TEXT-Fitch affirms 4 PIMCO closed-end funds preferred share ratings

Thu Feb 28, 2013 5:31pm EST

Feb 28 - Fitch Ratings has affirmed the 'AAA' ratings assigned to the
auction rate preferred shares (ARPS) issued by the following four closed-end
funds sub-advised by Pacific Investment Management Company LLC (PIMCO) and
managed by Allianz Global Investment Fund Management LLC (AGIFM):

PIMCO High Income Fund (NYSE: PHK)
--$292,000,000 of ARPS consisting of Series M, T, W, TH and F, each with a
liquidation preference of $25,000 per share, affirmed at 'AAA';

PIMCO Corporate & Income Strategy Fund (NYSE: PCN)
--$169,000,000 of ARPS consisting of Series M, T, W, TH and F, each with a
liquidation preference of $25,000 per share, affirmed at 'AAA';

PIMCO Income Strategy Fund (NYSE: PFL)
--$78,975,000 of ARPS consisting of Series T, W and TH, each with a liquidation
preference of $25,000 per share, affirmed at 'AAA';

PIMCO Income Strategy Fund II (NYSE: PFN)
--$161,000,000 of ARPS consisting of Series M, T, W, TH and F, each with a
liquidation preference of $25,000 per share, affirmed at 'AAA'.

KEY RATING DRIVERS
The affirmations follow Fitch's annual reviews of the funds. The 'AAA' ratings
are based on the following:

--Sufficient asset coverage provided to the ARPS by the funds' underlying
portfolios of assets;
--The structural protections afforded by mandatory cure and de-leveraging
provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the funds' operations; and
--The capabilities of PIMCO as the sub-adviser.

Fitch's ratings assigned to the ARPS speak only to timely repayment of interest
and principal in accordance with the governing documents and not to potential
liquidity in the secondary market.

FUND PROFILES
As of Jan. 31, 2013, the portfolios consisted mainly of high-yield and
investment grade corporate securities, structured finance securities, preferred
stock and taxable municipal bonds issued by U.S. domiciled issuers. The PCN fund
had a higher allocation to investment grade corporate securities while the other
three funds had a higher allocation to high-yield corporate and non-agency
mortgage bond securities. The top sector concentration in each fund was to
'Banking, Finance and Insurance'.

FUND LEVERAGE
As of Jan. 31, 2013, the funds had the following assets, leverage and derivative
profiles:

--PHK: total portfolio assets of approximately $1,393 million, current
liabilities of $51 million and cash leverage of $292 million, or 22% of net
portfolio assets. Cash leverage consisted entirely of rated ARPS.

Fitch's criteria also consider the fund's use of economic leverage in the form
of derivatives, which amounted to $85 million in notional of credit default
swaps, $5 million in excess (unhedged) forward currency exposures, and $4,030
million in notional of interest rate swaps (long) positions (although the fund
also utilized a $700 million short position to hedge some of this risk).

--PCN: total portfolio assets of approximately $786 million, current liabilities
of $9 million and cash leverage of $169 million, or 22% of net portfolio assets.
Cash leverage consisted entirely of rated ARPS.

The fund also utilized $600 million in notional of interest rate swaps (long)
for current income, and $0.3 million in excess (unhedged) forward currency
exposures.

--PFL: total portfolio assets of approximately $394 million, current liabilities
of $4 million and cash leverage of $83 million or 21% of net portfolio assets.
Cash leverage consisted of approximately $4 million of reverse repurchase
agreements and $79 million of rated ARPS.

The fund also utilized $299 million in notional of interest rate swaps (long)
for current income, $1.5 million in credit default swaps, and $0.2 million in
excess (unhedged) forward currency exposures.

--PFN: total portfolio assets of approximately $794 million, current liabilities
of $9 million and cash leverage of $163 million, or 21% of net portfolio assets.
Cash leverage consisted of approximately $2 million of reverse repurchase
agreements and $161 million of rated ARPS.

The fund also utilized $609 million in notional of interest rate swaps (long)
for current income and $0.3 million in excess (unhedged) forward currency
exposures.

ASSET COVERAGE
As of Jan. 31, 2013, the funds' asset coverage ratios for the ARPS, as
calculated in accordance with the Fitch total and net overcollateralization
tests (Fitch OC tests) per the 'AAA' rating guidelines outlined in Fitch's
closed-end fund criteria, were in excess of 100%. This is the minimum asset
coverage guideline required by the fund's governing documents and evaluated as
such by Fitch.

Also at the time of the rating affirmation, the funds' asset coverage ratios for
rated ARPS, as calculated in accordance with the Investment Company Act of 1940
(1940 Act), were in excess of 200%, which is the minimum asset coverage required
by the 1940 Act and the fund's governing documents.

Should the asset coverage tests decline below their minimum threshold amounts
(as tested on the last business day of each week), the governing documents
require the fund to alter the composition of its portfolio toward assets with
lower discount factors (for Fitch OC Tests), or to reduce leverage in a
sufficient amount (for both the Fitch OC Tests and the 1940 Act test) to restore
compliance within a pre-specified period (a maximum of 38 business days for the
Fitch OC Tests and a longer period for the 1940 Act test).

THE ADVISOR
PIMCO acts as the sub-adviser to the funds, performing all investment management
and distribution functions. As of Dec. 31, 2012, PIMCO had $2 trillion in assets
under management. Allianz Global Investors Fund Management LLC (AGIFM) acts as
the investment manager to the funds, performing all legal, operations and
compliance functions. PIMCO and AGIFM are indirect, majority owned subsidiaries
of Allianz SE.

RATING SENSITIVITY
The ratings may be sensitive to material changes in the credit quality or market
risk profiles of the fund, including the risk exposure assumed by the funds' use
of interest rate swaps. A material adverse deviation from Fitch guidelines for
any key rating driver could cause the rating to be lowered by Fitch.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

The sources of information used to assess this rating were the public domain,
PIMCO and AGIFM.

Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock', Aug 15, 2012;
--'Fitch: Taxable CEFs Rely on Select Few Banks for Funding' (Jan. 11, 2013);
--'2013 Outlook: Closed-End Funds' (Dec. 14, 2012);
--'Taxable Closed-End Funds Reliant on Short-Term Debt Reap Low-Cost Funding at
the Expense of Rollover Risk' (Sept. 25, 2012).

Applicable Criteria and Related Research
Rating Closed-End Fund Debt and Preferred Stock
2013 Outlook: Closed-End Funds
Taxable Closed-End Funds Reliant on Short-Term Debt Reap Low-Cost Funding at the
Expense of Rollover Risk