PIMCO CEF Update: Coverage Rebound Mirage And A Portfolio Reshuffle

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Pgiam/iStock via Getty Images In this article, we provide an update on the PIMCO CEF suite. Specifically, we discuss the changes in distribution coverage over April. We also discuss allocation changes...

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We also discuss allocation changes...</p>\n\n<a href=\"https://seekingalpha.com/article/4699773-pimco-cef-update-coverage-rebound-mirage-and-portfolio-reshuffle\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>PIMCO CEF Update: Coverage Rebound Mirage And A Portfolio Reshuffle</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPIMCO CEF Update: Coverage Rebound Mirage And A Portfolio Reshuffle\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-18 17:09 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4699773-pimco-cef-update-coverage-rebound-mirage-and-portfolio-reshuffle><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Pgiam/iStock via Getty Images In this article, we provide an update on the PIMCO CEF suite. Specifically, we discuss the changes in distribution coverage over April. We also discuss allocation changes...</p>\n\n<a href=\"https://seekingalpha.com/article/4699773-pimco-cef-update-coverage-rebound-mirage-and-portfolio-reshuffle\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"PGP","symbol_name":"PIMCO全球StocksPLUS收益基金","start_time":0,"source_url":"https://seekingalpha.com/article/4699773-pimco-cef-update-coverage-rebound-mirage-and-portfolio-reshuffle","article_id":"2444488701","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1220627489/image_1220627489.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2444488701","pubTimestamp":1718701752,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Pgiam/iStock via Getty Images In this article, we provide an update on the PIMCO CEF suite. 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We also discuss allocation changes in the last shareholder report. Within the taxable suite, we continue to favor the Dynamic Income Strategy Fund (PDX) as well as the Global StocksPLUS & Income Fund (PGP). Coverage Update Based on the April six-month rolling figures, average taxable coverage rebounded while average tax-exempt coverage continued to grow.   Systematic Income CEF Tool That said, much of the coverage uplift was concentrated in PDO, with the remainder of the taxable suite seeing little change. Outside of PDO, average taxable coverage is 63%. The fiscal-year-to-date picture is slightly better, at 73%.   Systematic Income CEF Tool The Big Portfolio Reshuffle PIMCO semi-annual reporting periods end in the months of June and December. Now that we are coming up to the end of the current reporting period and awaiting a new report, we take the opportunity to review significant changes in the taxable fund portfolios in the last report as of Dec-2023. The chart below shows the holdings across different types of securities for the portfolio from the Jun-23 report as well as the Dec-23 report. The numbers show market value which is not ideal for fixed-income instruments as par value would be a better metric, though unfortunately par (i.e. notional) figures are not readily provided by PIMCO. Par values would be more useful as market value can change for two reasons - a change in the par amount or the change in the price, and here we are interested in the change in the par amount of assets held. However, because prices for fixed-income instruments did not change a huge amount between the two dates (the change in the high-yield ETF JNK was less than 3%) the vast bulk of the difference can be ascribed to the difference in par amounts held.   Systematic Income The chart below shows the changes in holdings by security type between the two dates. What we see is that there was a sizable drop in holdings across Loans, ABS, short-term instruments (primarily a drop in asset-side repo), ABS and preferreds.   Systematic Income The capital pulled out from these assets look to have been transferred to cash and common shares. New common share holdings include $93m in utility Windstream Units and $180m in Amsurg stock - a provider of ambulatory surgery center services which emerged from the Envision Chapter 11 process. It appears that PDI held a $110m secured loan in Amsurg which was restructured into stock. PIMCO also bought out previous owner KKR's remaining one-fifth share in the company. The Amsurg story is a very interesting example of lender-on-lender violence where Envision put Amsurg into an unrestricted subsidiary, effectively stripping assets from its senior lenders, including PIMCO in order to collateralize a new loan from two hedge funds.   PIMCO The $593m transfer to the PIMCO Short-Term Floating NAV Portfolio III looks to be for cash management purposes and, effectively, derisks and deleverages the fund by a sizable amount. For context, the fund's net assets are $4.9bn. Overall, it looks like this portfolio reshuffle achieved two things. One, it derisked the portfolio somewhat, which is a bit clearer if we strip out the Amsurg move from a loan to equity position which PIMCO did not have much control over. Credit spreads, as proxied by high-yield corporate bonds, hit a very low level at the end of last year. If this prompted the fund to reduce its credit position, then its move makes a lot of sense. As we have discussed a number of times, tight spreads are not a catalyst in themselves for the market to sell off. In fact, spreads have tightened even further since then, now just only a few basis points off their post-GFC tights. Although loan spreads are wider than corporate bond spreads, they are relatively expensive as well.   FRED There are also fundamental reasons for paring down a loan allocation. One is the rising default rate, which is now north of 4% - close to an 8-year high if we include distressed exchanges - versus a low of under 1% in 2022. And two, recoveries have been the weakest on record at 38% due to weak credit agreements, lender-on-lender violence and coercive sponsor behavior. S&P forecasts average recoveries of around 35% for newly issued loans versus 72% over the 5-year period prior to 2022. This is even below the historic recovery figure for unsecured bonds, which is quite something. The second thing that the portfolio reshuffle achieved was to reduce the allocation to floating-rate assets. We can see this not only from the reduction in the loan allocation as well as ABS (part of which is floating-rate) but also the fact that the bond allocation actually increased slightly. At the end of the year, the consensus was that short-term rates would fall significantly over 2024 with the Fed expected to make 6-7 cuts. The view now is that the Fed could make 1-2 cuts in the policy rate instead. It's possible the fund wanted to cut its allocation to assets whose income production would fall. This could make sense, though it's not a totally satisfying explanation given loan income net of leverage costs would remain the same as the cost of repo would fall in line with that of loan income. The second important shift across the portfolio was the large increase in the interest rate swap position. Specifically, the value of the swap portfolio (i.e. the mark-to-market) went from -$47m to +182m. This was achieved by tweaking the coupons on a number of swaps, i.e., the $229m gain was not \"real\" in the sense that a gain on a bond is real. Rather, the company had to post cash to the counterparty to reflect the higher market value of the swaps. For example, two of these swaps in the June report   PIMCO were combined into one swap (and upsized) with a much larger fixed coupon (0.66% and 1.75% to 4.5%) received by PIMCO. As expected, because PIMCO now receives a larger coupon, the market value of the swap to PIMCO is now higher. This explains the market value swing of around $100mm just on this line item.   PIMCO These swap changes will not hugely drive up the fund’s net income as many of the swaps are or were turned into forward-starting ones, i.e., they don’t actually throw off cash today and may not in the future as PIMCO could restructure them again. Perhaps PIMCO is getting ready for a lower-rate environment and may choose to top up fund income by making the swaps spot-starting in the future. Overall, these portfolio shifts look like PDI, as well as the other PIMCO taxable CEFs, were shifting their allocation to reflect both an expensive credit environment (by derisking their credit allocation) as well as a likely drop in short-term rates (by reducing their floating-rate allocation and adding capital into forward-starting swaps). It will be interesting to see what changes are made as of the June-24 report. Takeaways The average PIMCO taxable CEF premium remains elevated at a low double-digit level.   Systematic Income The recent high-flyer PCM saw its 40%+ premium deflate to below 25% - still too high in our view.   Systematic Income This is particularly the case as PCM total NAV return is the lowest in the suite this year.   Systematic Income As well as on a longer timeframe such as from 2020.   Systematic Income The two funds in the taxable suite that remain reasonably attractive are the Dynamic Income Strategy Fund (PDX), trading at a 12% discount. The fund's massive Venture Global position remains a key risk for the fund. As a sidenote, the fund's current yield is 6.35% rather than 2.15% as CEFConnect has it. It hasn't updated the frequency to monthly yet.   CEFConnect We also like the Global StocksPLUS & Income Fund (PGP) which has more of an all-market feel with positions across equity and fixed-income. Its valuation remains low relative to the suite, as the following chart shows.   Systematic Income  Editor's Note: This article covers one or more microcap stocks. 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