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Select PIMCO Taxable CEFs Trim Distributions

Jun. 02, 2020 8:57 AM ETPCN, PDI, PFL, PFN, PGP22 Comments


  • Lower asset prices have led to a wave of distribution cuts across the CEF space as many funds have had to deleverage in order to comply with their leverage covenants.
  • PIMCO has not been immune to this trend with three distribution cuts announced on June 1st in PGP, RCS, and PHK.
  • What these funds have in common is their relatively large deleveraging over the past two months as well as lower distribution coverage.
  • We remain overweight PFL and PFN over PCN as well as PDI over PCI - due to their more muted deleveraging and more attractive discount valuation.
  • Looking for a helping hand in the market? Members of Systematic Income get exclusive ideas and guidance to navigate any climate. Get started today »

Over the last few weeks and across a number of articles we have been focused on the changes in leverage of PIMCO CEFs. Our view has been that changes in borrowings are key drivers of fund earnings and, by extension, distribution sustainability. Today we saw three taxable CEFs cut their distribution substantially. In this article, we take a look at whether anything we learned over the past week prepared us for these cuts and what the outlook is for the remainder of PIMCO CEFs.

Our takeaway is that the three funds making cuts have seen relatively large deleveraging while maintaining less robust distribution coverage. We remain overweight those PIMCO funds that have seen relatively little deleveraging and are trading at attractive discount valuations. We are overweight the Income Strategy Fund (PFL) and Income Strategy Fund II (PFN) over the Corporate & Income Strategy Fund (PCN) as well as Dynamic Income Fund (PDI) over Dynamic Credit and Mortgage Income Fund (PCI).

What Just Happened?

On 1-June PIMCO announced July distributions for their monthly-paying CEFs. Three of the taxable funds saw substantial cuts with no cuts across municipal CEFs.

Source: PIMCO

On 13-May we suggested investors remain wary of two of these funds given their more vulnerable stance. The fact that PIMCO has made these cuts is not a complete surprise for three main reasons. First, in the last two months, we have seen more than 150 distribution changes in the CEF space - 90% of the cuts. The few raises have largely been confined to the municipal sector.

Secondly, PIMCO funds, by and large, have been cutting their borrowings. The cuts in March were made largely as a result of hitting leverage caps. The cuts in April are a bit harder to explain since there did not appear to be

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This article was written by

ADS Analytics profile picture

At Systematic Income our aim is to build robust Income Portfolios with mid-to-high single digit yields and provide investors with unique Interactive Tools to cut through the wealth of different investment options across BDCs, CEFs, ETFs, mutual funds, preferred stocks and more. Join us on our Marketplace service Systematic Income.

Our background is in research and trading at several bulge-bracket global investment banks along with technical savvy which helps to round out our service. 

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (22)

Pooh_Lover profile picture
I'm pretty long PTY, PCI and PDI with PCI being the largest at 5k shares. Hopefully we don't get a negative surprise here soon. Was able to get in at reasonable prices due to the 'rona so no complaints so far. Reinvest for the long term and live off dividends is the plan.
A Section 19a was recently released for PFN. Is this cause for concern for the dividend? Also, is it related to the Form 497 from around May 15?

I love this article and analysis. Does Systemic Income release this analysis of Pimco funds on a monthly basis? If so, please let me know because I definitely want to sign up for the service if that is the case. Many thanks!
ADS Analytics profile picture
Section 19 figures for PIMCO funds are a bit cryptic in the sense that while basically all the funds have < 100% coverage very few release Section 19s. In any case the Section 19 NII %ge for NII return at 95.3% is actually higher than the distribution coverage figures. So, not a concern yet really.
ADS Analytics profile picture
To add, a 497 is usually filed because of additional share issuance. We follow these funds live on the service and are working on a rating framework which should be ready in a few days.
Seems like the market is in favor of PCI at a premium here. The premium tells us investors are somewhat comfortable with the managements ability. NAV 6/2/20 $17.57 Share price inter day around $19.08. The money is talking.
For whatever reason, PCI's market and NAV total return have been on a run this past month. I like the turn-around. This is pretty typical of PIMCO bond funds after a bad quarter.
Forbes declares " PTY’s Glory Days Are Over " The cite the 3 best CEFs right now to buy are BME, QQQX and UTF. I
Don't count PTY out .
Do you think it's a fair conclusion to say those funds that Pimco did not cut are "safe" for the time being? or is next wave of divi cuts coming next month? I thought they moved in waves in the last downturn, but admit my memory is a little cloudy.
ADS Analytics profile picture
Hard to say definitively. All but 1 fund have below 100% distribution coverage and all but 2 funds have deleveraged over the last two months. This doesn't mean PIMCO can't carry on for a while with subpar coverage - they have been doing this for a couple of years already.
Last year, many of their funds showed a major earnings ramp in July and subsequently paid specials at year end. For example, PDI generated 61c in the month of July and PCI posted earnings of 57c in July. It seems we need another earnings ramp later this summer to secure the annual dividend.

Thanks for your replay and posts - I find them to be very valuable.
02 Jun. 2020
Great information, thank you!
sc21 profile picture
thanks for the review which is helpful. SC
Trader81037 profile picture
Anyone have a link to a wide overview explanation of the PIMCO CEFs? Spent so much time trying to decipher them, including holdings, but it's very complicated.
I would also like to know this. Thank you for asking the question.
@ADS Analytics
Thanks for the insights-
where can one look to find accurate current yields?
ADS Analytics profile picture
Outside of my own service, not sure.
gimmeecoffee profile picture
Wow, even after the cuts, the prices on those 3 funds are still way out of synch with their NAVs. Put them on watchlist hoping for much better prices, but this market is just nuts.
Ta0 profile picture
I've been holding onto PCN for about a decade. Is that too long? Should I wait until it breaks even and get out, while I still can?
Excellent data and commentary,thanks.
Good to see PKO and PTY out of the "More Vulnerable" danger zone (for now).

Thank you for the illuminating report, ADS Analytics.
Thanks for the analysis. I would rather be lucky than smart. I have been holding PTY and PFN for years, and more recently picked up PDI. Not complaining!
Excellent analysis. I feel guilty - you do all the work for me! Long PDI, PCI, and PKO.
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