contractual management fee rates of other funds in the Lipper peer groups, which generally do not have a unitary fee structure and bear Operating Expenses directly and in addition to the management fee. The Trustees determined that a review of each Fund’s total expense ratio with the total expense ratios of peer funds would generally provide more meaningful comparisons than considering contractual management fee rates in isolation.

 

In this regard, the Trustees noted PIMCO’s view that the unitary fee arrangements have benefited and will continue to benefit common shareholders because they provide a management fee expense structure (including Operating Expenses) that is essentially fixed as a percentage of either managed assets (including assets attributable to preferred shares and certain other forms of leverage) or net assets (including assets attributable to preferred shares), as applicable, making it more predictable under ordinary circumstances in comparison to fee and expense structures, such as the structure in place for the Funds prior to September 6, 2014, under which the Funds’ Operating Expenses (including certain third-party fees and expenses) can vary significantly over time. The Trustees also considered that the unitary fee arrangements generally insulate the Funds and common shareholders from increases in applicable third-party and certain other expenses because PIMCO, rather than the Funds, would bear the risk of such increases (though the Trustees also noted that PIMCO would benefit from any reductions in such expenses).

 

Fund-specific comparative performance results for the Funds reviewed by the Trustees are discussed below. The comparative performance information was prepared and provided by Lipper and was not independently verified by the Trustees. Due to the passage of time, these performance results may differ from the performance results for

 

 

106   PIMCO CLOSED-END FUNDS     


(Unaudited)

 

more recent periods. With respect to all Funds, the Trustees reviewed, among other information, comparative information showing performance of the Funds against the Lipper Performance Universes for the one-year, three-year, five-year and ten-year periods (to the extent each such Fund had been in existence) ended December 31, 2016. The Trustees also reviewed the Fund Scoring Summaries prepared by PIMCO at the Independent Trustees’ request comparing each Fund’s fees/expenses against those of its Lipper Expense Universe and performance against that of its Lipper Performance Universe, by identifying a quadrant designation based on the average of six different measures of fees/expenses versus performance (one-year, three-year and five-year performance for the period ended December 31, 2016, in each case, versus a Fund’s management fees or total expense ratio). The Fund Scoring Summaries were based on net assets, one showing total expenses inclusive of interest and borrowing expenses and the other showing total expenses exclusive of interest and borrowing expenses. In addition, the Trustees also reviewed fact cards for each Fund that included summary information regarding each Fund, including investment objective and strategy, portfolio managers, assets under management, outstanding leverage, net asset value and market performance comparisons, comparative fee and expense information, premium/discount information and information regarding PIMCO’s estimated profitability.

 

In addition, it was noted that the Trustees considered matters bearing on the Funds and their advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting.

 

Among other information, the Trustees took into account the following regarding particular Funds.

 

PTY

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper Performance Universe, consisting of 27 funds for one-year and three-year performance, 21 funds for five-year performance and 17 funds for ten-year performance, the Trustees noted that the Fund had first quintile performance for the one-year, three-year, five-year and ten-year periods ended December 31, 2016.

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from $54.1 million to $929.0 million, and that no funds in the Lipper Expense Group were larger in asset size than the Fund. The Trustees noted that the Lipper Expense Universe for the Fund consisted of a total of 27 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on both average managed assets

and average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on both average managed assets and average net assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe.

 

PCN

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper Performance Universe, consisting of 27 funds for one-year and three-year performance, 21 funds for five-year performance and 17 funds for ten-year performance, the Trustees noted that the Fund had second quintile performance for the one-year period and first quintile performance for the three-year, five-year and ten-year periods ended December 31, 2016.

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from $54.1 million to $704.4 million, and that two of the funds in the group were larger in asset size than the Fund. The Trustees noted that the Lipper Expense Universe for the Fund consisted of a total of 27 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on both average managed assets and average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Group. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was above the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average net assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe.

 

PHK

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper Performance Universe, consisting of 27 funds for one-year and three-year performance, 21 funds for five-year performance and 17 funds for ten-year performance, the Trustees noted that the Fund had second quintile

 

 

  ANNUAL REPORT   JULY 31, 2017   107


Approval of Investment Management Agreement (Cont.)

 

performance for the one-year period and first quintile performance for the three-year, five-year and ten-year periods ended December 31, 2016.

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from $148.3 million to $836.7 million, and that no funds in the group were larger in asset size than the Fund. The Trustees noted that the Lipper Expense Universe for the Fund consisted of a total of 27 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on both average managed assets and average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was at the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Group. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average net assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe.

 

PFL

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper Performance Universe, consisting of 27 funds for one-year and three-year performance, 21 funds for five-year performance and 17 funds for ten-year performance, the Trustees noted that the Fund had second quintile performance for the one-year and three-year periods, first quintile performance for the five-year period, and fifth quintile performance for the ten-year period ended December 31, 2016.

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from $148.3 million to $704.4 million, and that eight of the funds in the group were larger in asset size than the Fund. The Trustees noted that the Lipper Expense Universe for the Fund consisted of a total of 27 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on both average managed assets and average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its

Lipper Expense Group and Lipper Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was above the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average net assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe.

 

PFN

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper Performance Universe, consisting of 27 funds for one-year and three-year performance, 21 funds for five-year performance and 17 funds for ten-year performance, the Trustees noted that the Fund had second quintile performance for the one-year and three-year periods, first quintile performance for the five-year period, and fifth quintile performance for the ten-year period ended December 31, 2016.

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from $148.3 million to $704.4 million, and that two of the funds in the group were larger in asset size than the Fund. The Trustees noted that the Lipper Expense Universe for the Fund consisted of a total of 27 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on both average managed assets and average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was at the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Group. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was above the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average net assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Group and Lipper Expense Universe.

 

In addition to their review of Fund performance based on net asset value, the Trustees also considered the market value performance of each Fund’s common shares and related share price premium and/or

 

 

108   PIMCO CLOSED-END FUNDS     


(Unaudited)

 

discount information based on the materials provided by Lipper and PIMCO. The Trustees also considered information provided by PIMCO regarding the dividend yields of the each Fund in comparison to funds in the Lipper General Bond Funds grouping as of December 31, 2016.

 

The Trustees considered information provided by PIMCO regarding the management fees charged by PIMCO to other funds and accounts with similar strategies to those of the Funds. The Trustees considered information provided by PIMCO indicating that, in comparison to certain other products managed by PIMCO, including open-end funds and exchange-traded funds, there are additional portfolio management challenges in managing closed-end funds such as the Funds, such as those associated with less liquid holdings, the use of leverage, issues relating to trading on a national exchange and attempting to meet a regular dividend. The Trustees were advised by PIMCO that, in light of these additional challenges, different pricing structures for closed-end funds such as the Funds and other products managed by PIMCO are to be expected, and that comparisons of pricing structures across these products may not always be apt comparisons, even where other products have similar investment objectives and strategies to those of the Funds.

 

The Trustees also took into account that the Funds have preferred shares outstanding and use leverage, such as by the use of reverse repurchase agreements, which increases the amount of management fees payable by the Funds under the Agreement (because each Fund’s fees are calculated either based on net assets including assets attributable to preferred shares outstanding or based on total managed assets, including assets attributable to preferred shares and certain other forms of leverage outstanding). In this regard, the Trustees took into account that PIMCO has a financial incentive for the Funds to continue to use leverage, which may create a conflict of interest between PIMCO, on one hand, and the Funds’ common shareholders, on the other. The Trustees further noted that this incentive may be greater under the unitary fee arrangements because the contractual management fee rates under the unitary fee arrangements are higher for each Fund than the Fund’s management fee would otherwise be if it did not cover the Fund’s Operating Expenses. Therefore, the total fees paid by each Fund to PIMCO under the unitary fee arrangements will vary more with increases and decreases in applicable leverage incurred by a Fund than under a non-unitary fee arrangement, all things being equal. The Trustees considered information provided by PIMCO and related presentations as to why each Fund’s use of leverage continues to be appropriate and in the best interests of the respective Fund under current market conditions. The Trustees also considered PIMCO’s representation that it will use leverage for the Funds solely as it determines to be in the best interests of the Funds from an investment perspective and without regard to the level of compensation PIMCO receives.

The Trustees also considered estimated profitability analyses provided by PIMCO, which included, among other information, (i) PIMCO’s estimated pre- and post-distribution operating margin for each Fund, as well as PIMCO’s estimated pre- and post-distribution operating margin for all of the closed-end funds advised by PIMCO, including the Funds (collectively, the “Estimated Margins”), in each case for the one-year period ended December 31, 2016; (ii) a year-over-year comparison of PIMCO’s Estimated Margins for the one-year periods ended December 31, 2016 and December 31, 2015, and (iii) an overview of PIMCO’s average fee rates with respect to all of the closed-end funds advised by PIMCO, including the Funds, compared to PIMCO’s average fee rates with respect to its other clients, including PIMCO-advised separate accounts, open-end funds and hedge funds and private equity funds. The Trustees also took into account explanations from PIMCO regarding how certain corporate and shared expenses were allocated among the Funds and other funds and accounts managed by PIMCO for purposes of developing profitability estimates. Based on the profitability analyses provided by PIMCO, the Trustees determined, taking into account the various assumptions made, that such profitability did not appear to be excessive.

 

The Trustees also took into account the entrepreneurial and business risk PIMCO has undertaken as investment manager and sponsor of the Funds.

 

The Trustees also took into account that the Funds do not currently have any breakpoints in their management fees. The Trustees considered that, as closed-end investment companies, the Funds do not continually offer new shares to raise additional assets (as does a typical open-end investment company), but may raise additional assets through periodic shelf offerings and may also experience asset growth through investment performance and/or the increased use of leverage. The Trustees considered that the unitary fee arrangements provide inherent economies of scale because a Fund maintains competitive fixed unitary fees even if the particular Fund’s assets decline and/or operating costs rise. The Trustees further considered that, in contrast, breakpoints are a proxy for charging higher fees on lower asset levels and that when a fund’s assets decline, breakpoints may reverse, which causes expense ratios to increase. The Trustees also considered that, unlike the Funds’ unitary fee arrangements, funds with “pass through” administrative fee structures may experience increased expense ratios when fixed dollar fees are charged against declining fund assets. The Trustees also considered that the unitary fee arrangements protect shareholders from a rise in operating costs that may result from, including, among other things, PIMCO’s investments in various business enhancements and infrastructure. The Trustees noted that PIMCO has made extensive investments in these areas.

 

Additionally, the Trustees considered so-called “fall-out benefits” to PIMCO, such as reputational value derived from serving as investment

 

 

  ANNUAL REPORT   JULY 31, 2017   109


Approval of Investment Management Agreement (Cont.)

 

(Unaudited)

 

manager to the Funds and research, statistical and quotation services PIMCO may receive from broker-dealers executing the Funds’ portfolio transactions on an agency basis.

 

After reviewing these and other factors described herein, the Trustees concluded, with respect to each Fund, within the context of their overall conclusions regarding the Agreement and based on the information provided and related representations made by management, that they were satisfied with PIMCO’s responses and efforts relating to the investment performance of the Funds. The Trustees also concluded that the fees payable under the Agreement represent reasonable compensation in light of the nature, extent and quality of services provided by PIMCO. Based on their evaluation of factors that they deemed to be material, including those factors described above, the Trustees, including the Independent Trustees, unanimously concluded that the continuation of the Agreement was in the interests of each Fund and its shareholders, and should be approved.

 

110   PIMCO CLOSED-END FUNDS     


Privacy Policy1

 

The Funds2 consider customer privacy to be a fundamental aspect of their relationships with shareholders and are committed to maintaining the confidentiality, integrity and security of their current, prospective and former shareholders’ non-public personal information. The Funds have developed policies that are designed to protect this confidentiality, while allowing shareholder needs to be served.

 

OBTAINING PERSONAL INFORMATION

 

In the course of providing shareholders with products and services, the Funds and certain service providers to the Funds, such as the Funds’ investment adviser or sub-adviser (“Adviser”), may obtain non-public personal information about shareholders, which may come from sources such as account applications and other forms, from other written, electronic or verbal correspondence, from shareholder transactions, from a shareholder’s brokerage or financial advisory firm, financial advisor or consultant, and/or from information captured on applicable websites.

 

RESPECTING YOUR PRIVACY

 

As a matter of policy, the Funds do not disclose any non-public personal information provided by shareholders or gathered by the Funds to non-affiliated third parties, except as required or permitted by law or as necessary for such third parties to perform their agreements with respect to the Funds. As is common in the industry, non-affiliated companies may from time to time be used to provide certain services, such as preparing and mailing prospectuses, reports, account statements and other information, conducting research on shareholder satisfaction and gathering shareholder proxies. The Funds or their affiliates may also retain non-affiliated companies to market Fund shares or products which use Fund shares and enter into joint marketing arrangements with them and other companies. These companies may have access to a shareholder’s personal and account information, but are permitted to use this information solely to provide the specific service or as otherwise permitted by law. In most cases, the shareholders will be clients of a third party, but the Funds may also provide a shareholder’s personal and account information to the shareholder’s respective brokerage or financial advisory firm and/or financial advisor or consultant.

 

SHARING INFORMATION WITH THIRD PARTIES

 

The Funds reserve the right to disclose or report personal or account information to non-affiliated third parties in limited circumstances where the Funds believe in good faith that disclosure is required under law, to cooperate with regulators or law enforcement authorities, to protect their rights or property, or upon reasonable request by any fund advised by PIMCO in which a shareholder has invested. In addition, the Funds may disclose information about a shareholder or a shareholder’s accounts to a non-affiliated third party at the shareholder’s request or with the consent of the shareholder.

SHARING INFORMATION WITH AFFILIATES

 

The Funds may share shareholder information with their affiliates in connection with servicing shareholders’ accounts, and subject to applicable law may provide shareholders with information about products and services that the Funds or their Adviser or its affiliates (“Service Affiliates”) believe may be of interest to such shareholders. The information that the Funds may share may include, for example, a shareholder’s participation in the Funds or in other investment programs sponsored by a Service Affiliate, a shareholder’s ownership of certain types of accounts (such as IRAs), information about the Funds’ experiences or transactions with a shareholder, information captured on applicable websites, or other data about a shareholder’s accounts, subject to applicable law. The Funds’ Service Affiliates, in turn, are not permitted to share shareholder information with non-affiliated entities, except as required or permitted by law.

 

PROCEDURES TO SAFEGUARD PRIVATE INFORMATION

 

The Funds take seriously the obligation to safeguard shareholder non-public personal information. In addition to this policy, the Funds have implemented procedures that are designed to restrict access to a shareholder’s non-public personal information to internal personnel who need to know that information to perform their jobs, such as servicing shareholder accounts or notifying shareholders of new products or services. Physical, electronic and procedural safeguards are in place to guard a shareholder’s non-public personal information.

 

INFORMATION COLLECTED FROM WEBSITES

 

Websites maintained by the Funds or their service providers may use a variety of technologies to collect information that help the Funds and their service providers understand how the website is used. Information collected from your web browser (including small files stored on your device that are commonly referred to as “cookies”) allow the websites to recognize your web browser and help to personalize and improve your user experience and enhance navigation of the website. In addition, the Funds or their Service Affiliates may use third parties to place advertisements for the Funds on other websites, including banner advertisements. Such third parties may collect anonymous information through the use of cookies or action tags (such as web beacons). The information these third parties collect is generally limited to technical and web navigation information, such as your IP address, web pages visited and browser type, and does not include personally identifiable information such as name, address, phone number or email address. If you are a registered user of the Funds’ website, the Funds or their service providers or third party firms engaged by the Funds or their service providers may collect or share information submitted by you, which may include personally identifiable information. This information can be useful to the Funds when assessing and offering services and website features. You can

 

 

  ANNUAL REPORT   JULY 31, 2017   111


Privacy Policy1 (Cont.)

 

(Unaudited)

 

change your cookie preferences by changing the setting on your web browser to delete or reject cookies. If you delete or reject cookies, some website pages may not function properly. The Funds do not look for web browser “do not track” requests.

 

CHANGES TO THE PRIVACY POLICY

 

From time to time, the Funds may update or revise this privacy policy. If there are changes to the terms of this privacy policy, documents containing the revised policy on the relevant website will be updated.

 

1 Amended as of March 23, 2017.

2 When distributing this Policy, a Fund may combine the distribution with any similar distribution of its investment adviser’s privacy policy. The distributed, combined policy may be written in the first person (i.e., by using “we” instead of “the Funds”).

 

 

112   PIMCO CLOSED-END FUNDS     


General Information

 

Investment Manager

Pacific Investment Management Company LLC

1633 Broadway

New York, NY 10019

 

Custodian

State Street Bank and Trust Company

801 Pennsylvania Avenue

Kansas City, MO 64105

 

Transfer Agent, Dividend Paying Agent and Registrar

American Stock Transfer & Trust Company, LLC

6201 15th Avenue

Brooklyn, NY 11219

 

Legal Counsel

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

 

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP

1100 Walnut Street, Suite 1300

Kansas City, MO 64106

 

This report is submitted for the general information of the shareholders of PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, PIMCO High Income Fund, PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II.


 

LOGO

 

CEF3011AR_073117


Item 2. Code of Ethics.

As of the end of the period covered by this report, the Registrant has adopted a code of ethics (the “Code”) that applies to the Registrant’s principal executive officer and principal financial & accounting officer. The Registrant did not grant any waivers, including implicit waivers, from any provisions of the Code to the principal executive officer or principal financial & accounting officer during the period covered by this report.

A copy of the Code is included as an exhibit to this report.

 

Item 3. Audit Committee Financial Expert.

(a) The Board of Trustees has determined that James A. Jacobson, who serves on the Board’s Audit Oversight Committee, qualifies as an “audit committee financial expert” as such term is defined in the instructions to this Item 3. The Board has also determined that Mr. Jacobson is “independent” as such term is interpreted under this Item 3.


Item 4. Principal Accountant Fees and Services.

 

(a)    Fiscal Year Ended

July 31, 2017

July 31, 2016

  

Audit Fees

$ 45,627

$ 45,910

(b)    Fiscal Year Ended

July 31, 2017

July 31, 2016

  

Audit-Related Fees

$ 18,000

$ 16,480

(c)    Fiscal Year Ended

July 31, 2017

July 31, 2016

  

Tax Fees

$ —

$ 17,250

(d)    Fiscal Year Ended

July 31, 2017

July 31, 2016

  

All Other Fees(1)

$ —

$ —

“Audit Fees” represents fees billed for each of the last two fiscal years for professional services rendered for the audit and review of the Registrant’s annual financial statements for those fiscal years or services that are normally provided by the accountant in connection with statutory or regulatory filings or engagements for those fiscal years.

“Audit-Related Fees” represents fees billed for each of the last two fiscal years for assurance and related services that are reasonably related to the performance of the audit or review of the Registrant’s financial statements, but not reported under “Audit Fees” above, and that include accounting consultations, agreed-upon procedure reports (inclusive of annual review of basic maintenance testing associated with the Preferred Shares), attestation reports and comfort letters for those fiscal years.

“Tax Fees” represents fees billed for each of the last two fiscal years for professional services related to tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews, and tax distribution and analysis reviews.

“All Other Fees” represents fees, if any, billed for other products and services rendered by the principal accountant to the Registrant other than those reported above under “Audit Fees,” “Audit-Related Fees” and “Tax Fees” for the last two fiscal years.

(1)There were no “All Other Fees” for the last two fiscal years.

 

  (e) Pre-approval policies and procedures

(1) The Registrant’s Audit Oversight Committee has adopted pre-approval policies and procedures (the “Procedures”) to govern the Audit Oversight Committee’s pre-approval of (i) all audit services and permissible non-audit services to be provided to the Registrant by its independent accountant, and (ii) all permissible non-audit services to be provided by such independent accountant to the Registrant’s investment adviser and to any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant (collectively, the “Service Affiliates”) if the services provided directly relate to the Registrant’s operations and financial reporting. In accordance with the Procedures, the Audit Oversight Committee is responsible for the engagement of the independent accountant to certify the Registrant’s financial statements for each fiscal year. With respect to the pre-approval of non-audit services provided to the Registrant and its Service Affiliates, the Procedures provide that the Audit Oversight Committee may annually pre-approve a list of types or categories of non-audit services that may be provided to the Registrant or its Service Affiliates, or the Audit Oversight Committee may pre-approve such services on a project-by-project basis as they arise. Unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Oversight Committee if it is to be provided by the independent accountant. The Procedures also permit the Audit Oversight Committee to delegate authority to one or more of its members to pre-approve any proposed non-audit services that have not been previously pre-approved by the Audit Oversight Committee, subject to the ratification by the full Audit Oversight Committee no later than its next scheduled meeting.

(2) With respect to the services described in paragraphs (b) through (d) of this Item 4, no amount was approved by the Audit Oversight Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

  f) Not applicable.


  g)

 

     Aggregate Non-Audit Fees Billed to Entity  

Entity

   July 31, 2017      July 31, 2016  

PIMCO High Income Fund

   $ 18,000      $ 33,730  

Pacific Investment Management Company LLC (“PIMCO”)

     8,531,028        7,767,308  
  

 

 

    

 

 

 

Total

   $ 8,549,028      $ 7,801,538  
  

 

 

    

 

 

 

 

  h) The Registrant’s Audit Oversight Committee has considered whether the provision of non-audit services that were rendered to the Registrant’s investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant which were not pre-approved (not requiring pre-approval) is compatible with maintaining the principal accountant’s independence.

 

Item 5. Audit Committee of Listed Registrants.

The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The audit committee is comprised of:

Deborah A. DeCotis;

Bradford K. Gallagher;

James A. Jacobson;

Hans W. Kertess;

William B. Ogden, IV; and

Alan Rappaport.

 

Item 6. Schedule of Investments.

The Schedule of Investments is included as part of the reports to shareholders under Item 1.

 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

PIMCO has adopted written proxy voting policies and procedures (“Proxy Policy”) as required by Rule 206(4)-6 under the Advisers Act. In addition to covering the voting of equity securities, the Proxy Policy also applies generally to voting and/or consent rights of fixed income securities, including but not limited to, plans of reorganization, and waivers and consents under applicable indentures. The Proxy Policy does not apply, however, to consent rights that primarily entail decisions to buy or sell investments, such as tender or exchange offers, conversions, put options, redemption and Dutch auctions. The Proxy Policy is designed and implemented in a manner reasonably expected to ensure that voting and consent rights (collectively, “proxies”) are exercised in the best interests of accounts.

With respect to the voting of proxies relating to equity securities, PIMCO has selected an unaffiliated third party proxy research and voting service (“Proxy Voting Service”), to assist it in researching and voting proxies. With respect to each proxy received, the Proxy Voting Service researches the financial implications of the proposals and provides a recommendation to PIMCO as to how to vote on each proposal based on the Proxy Voting Service’s research of the individual facts and circumstances and the Proxy Voting Service’s application of its research findings to a set of guidelines that have been approved by PIMCO. Upon the recommendation of the applicable portfolio managers, PIMCO may determine to override any recommendation made by the Proxy Voting Service. In the event that the Proxy Voting Service does not provide a recommendation with respect to a proposal, PIMCO may determine to vote on the proposals directly. With respect to the voting of proxies relating to fixed income securities, PIMCO’s fixed income credit research group (the “Credit Research Group”) is responsible for researching and issuing recommendations for voting proxies. With respect to each proxy received, the Credit Research Group researches the financial implications of the proxy proposal and makes voting recommendations specific for each account that holds the related fixed income security. PIMCO considers each proposal regarding a fixed income security on a case-by-case basis taking into consideration any relevant contractual obligations as well as other relevant facts and circumstances at the time of the vote. Upon the recommendation of the applicable portfolio managers, PIMCO may determine to override any recommendation made by the Credit Research Group. In the event that the Credit Research Group does not provide a recommendation with respect to a proposal, PIMCO may determine to vote the proposal directly.


PIMCO may determine not to vote a proxy for an equity or fixed income security if: (1) the effect on the applicable

account’s economic interests or the value of the portfolio holding is insignificant in relation to the account’s portfolio; (2) the cost of voting the proxy outweighs the possible benefit to the applicable account, including, without limitation, situations where a jurisdiction imposes share blocking restrictions which may affect the ability of the portfolio managers to effect trades in the related security; or (3) PIMCO otherwise has determined that it is consistent with its fiduciary obligations not to vote the proxy.

In the event that the Proxy Voting Service or the Credit Research Group, as applicable, does not provide a recommendation or the portfolio managers of a client account propose to override a recommendation by the Proxy Voting Service, or the Credit Research Group, as applicable, PIMCO will review the proxy to determine whether there is a material conflict between PIMCO and the applicable account or among PIMCO-advised accounts. If no material conflict exists, the proxy will be voted according to the portfolio managers’ recommendation. If a material conflict does exist, PIMCO will seek to resolve the conflict in good faith and in the best interests of the applicable client account, as provided by the Proxy Policy. The Proxy Policy permits PIMCO to seek to resolve material conflicts of interest by pursuing any one of several courses of action. With respect to material conflicts of interest between PIMCO and a client account, the Proxy Policy permits PIMCO to either: (i) convene a committee to assess and resolve the conflict (the “Proxy Conflicts Committee”); or (ii) vote in accordance with protocols previously established by the Proxy Policy, the Proxy Conflicts Committee and/or other relevant procedures approved by PIMCO’s Legal and Compliance department with respect to specific types of conflicts. With respect to material conflicts of interest between one or more PIMCO-advised accounts, the Proxy Policy permits PIMCO to: (i) designate a PIMCO portfolio manager who is not subject to the conflict to determine how to vote the proxy if the conflict exists between two accounts with at least one portfolio manager in common; or (ii) permit the respective portfolio managers to vote the proxies in accordance with each client account’s best interests if the conflict exists between client accounts managed by different portfolio managers.

PIMCO will supervise and periodically review its proxy voting activities and the implementation of the Proxy Policy. PIMCO’s Proxy Policy, and information about how PIMCO voted a client’s proxies, is available upon request.

 

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

(a)(1)

As of September 28, 2017, the following individuals have primary responsibility for the day-to-day implementation of the PIMCO High Income Fund (the “Fund”):

Alfred T. Murata

Mr. Murata has been a portfolio manager of the Fund since September 2014. Mr. Murata is a managing director in the Newport Beach office and a portfolio manager on the mortgage credit team. Prior to joining PIMCO in 2001, he researched and implemented exotic equity and interest rate derivatives at Nikko Financial Technologies.

Mohit Mittal

Mr. Mittal has been a portfolio manager of the Fund since September 2014. Mr. Mittal is a managing director and portfolio manager in the Newport Beach office. He manages investment grade credit, total return and unconstrained bond portfolios and is a member of the Americas Portfolio Committee. Previously, he was a specialist on PIMCO’s interest rates and derivatives desk.

(a)(2)

The following summarizes information regarding each of the accounts, excluding the Fund, managed by the Portfolio Managers as of July 31, 2017, including accounts managed by a team, committee, or other group that includes a Portfolio Manager. Unless mentioned otherwise, the advisory fee charged for managing each of the accounts listed below is not based on performance.


       
     Registered Investment Companies    Other Pooled Investment Vehicles    Other Accounts
             
PM    #   AUM($million)    #   AUM($million)    #    AUM($million)    
             
Alfred T. Murata    18   $108,959.01    8   $16,904.35    11    $1,566.61
             
Mohit Mittal    11   $21,863.69    13   $7,621.73*    136    $57,332.66**

* Of these Other Pooled Investment Vehicles, 2 account(s) totaling $1,717.95 million in assets pay(s) an advisory fee that is based in part on the performance of the accounts.

**Of these Other Accounts, 3 account(s) totaling $682.95 million in assets pay(s) an advisory fee that is based in part on the performance of the accounts.

From time to time, potential and actual conflicts of interest may arise between a portfolio manager’s management of the investments of the Fund, on the one hand, and the management of other accounts, on the other. Potential and actual conflicts of interest may also arise as a result of PIMCO’s other business activities and PIMCO’s possession of material non-public information about an issuer. Other accounts managed by a portfolio manager might have similar investment objectives or strategies as the Fund, track the same index as the Fund or otherwise hold, purchase, or sell securities that are eligible to be held, purchased or sold by the Fund. The other accounts might also have different investment objectives or strategies than the Fund. Potential and actual conflicts of interest may also arise as a result of PIMCO serving as investment adviser to accounts that invest in the Fund. In this case, such conflicts of interest could in theory give rise to incentives for PIMCO to, among other things, vote proxies of the Fund in a manner beneficial to the investing account but detrimental to the Fund. Conversely, PIMCO’s duties to the Fund, as well as regulatory or other limitations applicable to the Fund, may affect the courses of action available to PIMCO-advised accounts (including certain funds) that invest in the Fund in a manner that is detrimental to such investing accounts. In addition, regulatory restrictions, actual or potential conflicts of interest or other considerations may cause PIMCO to restrict or prohibit participation in certain investments.

Because PIMCO is affiliated with Allianz, a large multi-national financial institution, conflicts similar to those described below may occur between the Fund and other accounts managed by PIMCO and PIMCO’s affiliates or accounts managed by those affiliates. Those affiliates (or their clients), which generally operate autonomously from PIMCO, may take actions that are adverse to the Fund or other accounts managed by PIMCO. In many cases, PIMCO will not be in a position to mitigate those actions or address those conflicts, which could adversely affect the performance of the Fund or other accounts managed by PIMCO.

Knowledge and Timing of Fund Trades. A potential conflict of interest may arise as a result of the portfolio manager’s day-to-day management of the Fund. Because of their positions with the Fund, the portfolio managers know the size, timing and possible market impact of the Fund’s trades. It is theoretically possible that the portfolio managers could use this information to the advantage of other accounts they manage and to the possible detriment of the Fund.

Investment Opportunities. A potential conflict of interest may arise as a result of the portfolio manager’s management of a number of accounts with varying investment guidelines. Often, an investment opportunity may be suitable for both the Fund and other accounts managed by the portfolio manager, but may not be available in sufficient quantities for both the Fund and the other accounts to participate fully. In addition, regulatory issues applicable to PIMCO or the Fund or other accounts may result in the Fund not receiving securities that may otherwise be appropriate for it. Similarly, there may be limited opportunity to sell an investment held by the Fund and another account. PIMCO has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time.

Under PIMCO’s allocation procedures, investment opportunities are allocated among various investment strategies based on individual account investment guidelines and PIMCO’s investment outlook. PIMCO has also adopted additional procedures to complement the general trade allocation policy that are designed to address potential conflicts of interest due to the side-by-side management of the Fund and certain pooled investment vehicles, including investment opportunity allocation issues.


Conflicts potentially limiting the Fund’s investment opportunities may also arise when the Fund and other PIMCO clients invest in different parts of an issuer’s capital structure, such as when the Fund owns senior debt obligations of an issuer and other clients own junior tranches of the same issuer. In such circumstances, decisions over whether to trigger an event of default, over the terms of any workout, or how to exit an investment may result in conflicts of interest. In order to minimize such conflicts, a portfolio manager may avoid certain investment opportunities that would potentially give rise to conflicts with other PIMCO clients or PIMCO may enact internal procedures designed to minimize such conflicts, which could have the effect of limiting the Fund’s investment opportunities. Additionally, if PIMCO acquires material non-public confidential information in connection with its business activities for other clients, a portfolio manager may be restricted from purchasing securities or selling securities for the Fund. Moreover, the Fund or other accounts managed by PIMCO may invest in a transaction in which one or more other funds or accounts managed by PIMCO are expected to participate, or already have made or will seek to make, an investment. Such funds or accounts may have conflicting interests and objectives in connection with such investments, including, for example and without limitation, with respect to views on the operations or activities of the issuer involved, the targeted returns from the investment, and the timeframe for, and method of, exiting the investment. Additionally, a fund or other account managed by PIMCO may take an investment position or action that may be different from, or inconsistent with, an investment position or action taken by another fund or other account managed by PIMCO having similar or differing investment objectives. These positions and actions may adversely impact the Fund. For example, the Fund may buy a security and another fund or other account managed by PIMCO may establish a short position in that same security or in another security issued by the same issuer. The subsequent short sale may result in a decrease in the price of the security that the first fund holds. When making investment decisions where a conflict of interest may arise, PIMCO will endeavor to act in a fair and equitable manner as between the Fund and other clients; however, in certain instances the resolution of the conflict may result in PIMCO acting on behalf of another client in a manner that may not be in the best interest, or may be opposed to the best interest, of the Fund.

Performance Fees. A portfolio manager may advise certain accounts with respect to which the management fee is based entirely or partially on performance. Performance fee arrangements may create a conflict of interest for the portfolio manager in that the portfolio manager may have an incentive to allocate the investment opportunities that he or she believes might be the most profitable to such other accounts instead of allocating them to the Fund. PIMCO has adopted policies and procedures reasonably designed to allocate investment opportunities between the Fund and certain pooled investment vehicles on a fair and equitable basis over time.

(a)(3)

As of July 31, 2017 the following explains the compensation structure of the individuals who have primary responsibility for day-to-day portfolio management of the Fund:

Portfolio Manager Compensation

PIMCO’s approach to compensation seeks to provide professionals with a Total Compensation Plan and process that is driven by PIMCO’s mission and values. Key Principles on Compensation Philosophy include:

    PIMCO’s pay practices are designed to attract and retain high performers;
    PIMCO’s pay philosophy embraces a corporate culture of rewarding strong performance, a strong work ethic, and meritocracy;
    PIMCO’s goal is to ensure key professionals are aligned to PIMCO’s long-term success through equity participation; and
    PIMCO’s “Discern and Differentiate” discipline guides total compensation levels.

The Total Compensation Plan consists of three components. The compensation program for portfolio managers is designed to align with clients’ interests, emphasizing each portfolio manager’s ability to generate long-term investment success for PIMCO’s clients. A portfolio manager’s compensation is not based solely on the performance of the Fund or any other account managed by that portfolio manager:

Base Salary – Base salary is determined based on core job responsibilities, positions/levels and market factors. Base salary levels are reviewed annually, when there is a significant change in job responsibilities or position, or a significant change in market levels.


Performance Bonus – Performance bonuses are designed to reward risk-adjusted performance and contributions to PIMCO’s broader investment process. The compensation process is not formulaic and the following non-exhaustive list of qualitative and quantitative criteria are considered when determining the total compensation for portfolio managers:

    Performance measured over a variety of longer- and shorter-term periods, including 5-year, 4-year, 3-year, 2-year and 1-year dollar-weighted and account-weighted, pre-tax total and risk-adjusted investment performance as judged against the applicable benchmarks (which may include internal investment performance-related benchmarks) for each account managed by a portfolio manager (including the Fund) and relative to applicable industry peer groups; greatest emphasis is placed on 5-year and 3-year performance, followed by 1-year performance;
    Consistency of investment performance across portfolios of similar mandate and guidelines, rewarding low dispersion and consistency of outperformance;
    Appropriate risk positioning and risk management mindset which includes consistency with PIMCO’s investment philosophy, the Investment Committee’s positioning guidance, absence of defaults, and appropriate alignment with client objectives;
    Contributions to mentoring, coaching and/or supervising members of team;
    Collaboration, idea generation, and contribution of investment ideas in the context of PIMCO’s investment process, Investment Committee meetings, and day-to-day management of portfolios;
    With much lesser importance than the aforementioned factors: amount and nature of assets managed by the portfolio manager, contributions to asset retention, and client satisfaction.

PIMCO’s partnership culture further rewards strong long term risk adjusted returns with promotion decisions almost entirely tied to long term contributions to the investment process. 10-year performance can also be considered, though not explicitly as part of the compensation process.

Deferred Compensation – Long Term Incentive Plan (“LTIP”) and/or M Options are awarded to key professionals. Employees who reach a total compensation threshold are delivered their annual compensation in a mix of cash and/or deferred compensation. PIMCO incorporates a progressive allocation of deferred compensation as a percentage of total compensation, which is in line with market practices.

    The LTIP provides participants with deferred cash awards that appreciate or depreciate based on PIMCO’s operating earnings over a rolling three-year period. The plan provides a link between longer term company performance and participant pay, further motivating participants to make a long term commitment to PIMCO’s success.
    The M Unit program provides mid-to-senior level employees with the potential to acquire an equity stake in PIMCO over their careers and to better align employee incentives with the Firm’s long-term results. In the program, options are awarded and vest over a number of years and may convert into PIMCO equity which shares in the profit distributions of the Firm. M Units are non-voting common equity of PIMCO and provide a mechanism for individuals to build a significant equity stake in PIMCO over time.
    The Carried Interest Compensation Plan awards entitle eligible individuals who provide services to PIMCO’s Alternative Funds a percentage (“points”) of the carried interest otherwise payable to PIMCO in the event that the applicable performance measurements described in the Alternative Fund’s partnership agreements are achieved. The awards are granted before any payments are made in respect of the awards and payout is contingent on long-term performance, and are intended to align the interests of the employees with that of PIMCO and the investors in the Alternative Funds. While subject to forfeiture and vesting terms, payments to participants are generally made if and when the applicable carried interest payments are made to PIMCO.

Eligibility to participate in LTIP, the M Unit program, and the Carried Interest Compensation Plan is contingent upon continued employment at PIMCO and all other applicable eligibility requirements.

Profit Sharing Plan. Portfolio managers who are Managing Directors of PIMCO receive compensation from a non-qualified profit sharing plan consisting of a portion of PIMCO’s net profits. Portfolio managers who are Managing Directors receive an amount determined by the Compensation Committee, based upon an individual’s overall contribution to the firm.

(a)(4)

The following summarizes the dollar range of securities of the Fund the Portfolio Managers beneficially owned as of July 31, 2017:


   
Portfolio Manager    Dollar Range of Equity Securities of the Fund Owned as of July 31, 2017
   
Alfred T. Murata    None
   
Mohit Mittal    None

 

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

None.

 

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board of Trustees since the Fund last provided disclosure in response to this item.

 

Item 11. Controls and Procedures.

 

  (a) The principal executive officer and principal financial & accounting officer have concluded as of a date within 90 days of the filing date of this report, based on their evaluation of the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)), that the design of such procedures is effective to provide reasonable assurance that material information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

  (b) There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

 

Item 12. Exhibits.

 

  (a)(1) Exhibit 99.CODE— Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002.

 

  (a)(2) Exhibit 99.CERT—Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

  (b) Exhibit 99.906CERT—Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

PIMCO High Income Fund
By:   /s/ PETER G. STRELOW
  Peter G. Strelow
  President (Principal Executive Officer)
Date: September 28, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:   /s/ PETER G. STRELOW
  Peter G. Strelow
  President (Principal Executive Officer)
Date: September 28, 2017

 

By:   /s/ WILLIAM G. GALIPEAU
  William G. Galipeau
  Treasurer (Principal Financial & Accounting Officer)
Date: September 28, 2017