UPDATE 1-PIMCO closed-end funds defer dividends in rare move

* First municipal funds to defer dividend, says analyst

* Some funds traded at discounts to NAVs on news - analyst (Adds analyst comments, byline)

By Muralikumar Anantharaman

BOSTON, Dec 1 (Reuters) - Eight closed-end funds of U.S. asset manager PIMCO said on Monday they have postponed paying or setting dividends on their common shares after failing to meet regulations for such payments due to turbulent markets, a rare step in the industry.

Closed-end funds, which issue a fixed number of common shares and trade on stock exchanges, usually make borrowings to boost their returns. A common route for such borrowing is the issue of preferred shares.

The Investment Company Act of 1940 stipulates that for the funds to declare and pay dividends, their total assets must be at least twice the sum borrowed from the issue of preferred shares, or their asset-coverage ratios must be above 200 percent.

Six of the eight funds of Pacific Investment Management Co. (PIMCO) said their asset-coverage ratios have fallen below that threshold. PIMCO is a unit of German insurer Allianz (ALVG.DE).

"Continued severe market dislocations and recent further erosions in the municipal bond market have caused the values of the funds' portfolio securities to decline and as a result the funds' asset-coverage ratios have fallen below the 200% level," six of PIMCO's funds said in a statement.

The six funds are the New York Municipal Income Fund, the Municipal Income Fund II, California Municipal Income Fund II, the Municipal Income Fund III, California Municipal Income Fund III and New York Municipal Income Fund III.

These funds said they have postponed the payment of previously set dividends that were due on Dec. 1 and have put off the declaration of the next round of monthly dividends, which would have been paid on Dec. 31.

"This is the first time I saw that a municipal closed-end fund has postponed the dividend," Cecilia Gondor, executive vice-president of Miami-based closed-end funds research and trading firm Thomas J. Herzfeld Advisors, told Reuters.

Gondor said a few other closed-end funds that invested in riskier assets such as preferred shares, high-yield and real estate had deferred their dividends since markets crumbled in September.

PIMCO and Allianz officials did not return calls seeking comments.

"The funds intend to resume paying and declaring dividends as soon as possible," the funds said. In order to facilitate this, they may redeem part of the preferred shares issue, they said.

The Corporate Income Fund and the Corporate Opportunity Fund, which will pay dividends as of Dec. 1, said they have postponed the declaration of the next round of monthly dividends. These funds said their asset-coverage ratios are expected to soon fall below the 200 percent level.

Gondor of Thomas J. Herzfeld Advisors said the PIMCO funds that deferred dividends traded at "very wide discounts" to their net asset values on Monday. "We were a big buyer today of several of these PIMCO funds," she said.

"If you bought something for yield and suddenly they are postponing the dividend, it makes investors nervous," said Gondor.