PIMCO Corporate & Income Strategy Fund
Table of Contents

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: 811-10555

PIMCO Corporate & Income Strategy 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: October 31, 2014

Date of reporting period: October 31, 2014

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.


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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).


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Your Global Investment Authority

 

 

PIMCO Closed-End Funds

 

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Annual Report

October 31, 2014

 

PIMCO Corporate & Income Strategy Fund

 

PIMCO Income Opportunity Fund

 

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Table of Contents

 

          Page  
     

Letter from the Chairman of the Board & President

        2   

Important Information About the Funds

        5   

Financial Highlights

        14   

Statements of Assets and Liabilities

        16   

Statements of Operations

        17   

Statements of Changes in Net Assets

        18   

Statement of Cash Flows

        20   

Schedule of Investments

        21   

Notes to Financial Statements

        52   

Report of Independent Registered Public Accounting Firm

        77   

Glossary

        78   

Federal Income Tax Information

        79   

Management of the Funds

        80   

Shareholder Meeting Results

        83   

Changes to Boards of Trustees

        84   

Investment Strategy Updates

        85   

Dividend Reinvestment Plan

        87   

Matters Relating to the Trustees’ Consideration of the Investment Management and Portfolio Management Agreements

       
89
  

Privacy Policy

        94   


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Letter from the Chairman of the Board & President

 

Dear Shareholder:

 

As previously announced, on September 26, 2014, prior to the close of the reporting period, William “Bill” Gross, PIMCO’s former chief investment officer (“CIO”) and co-founder, resigned from the firm. PIMCO’s managing directors elected Daniel Ivascyn to serve as group chief investment officer (“Group CIO”). In addition, PIMCO appointed Andrew Balls, CIO Global; Mark Kiesel, CIO Global Credit; Virginie Maisonneuve, CIO Global Equities; Scott Mather, CIO U.S. Core Strategies; and Mihir Worah, CIO Real Return and Asset Allocation. As announced by PIMCO on November 3, 2014, Marc Seidner returned to the firm effective November 12, 2014, in a new role as CIO Non-Traditional Strategies and head of Portfolio Management in PIMCO’s New York office. Under this leadership structure, Andrew and Mihir have additional managerial responsibility for PIMCO’s Portfolio Management group and trade floor activities globally. Andrew oversees portfolio management and trade floor activities in Europe and Asia-Pacific, and Mihir oversees portfolio management and trade floor activities in the U.S. Furthermore, effective as of September 26, 2014, Alfred Murata and Mohit Mittal replaced Mr. Gross as portfolio managers for PIMCO Corporate & Income Strategy Fund (“PCN”). There have not been any changes to the portfolio management of PIMCO Income Opportunity Fund (each a “Fund” and together with PCN, the “Funds”).

 

Douglas Hodge, PIMCO’s chief executive officer, and Jay Jacobs, PIMCO’s president, continue to serve as the firm’s senior executive leadership team, spearheading PIMCO’s business strategy, client service and the firm’s operations.

 

These appointments are a further evolution of the structure that PIMCO established earlier in 2014, reflecting our belief that the best approach for PIMCO’s clients and our firm is an investment leadership team of seasoned, highly skilled investors overseeing all areas of PIMCO’s investment activities.

 

During his 43 years at PIMCO, Mr. Gross made great contributions to building the firm and delivering value to PIMCO’s clients. Over this period, PIMCO developed into a global asset manager, expanding beyond core fixed income, now encompassing over 2,400 employees across 13 offices, including more than 250 portfolio managers. Mr. Gross was also responsible for starting PIMCO’s robust investment process, with a focus on long-term macroeconomic views and bottom-up security selection—a process that is well institutionalized and will continue into PIMCO’s future.

 

For the 12-month reporting period ended October 31, 2014:

 

After several years of positive growth, severe winter weather in parts of the country appeared to be a headwind for the U.S. economy in early 2014. Looking back, gross domestic product (“GDP”), the value of goods and services produced in the country, the broadest measure of economic activity and the principal indicator of economic performance, expanded at a 3.5% annual pace during the fourth quarter of 2013.

 

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According to the U.S. Commerce Department, GDP then contracted at an annual pace of 2.1% during the first quarter of 2014. However, this was a temporary setback, as GDP expanded at a 4.6% annual pace during the second quarter of 2014. This represented the strongest growth rate since the fourth quarter of 2011. According to the Commerce Department’s estimate released on November 25, 2014, GDP expanded at an annual pace of 3.9% during the third quarter of 2014.

 

The Federal Reserve (the “Fed”) began tapering its monthly asset purchase program in January 2014. At each of its next seven meetings, the Fed announced that it would further taper its asset purchases. Following its meeting in October 2014, the Fed announced that it had concluded its asset purchases.

 

However, the Fed again indicated that it would not raise interest rates in the near future, saying in October that “… it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

 

Outlook

 

PIMCO’s 2015 forecast in the U.S. is for a continuation of the economic recovery. With the ongoing assistance of easy monetary policy, combined with healthy private financial sector balance sheets, we believe the U.S. economy is poised to grow between 2.5% and 3.0% in the coming calendar year. We expect to see corporate capital expenditures accelerate on the back of rising pricing power and expected returns on newly invested capital. We expect very gradually rising wages and product prices, which will allow the Fed to maintain its accommodative monetary policy for 2015. Potential wildcards for the economy in both the U.S. and abroad are geopolitical issues in Ukraine, the Middle East and elsewhere.

 

On 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 performance of the Funds over the 12-month reporting period ended October 31, 2014.

 

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 (844-337-4626). We also invite you to visit our website at pimco.com/investments to learn more about our views and global thought leadership.

 

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Letter from the Chairman of the Board & President (Cont.)

 

 

We remain dedicated to serving your investment needs.

 

Sincerely,

 

LOGO   LOGO
LOGO   LOGO
Hans W. Kertess   Peter G. Strelow
Chairman of the Board of Trustees   President; Principal Executive Officer

 

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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 number of factors can cause interest rates to rise (e.g., central bank monetary policies, inflation rates, general economic conditions, etc.). Accordingly, changes in interest rates can be sudden, and there is no guarantee that Fund Management will anticipate such movement.

 

As of the date of this report, interest rates in the U.S. are at or near historically low levels. As such, bond funds may currently face an increased exposure to the risks associated with rising interest rates. This is especially true since the Federal Reserve Board has concluded its quantitative easing program. 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. 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.

 

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 to the Fund of leverage 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,

 

  ANNUAL REPORT   OCTOBER 31, 2014    5


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Important Information About the Funds (Cont.)

 

 

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. 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, 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 the Fund and its shareholders.

 

Mortgage-related and other asset-backed securities often involve risks that are different from or 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

 

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changes in interest rates. As a result, in a period of rising interest rates, if a Fund holds mortgage-related securities, it may experience 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.

 

High-yield bonds (commonly referred to as “junk bonds”) typically have a lower credit rating than other bonds. Lower-rated bonds generally 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 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 securities are often illiquid and may not be actively traded. Sale 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.

 

Certain Funds may invest in securities and instruments that are economically tied to Russia. Investments in Russia are subject to political, economic, legal, market and currency risks, as well as the risk of economic sanctions 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 a Fund’s performance and/or ability to achieve its investment objective. For example, certain transactions may be prohibited and/or existing investments may become illiquid (e.g., in the event that transacting in certain existing investments is prohibited).

 

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.

 

The Funds may be subject to various risks in addition to those described above. Some of these risks may include, but are 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

 

  ANNUAL REPORT   OCTOBER 31, 2014    7


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Important Information About the Funds (Cont.)

 

 

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.

 

The geographical classification of foreign 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.

 

On each individual Fund Summary page in this Shareholder Report the Common Share Average Annual Total Return table and Common Share Cumulative Returns (if applicable) measure 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 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 of each Fund:

 

Fund Name      

Commencement
of Operations

 
PIMCO Corporate & Income Strategy Fund       12/21/01   
PIMCO Income Opportunity Fund       11/30/07   

 

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.

 

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.pimcofunds.com/closedendfunds, and on the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.

 

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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/closedendfunds. Updated portfolio holdings information about a Fund will be available at www.pimco.com/investments 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   OCTOBER 31, 2014    9


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PIMCO Corporate & Income Strategy Fund    Symbol on NYSE -  PCN

 

Allocation Breakdown       
Mortgage-Backed Securities      34.5%   
Corporate Bonds & Notes      27.7%   
U.S. Government Agencies      8.8%   
Short-Term Instruments      8.1%   
Sovereign Issues      7.2%   
Municipal Bonds & Notes      5.8%   
Other      7.9%   

 

   

% of Investments, at value as of 10/31/14

Fund Information (as of October 31, 2014)(1)  
Market Price      $16.18   
NAV      $15.60   
Premium/(Discount) to NAV      3.72%   
Market Price Distribution Yield (2)      8.34%   
NAV Distribution Yield (2)      8.65%   
Regulatory Leverage Ratio (3)      21.98%   

 

 

 

Average Annual Total Return for the period ended October 31, 2014  
     1 Year      5 Year      10 Year      Commencement
of Operations
(12/21/01)
 
Market Price      8.84%         17.40%         12.16%         12.07%   
NAV      12.80%         17.81%         12.35%         12.74%   

 

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/investments or call (844) 33-PIMCO.

(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, 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 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 regulatory leverage outstanding, as a percentage of total managed assets. Regulatory leverage may include preferred shares, tender option bond transactions, reverse repurchase agreements, and other borrowings (collectively “Leverage”). Total managed assets refer to total assets (including assets attributable to Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Leverage).

 

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Portfolio Insights

 

»  

The overall fixed income market generated a positive return during the reporting period. The fixed income market was volatile at times as investor sentiment was impacted by incoming economic data, changing expectations regarding future monetary policy and a number of geopolitical issues. All considered, longer-term U.S. Treasury yields declined during the 12-month period, with the yield on the benchmark 10-year Treasury bond falling from 2.57% to 2.35%. Compared to the 4.14% return for the overall U.S. fixed income market (as measured by the Barclays U.S. Aggregate Bond Index), investment grade and high yield corporate bonds returned 6.24% and 5.82%, respectively (as measured by the Barclays U.S. Credit and Barclays U.S. Corporate High Yield Indexes), for the 12 months ended October 31, 2014. Among investment grade quality credits, lower-quality tiers outperformed with AAA-, AA-, A- and BBB-rated issues, returning 2.54%, 5.42%, 5.94% and 7.62%, respectively, as measured by the Barclays U.S. Credit Index. In contrast, higher-rated high yield credits outperformed, with BB-rated issues returning 7.18%, versus 5.17% for B-rated issues, as measured by the Barclays U.S. Corporate High Yield Index.

 

»  

The Fund benefited most from its allocation to nonagency mortgage-backed securities as an improving U.S. housing market, driven by continued recovery in home prices as well as favorable demand relative to supply, supported the sector. Specifically, attractive levels of coupon, coupled with a substantial allocation to this sector, resulted in a large positive contribution to return. Another substantial contributor to performance came from the Fund’s allocation to municipal bonds during the reporting period. The sector benefited from both attractive current coupon as well as increases in bond prices, supported by continued economic recovery in the United States and, subsequently, higher local tax revenues. Lastly, the Fund’s exposure to corporate credit, specifically to the banking and automotive sectors, contributed to results, driven primarily by attractive current coupons.

 

»  

The Fund’s exposure to Brazilian interest rates detracted from returns as local interest rates rose during the period following higher-than-expected inflation reports and market concerns about future higher inflation following Dilma Rousseff’s re-election as president. There were no additional material detractors from results during the period.

 

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PIMCO Income Opportunity Fund    Symbol on NYSE -  PKO

 

Allocation Breakdown       
Corporate Bonds & Notes      41.3%   
Mortgage-Backed Securities      24.6%   
Asset-Backed Securities      18.5%   
Sovereign Issues      4.3%   
Bank Loan Obligations      4.0%   
Other      7.3%   

 

   

% of Investments, at value as of 10/31/14

Fund Information (as of October 31, 2014)(1)  
Market Price      $27.26   
NAV      $28.38   
Premium/(Discount) to NAV      (3.95%
Market Price Distribution Yield (2)      8.36%   
NAV Distribution Yield (2)      8.03%   
Regulatory Leverage Ratio (3)      43.79%   

 

 

 

Average Annual Total Return for the period ended October 31, 2014  
     1 Year      5 Year      Commencement
of Operations
(11/30/07)
 
Market Price      4.39%         17.15%         12.62%   
NAV      9.53%         17.96%         14.18%   

 

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/investments or call (844) 33-PIMCO.

(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, 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 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 regulatory leverage outstanding, as a percentage of total managed assets. Regulatory leverage may include preferred shares, tender option bond transactions, reverse repurchase agreements, and other borrowings (collectively “Leverage”). Total managed assets refer to total assets (including assets attributable to Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Leverage).

 

12   PIMCO CLOSED-END FUNDS    


Table of Contents

Portfolio Insights

 

»  

The overall fixed income market generated a positive return during the reporting period. The fixed income market was volatile at times as investor sentiment was impacted by incoming economic data, changing expectations regarding future monetary policy and a number of geopolitical issues. Everything considered, longer-term U.S. Treasury yields declined during the 12-month period, with the yield on the benchmark 10-year Treasury bond falling from 2.57% to 2.35%. Compared to the 4.14% return for the overall U.S. fixed income market (as measured by the Barclays U.S. Aggregate Bond Index), investment grade and high yield corporate bonds returned 6.24% and 5.82%, respectively (as measured by the Barclays U.S. Credit and Barclays U.S. Corporate High Yield Indexes), for the 12 months ended October 31, 2014. Among investment grade quality credits, lower-quality tiers outperformed with AAA-, AA-, A- and BBB-rated issues, returning 2.54%, 5.42%, 5.94% and 7.62%, respectively, as measured by the Barclays U.S. Credit Index. In contrast, higher-rated high yield credits outperformed, with BB-rated issues returning 7.18%, versus 5.17% for B-rated issues, as measured by the Barclays U.S. Corporate High Yield Index.

 

»  

The Fund benefited most from its allocation to non-agency mortgage-backed securities as an improving U.S. housing market, driven by continued recovery in home prices as well as favorable demand relative to supply, supported the sector. Specifically, attractive levels of coupon, coupled with a substantial allocation to this sector, resulted in a large positive contribution to return. The Fund’s exposure to bank capital via investments into junior parts of the capital structure enhanced its results as these performed well given continued improvement in fundamentals and broad deleveraging imposed by regulators. The Fund’s exposure to high yield corporate bonds benefited the Fund’s performance as those bonds offered attractive coupon. Specifically, energy pipeline, gambling and media issuers offered the largest contribution to returns. The Fund’s smaller exposure to taxable municipal bonds was modestly positive for performance.

 

»  

An allocation to emerging markets credits was additive for results, with Brazilian and Russian quasi-sovereign credits being the largest contributors. However, exposure to Brazilian interest rates detracted from returns as local interest rates rose during the period following higher-than-expected inflation reports and market concerns about future higher inflation following Dilma Rousseff’s re-election as president.

 

  ANNUAL REPORT   OCTOBER 31, 2014    13


Table of Contents

Financial Highlights

 

Selected Per Common Share Data
for the Year Ended:
  Net Asset
Value
Beginning
of Year
    Net
Investment
Income (a)
    Net Realized/
Unrealized
Gain (Loss)
    Total Income
(Loss) from
Investment
Operations
    Distributions
on Preferred
Shares
from Net
Investment
Income and
Net Realized
Gain
    Net Increase
(Decrease) in
Net Assets
Applicable
to Common
Shareholders
Resulting from
Investment
Operations
    Distributions
to Common
Shareholders
from Net
Investment
Income
    Distributions
to Common
Shareholders
from Net
Realized
Gain
 

PIMCO Corporate & Income Strategy Fund

               

10/31/2014

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

10/31/2013

    15.90        1.28        0.44        1.72        (0.01     1.71        (1.57     0.00   

10/31/2012

    13.67        1.57        2.47        4.04        (0.01     4.03        (1.80     0.00   

10/31/2011

    15.51        1.72        (1.87      (0.15     (0.01      (0.16     (1.68     0.00   

10/31/2010

    12.88        1.61        2.90        4.51        (0.01     4.50        (1.87     0.00   

PIMCO Income Opportunity Fund

               

10/31/2014

  $ 28.67      $ 2.71      $  (0.12   $ 2.59      $ 0.00      $ 2.59      $ (2.88   $ 0.00   

10/31/2013

     27.86         2.87        0.77        3.64        0.00        3.64        (2.83     0.00   

10/31/2012

    24.62        2.61        3.69        6.30        0.00        6.30        (3.06     0.00   

10/31/2011

    26.97        3.24        (2.20     1.04        0.00        1.04        (3.39     0.00   

10/31/2010

    21.40        3.11        4.58        7.69        0.00        7.69        (2.12     0.00   

 

^ Reflects an amount rounding to less than $0.005.
(a)

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

(b)

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 reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions in connection with the purchase or sale of Fund shares.

(c)

Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders.

(d)

Interest expense primarily relates to participation in reverse repurchase agreement transactions.

 

14   PIMCO CLOSED-END FUNDS     See Accompanying Notes


Table of Contents
Total
Distri
butions
to Common
Share
holders
    Net
Asset
Value
End
of Year
    Market
Price
End
of Year
    Total
Invest
ment
Return
(b)
    Net
Assets
Applicable
to
Common
Share
holders
End of
Year
(000s)
    Ratio
of
Expenses
to
Average
Net
Assets
(c)(d)
    Ratio of
Expenses to
Average
Net
Assets
Excluding
Waivers
(c)(d)
    Ratio of
Expenses
to
Average
Net assets
Excluding
Interest
Expense
(c)
    Ratio of
Expenses
to
Average
Net
Assets
Excluding
Interest
Expense
and
Waivers
(c)
    Ratio
of
Net
Invest
ment
Income to
Average
Net
Assets
(c)
    Preferred
Shares
Asset
Coverage
Per
Share
    Portfolio
Turnover
Rate
 
                     
$ (2.30   $ 15.60      $ 16.18        8.84   $ 599,980        1.09     1.09     1.09     1.09     6.32   $  113,753        48
  (1.57     16.04        17.15        3.48        612,225        1.10        1.10        1.09        1.09        7.91        115,565        108   
  (1.80     15.90        18.17        33.21        603,483        1.32        1.32        1.14        1.14        11.03        114,270        28   
  (1.68     13.67        15.27        4.78        515,041        1.30        1.30        1.16        1.16        11.56        101,188        32   
  (1.87     15.51        16.24        41.86        579,963        1.24        1.25        1.17        1.18        11.64        110,790        52   
                     
$  (2.88   $  28.38      $  27.26        4.39   $ 424,632        2.01     2.01     1.65     1.65     9.44     N/A        175
  (2.83     28.67        28.90        6.81        426,561        1.93        1.93        1.66        1.66        10.03        N/A        65   
  (3.06     27.86        29.85        26.98        411,976        2.29        2.29        1.86        1.86        10.38        N/A        57   
  (3.39     24.62        26.45        11.68         359,909        2.44        2.44        1.93        1.93        12.40        N/A        194   
  (2.12     26.97        26.92        39.51        391,730        2.36        2.36        1.86        1.86        13.07        N/A        77   

 

  ANNUAL REPORT   OCTOBER 31, 2014    15


Table of Contents

Statements of Assets and Liabilities

 

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

Assets:

     

Investments, at value

                 

Investments in securities*

   $ 760,639       $ 737,993   

Financial Derivative Instruments

                 

Exchange-traded or centrally cleared

     1,663         363   

Over the counter

     1,908         3,770   

Cash

     3         0   

Deposits with counterparty

     3,683         3,483   

Foreign currency, at value

     636         943   

Receivable for investments sold

     3,417         29,435   

Interest and dividends receivable

     7,054         7,343   

Other assets

     49         21   
       779,052         783,351   

Liabilities:

     

Borrowings & Other Financing Transactions

                 

Payable for reverse repurchase agreements

   $ 0       $ 330,784   

Financial Derivative Instruments

                 

Exchange-traded or centrally cleared

     1,349         0   

Over the counter

     676         6,778   

Payable for investments purchased

     1,595         13,411   

Deposits from counterparty

     1,370         2,252   

Distributions payable to common shareholders

     4,328         2,842   

Distributions payable to preferred shareholders

     3         0   

Overdraft due to custodian

     0         1,855   

Accrued management fees

     562         717   

Other liabilities

     189         80   
       10,072         358,719   

Preferred Shares ($0.00001 par value and $25,000 liquidation preference per share applicable to an aggregate of 6,760 issued and 0 shares issued and outstanding, respectively)

     169,000         0   

Net Assets Applicable to Common Shareholders

   $ 599,980       $ 424,632   

Composition of Net Assets Applicable to Common Shareholders:

     

Common Shares:

                 

Par value ($0.00001 per share)

   $ 0      $ 0  

Paid in capital in excess of par

       546,800         343,113   

Undistributed net investment income

     11,115         6,094   

Accumulated undistributed net realized gain (loss)

     (12,374      10,704   

Net unrealized appreciation

     54,439         64,721   
     $ 599,980       $ 424,632   

Common Shares Issued and Outstanding

     38,468         14,960   

Net Asset Value Per Common Share

   $ 15.60       $ 28.38   

Cost of Investments in Securities

   $ 723,417       $   677,840   

Cost of Foreign Currency Held

   $ 642       $ 900   

Cost or Premiums of Financial Derivative Instruments, net

   $ (446    $ (14,518

* Includes repurchase agreements of:

   $ 16,164       $ 5,200   

 

Amount is less than $500.

 

16   PIMCO CLOSED-END FUNDS     See Accompanying Notes


Table of Contents

Statements of Operations

 

Year Ended October 31, 2014              
(Amounts in thousands)    PIMCO
Corporate &
Income
Strategy Fund
     PIMCO
Income
Opportunity
Fund
 

Investment Income:

     

Interest

   $ 43,441       $ 47,562   

Dividends

     1,075         1,523   

Total Income

     44,516         49,085   

Expenses:

     

Management fees

     5,852         6,706   

Auction agent fees and commissions

     201         0   

Trustee fees and related expenses

     50         29   

Auction rate preferred shares related expenses

     32         0   

Interest expense

     5         1,563   

Miscellaneous expense

     2         1   

Operating expenses pre-transition (a)

     

Custodian and accounting agent

     185         150   

Audit and tax services

     62         46   

Shareholder communications

     79         53   

New York Stock Exchange listing

     25         17   

Transfer agent

     21         23   

Legal

     9         14   

Insurance

     21         14   

Other expenses

     4         2   

Total Expenses

     6,548         8,618   

Net Investment Income

     37,968         40,467   

Net Realized Gain (Loss):

     

Investments in securities

     23,674         15,279   

Exchange-traded or centrally cleared financial derivative instruments

       (23,734      3,201   

Over the counter financial derivative instruments

     17,577         560   

Foreign currency

     94         (615

Net Realized Gain

     17,611         18,425   

Net Change in Unrealized Appreciation (Depreciation):

     

Investments in securities

     5,701         (14,479

Exchange-traded or centrally cleared financial derivative instruments

     12,196         (9,815

Over the counter financial derivative instruments

     (2,252      3,839   

Foreign currency assets and liabilities

     (55      285   

Net Change in Unrealized Appreciation (Depreciation)

     15,590           (20,170

Net Gain (Loss)

     33,201         (1,745

Net Increase in Net Assets Resulting from Investment Operations

     71,169         38,722   

Distributions on Preferred Shares from Net Investment Income and Net Realized Gain

     (163      0   

Net Increase in Net Assets Applicable to Common Shareholders Resulting from Investment Operations

   $ 71,006       $ 38,722   

 

(a) 

These expenses were incurred by the Fund prior to the close of business on September 5, 2014. Subsequent to the close of business on September 5, 2014, any such operating expenses are borne by PIMCO.

 

  ANNUAL REPORT   OCTOBER 31, 2014    17


Table of Contents

Statements of Changes in Net Assets

 

     PIMCO
Corporate & Income Strategy Fund
 
(Amounts in thousands)    Year Ended
October 31, 2014
     Year Ended
October 31, 2013
 

Increase (Decrease) in Net Assets from:

     

Operations:

     

Net investment income

   $ 37,968       $ 48,375   

Net realized gain

     17,611         93,577   

Net change in unrealized appreciation (depreciation)

     15,590         (76,826

Net increase resulting from operations

     71,169         65,126   

Distributions on Preferred Shares from Net Investment Income

     (41      (201

Distributions on Preferred Shares from Net Realized Capital Gains

     (122      0   

Net increase in net assets applicable to common shareholders resulting from operations

     71,006         64,925   

Distributions to Common Shareholders:

     

From net investment income

     (51,774      (59,574

From net realized capital gains

     (36,294      0   

Total Distributions to Common Shareholders

     (88,068      (59,574

Common Share Transactions**:

     

Issued as reinvestment of distributions

     4,817         3,391   

Total Increase (Decrease) in Net Assets

     (12,245      8,742   

Net Assets Applicable to Common Shareholders:

     

Beginning of year

     612,225         603,483   

End of year*

   $   599,980       $   612,225   

* Including undistributed (overdistributed) net investment income of:

   $ 11,115       $ (5,218

** Common Share Transactions:

     

Shares issued as reinvestment of distributions

     303         199   

 

18   PIMCO CLOSED-END FUNDS     See Accompanying Notes


Table of Contents

 

PIMCO
Income Opportunity Fund
 
Year Ended
October 31, 2014
    Year Ended
October 31, 2013
 
 
 
$ 40,467      $ 42,569   
  18,425        11,347   
  (20,170     33   
  38,722        53,949   
  0        0   
  0        0   
  38,722        53,949   
 
  (42,972     (42,006
  0        0   
  (42,972     (42,006
 
  2,321        2,642   
  (1,929     14,585   
 
  426,561        411,976   
$   424,632      $   426,561   
$ 6,094      $ 7,629   
 
  82        91   

 

  ANNUAL REPORT   OCTOBER 31, 2014    19


Table of Contents

Statement of Cash Flows

 

 

Year Ended October 31, 2014

 

(Amounts in thousands)

   PIMCO
Income
Opportunity
Fund
 

Cash flows (used for) operating activities:

  

Net increase in net assets resulting from operations

   $ 38,722   

Adjustments to reconcile net increase in net assets from operations to net cash (used for) operating activities:

  

Purchases of long-term securities

     (1,387,264

Proceeds from sales of long-term securities

     1,272,496   

Proceeds from sales of short-term portfolio investments, net

     (7,667

(Increase) in deposits with counterparty

     (1,967

Decrease in receivable for investments sold

     151,417   

(Increase) in interest and dividends receivable

     (2,164

(Increase) in exchange-traded or centrally cleared derivatives

     (6,937

(Increase) in over the counter derivatives

     (1,801

(Increase) in other assets

     (6

(Decrease) in payable for investments purchased

     (207,171

Increase in deposits from counterparty

     277   

Increase in accrued management fees

     229   

(Payments on) currency transactions

     (721

(Decrease) in other liabilities

     (84

Net Realized (Gain) Loss

        

Investments in securities

     (15,279

Exchange-traded or centrally cleared financial derivative instruments

     (3,201

Over the counter financial derivative instruments

     (560

Foreign currency

     615   

Net Change in Unrealized (Appreciation) Depreciation

        

Investments in securities

     14,479   

Exchange-traded or centrally cleared financial derivative instruments

     9,815   

Over the counter financial derivative instruments

     (3,839

Foreign currency assets and liabilities

     (285

Net amortization (accretion) on investments

     (3,517

Net cash (used for) operating activities

     (154,413

Cash flows received from financing activities:

  

Increase in overdraft due to custodian

     1,855   

Cash dividend paid*

     (40,636

Proceeds from reverse repurchase agreements

        1,566,271   

Payments on reverse repurchase agreements

     (1,373,980

Proceeds from deposits from counterparty

     9,531   

Payments on deposits from counterparty

     (8,536

Net cash received from financing activities

     154,505   

Net Increase in Cash and Foreign Currency

     92   

Cash and Foreign Currency:

  

Beginning of year

     851   

End of year

   $ 943   

* Reinvestment of dividends

   $ 2,321   

Supplemental disclosure of cash flow information:

  

Interest expense paid during the year

   $ 1,410   

 

20   PIMCO CLOSED-END FUNDS     See Accompanying Notes


Table of Contents

Schedule of Investments PIMCO Corporate & Income Strategy Fund

 

October 31, 2014

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 126.8%   
       
BANK LOAN OBLIGATIONS 0.1%   

Clear Channel Communications, Inc.

  

TBD% due 01/30/2019

  $     500      $     474   
       

 

 

 

Total Bank Loan Obligations
(Cost $463)

    474   
       

 

 

 
CORPORATE BONDS & NOTES 35.1%   
       
BANKING & FINANCE 22.4%   

AGFC Capital Trust

       

6.000% due 01/15/2067

      2,300          1,949   

AIG Life Holdings, Inc.

  

7.570% due 12/01/2045

      3,400          4,511   

Ally Financial, Inc.

  

6.250% due 12/01/2017

      2,900          3,168   

8.300% due 02/12/2015

      2,000          2,037   

American International Group, Inc.

  

6.250% due 03/15/2087

      2,500          2,779   

8.175% due 05/15/2068

      300          409   

Army Hawaii Family Housing Trust Certificates

  

5.524% due 06/15/2050

      7,200          7,794   

Banco Popular Espanol S.A.

  

11.500% due 10/10/2018 (d)

  EUR     1,800          2,586   

Barclays Bank PLC

  

7.625% due 11/21/2022

  $     3,900          4,256   

Credit Agricole S.A.

  

6.625% due 09/23/2019 (d)

      21,600            21,111   

7.875% due 01/23/2024 (d)

      1,300          1,346   

General Electric Capital Corp.

  

6.375% due 11/15/2067

      1,900          2,033   

GSPA Monetization Trust

  

6.422% due 10/09/2029

      5,044          5,797   

LBG Capital PLC

  

7.375% due 03/12/2020

  EUR     300          405   

8.500% due 12/17/2021 (d)

  $     8,500          9,482   

8.875% due 02/07/2020

  EUR     400          565   

9.125% due 07/15/2020

  GBP     3,100          5,302   

Lloyds Bank PLC

  

12.000% due 12/16/2024 (d)

  $     10,300          15,012   

Nippon Life Insurance Co.

  

   

5.100% due 10/16/2044

    1,600          1,675   

Novo Banco S.A.

       

2.625% due 05/08/2017

  EUR     200          227   

3.875% due 01/21/2015

      200          250   

4.750% due 01/15/2018

      600          720   

5.000% due 04/04/2019

      298          347   

5.000% due 04/23/2019

      608          718   

5.000% due 05/14/2019

      402          473   

5.000% due 05/21/2019

      225          263   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

5.000% due 05/23/2019

  EUR     224      $     264   

5.875% due 11/09/2015

      900          1,099   

Royal Bank of Scotland Group PLC

  

7.648% due 09/30/2031 (d)

  $     3,600          4,252   

Sberbank of Russia Via SB Capital S.A.

  

5.717% due 06/16/2021

      5,800          5,680   

Vnesheconombank Via VEB Finance PLC

  

6.902% due 07/09/2020

      8,900          9,122   

Wachovia Capital Trust

  

5.570% due 12/01/2014 (d)

      19,100          18,575   
       

 

 

 
            134,207   
       

 

 

 
       
INDUSTRIALS 7.5%   

Anadarko Petroleum Corp.

  

7.000% due 11/15/2027

      3,460          4,111   

Bombardier, Inc.

  

4.250% due 01/15/2016

      2,300          2,358   

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

  

9.000% due 10/15/2019 (b)

      600          541   

Continental Airlines Pass-Through Trust

  

9.798% due 10/01/2022

      1,404          1,569   

Forbes Energy Services Ltd.

  

9.000% due 06/15/2019

      300          291   

Ford Motor Co.

  

7.700% due 05/15/2097

      5,630          7,388   

9.980% due 02/15/2047

      1,500          2,424   

Gulfport Energy Corp.

  

7.750% due 11/01/2020

      400          410   

Hema Bondco BV

  

6.250% due 06/15/2019

  EUR     200          223   

Intrepid Aviation Group Holdings LLC

  

6.875% due 02/15/2019

  $     430          428   

Perstorp Holding AB

  

9.000% due 05/15/2017

  EUR     700          904   

Pertamina Persero PT

  

6.450% due 05/30/2044

  $     9,000          9,607   

Schaeffler Holding Finance BV (6.250% Cash or 6.250% PIK)

   

6.250% due 11/15/2019 (b)

      1,600          1,664   

Schaeffler Holding Finance BV (6.750% Cash or 6.750% PIK)

   

6.750% due 11/15/2022 (b)

      1,000          1,063   

Times Square Hotel Trust

  

8.528% due 08/01/2026

      1,979          2,510   

UAL Pass-Through Trust

  

10.400% due 05/01/2018

      2,637          2,913   

UCP, Inc.

  

8.500% due 10/21/2017

      6,000          5,936   
 

 

See Accompanying Notes   ANNUAL REPORT   OCTOBER 31, 2014    21


Table of Contents

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

 

 

 

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

UPCB Finance Ltd.

  

7.625% due 01/15/2020

  EUR     300      $     395   
       

 

 

 
          44,735   
       

 

 

 
       
UTILITIES 5.2%   

Bruce Mansfield Unit Pass-Through Trust

  

6.850% due 06/01/2034

  $     2,357          2,625   

Dynegy Finance, Inc.

  

6.750% due 11/01/2019

      895          927   

7.375% due 11/01/2022

      850          900   

7.625% due 11/01/2024

      145          154   

FPL Energy Wind Funding LLC

  

6.876% due 06/27/2017

      457          454   

Gazprom Neft OAO Via GPN Capital S.A.

  

4.375% due 09/19/2022

      5,800          5,155   

Illinois Power Generating Co.

  

7.000% due 04/15/2018

      1,600          1,536   

7.950% due 06/01/2032

      500          492   

Mountain States Telephone & Telegraph Co.

  

7.375 % due 05/01/2030

      8,200          9,828   

Qwest Corp.

  

7.200% due 11/10/2026

      5,360          5,393   

Red Oak Power LLC

  

8.540% due 11/30/2019

      2,030          2,207   

Rosneft Finance S.A.

  

7.500% due 07/18/2016

      1,200          1,252   

7.875% due 03/13/2018

      500          537   
       

 

 

 
          31,460   
       

 

 

 

Total Corporate Bonds & Notes
(Cost $193,724)

      210,402   
       

 

 

 
       
MUNICIPAL BONDS & NOTES 7.4%   
CALIFORNIA 1.6%   

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

    

7.750% due 10/01/2037

      1,220          1,358   

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

   

7.942% due 10/01/2038

      7,400          8,295   
       

 

 

 
          9,653   
       

 

 

 
       
ILLINOIS 2.4%   

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

   

7.517% due 01/01/2040

      12,700          14,385   
       

 

 

 
       
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
NEBRASKA 2.7%   

Public Power Generation Agency, Nebraska Revenue Bonds, (BABs), Series 2009

   

7.242% due 01/01/2041

  $     14,000      $     15,968   
       

 

 

 
       
NEW JERSEY 0.1%   

Tobacco Settlement Financing Corp., New Jersey Revenue Bonds, Series 2007

   

5.000% due 06/01/2041

      500          374   
       

 

 

 
       
VIRGINIA 0.1%   

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

   

6.706% due 06/01/2046

      800          593   
       

 

 

 
       
WEST VIRGINIA 0.5%   

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

   

7.467% due 06/01/2047

      3,800          3,238   
       

 

 

 

Total Municipal Bonds & Notes
(Cost $40,796)

      44,211   
       

 

 

 
       
U.S. GOVERNMENT AGENCIES 11.1%   

Fannie Mae

  

3.500% due
03/25/2042 - 01/25/2043 (a)

    14,525          2,268   

4.000% due 01/25/2043 (a)

      8,150          1,563   

5.217% due 12/25/2042

      650          516   

5.218% due 07/25/2043

      1,777          1,437   

5.772% due 01/25/2043

      2,649          2,090   

5.998% due 11/25/2042 (a)

      18,827          4,500   

6.448% due 04/25/2041 (a)

      3,018          514   

Fannie Mae Strips

  

3.000% due 02/25/2043 (a)

      83,008          15,448   

3.500% due 02/25/2043 (a)

      6,922          1,490   

Freddie Mac

  

3.000% due 02/15/2033 (a)

      19,252          2,478   

3.500% due 09/15/2042 (a)

      6,210          999   

4.500% due 10/15/2042 (a)

      8,024          1,609   

5.847% due 08/15/2042 (a)

      4,404          964   

11.593% due 08/15/2043

      2,755          2,908   

Freddie Mac Strips

  

3.000% due 12/15/2042 (a)

      54,045          10,724   

Ginnie Mae

  

4.000% due
05/16/2042 - 08/16/2042 (a)

    9,986          1,722   

6.493% due 12/20/2042 (a)

      23,771          6,010   

8.591% due 08/20/2039

      8,200          9,393   
       

 

 

 

Total U.S. Government Agencies
(Cost $63,929)

    66,633   
       

 

 

 
 

 

22   PIMCO CLOSED-END FUNDS     See Accompanying Notes


Table of Contents

October 31, 2014

 

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
MORTGAGE-BACKED SECURITIES 43.7%   

American Home Mortgage Assets Trust

  

0.382% due 09/25/2046 ^

  $     140      $     5   

Banc of America Alternative Loan Trust

  

5.500% due 10/25/2035

      7,939          7,224   

6.000% due 01/25/2036

      227          194   

6.000% due 07/25/2046 ^

      2,107          1,753   

Banc of America Funding Trust

  

6.000% due 03/25/2037 ^

      4,484          3,874   

6.000% due 07/25/2037 ^

      620          476   

Banc of America Mortgage Trust

  

5.500% due 11/25/2035

      4,700          4,451   

6.000% due 03/25/2037 ^

      890          844   

6.500% due 09/25/2033

      350          363   

BCAP LLC Trust

  

5.410% due 03/26/2037

      1,827          632   

17.000% due 07/26/2036

      1,862          1,918   

Bear Stearns Adjustable Rate Mortgage Trust

  

2.543% due 08/25/2035 ^

      10,055          8,839   

Bear Stearns ALT-A Trust

  

2.561% due 11/25/2036

      2,420          1,672   

2.661% due 09/25/2035 ^

      1,399          1,136   

2.842% due 08/25/2036 ^

      1,465          1,079   

Bear Stearns Mortgage Funding Trust

  

7.000% due 08/25/2036

      2,457          2,288   

Chase Mortgage Finance Trust

  

2.497% due 12/25/2035 ^

      21          19   

6.000% due 07/25/2037 ^

      1,524          1,353   

Citicorp Mortgage Securities Trust

  

6.000% due 06/25/2036

      2,628          2,743   

Citigroup Mortgage Loan Trust, Inc.

  

5.208% due 08/25/2035

      1,325          1,302   

5.333% due 04/25/2037

      572          508   

5.461% due 09/25/2037 ^

      6,055          5,421   

CitiMortgage Alternative Loan Trust

  

5.750% due 05/25/2037

      7,727          6,837   

6.000% due 01/25/2037

      4,888          4,091   

6.000% due 06/25/2037 ^

      4,310          3,595   

Countrywide Alternative Loan Resecuritization Trust

  

6.000% due 08/25/2037

      1,897          1,491   

Countrywide Alternative Loan Trust

  

5.500% due 03/25/2035

      605          565   

5.500% due 03/25/2036

      277          223   

5.500% due 05/25/2036 ^

      3,410            2,667   

5.750% due 01/25/2035

      746          765   

5.750% due 02/25/2035

      884          869   

5.750% due 03/25/2037 ^

      1,408          1,194   

6.000% due 02/25/2035

      1,821          1,960   

6.000% due 04/25/2036

      9,435          8,668   

6.000% due 08/25/2036

      3,886          3,538   

6.000% due 02/25/2037 ^

      7,186          5,846   

6.000% due 02/25/2037

      1,866          1,490   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

6.000% due 04/25/2037 ^

  $     2,204      $     1,856   

6.000% due 05/25/2037

      3,227          2,664   

6.000% due 07/25/2037

      735          716   

6.250% due 12/25/2036 ^

      2,454          2,061   

6.500% due 08/25/2036 ^

      861          675   

Countrywide Home Loan Mortgage Pass-Through Trust

   

2.362% due 09/20/2036 ^

      507          427   

5.500% due 10/25/2035

      1,013          939   

5.750% due 03/25/2037 ^

      1,452          1,331   

6.000% due 02/25/2037

      963          928   

6.000% due 03/25/2037 ^

      876          798   

6.000% due 03/25/2037

      1,256          1,143   

6.000% due 04/25/2037 ^

      285          265   

6.000% due 07/25/2037

      8,560          7,335   

Credit Suisse Mortgage Capital Mortgage-Backed Trust

   

6.000% due 02/25/2037 ^

      952          863   

6.000% due 06/25/2037 ^

      2,199            2,050   

6.750% due 08/25/2036 ^

      2,477          1,983   

Deutsche ALT-A Securities, Inc. Mortgage Loan Trust

  

5.945% due 02/25/2036

      1,381          1,200   

First Horizon Alternative Mortgage Securities Trust

  

6.000% due 08/25/2036 ^

      9,400          7,928   

GSR Mortgage Loan Trust

  

2.475% due 08/25/2034

      1,155          1,078   

4.989% due 11/25/2035

      1,580          1,558   

5.500% due 05/25/2036 ^

      1,013          943   

6.000% due 02/25/2036

      5,937          5,235   

IndyMac Mortgage Loan Trust

  

6.500% due 07/25/2037

      4,213          2,958   

JPMorgan Alternative Loan Trust

  

2.537% due 03/25/2037 ^

      3,204          2,513   

6.000% due 12/25/2035 ^

      3,333          3,037   

6.310% due 08/25/2036

      2,500          1,995   

JPMorgan Mortgage Trust

  

2.522% due 01/25/2037

      1,437          1,256   

2.610% due 02/25/2036 ^

      6,075          5,459   

5.000% due 03/25/2037 ^

      2,511          2,312   

5.750% due 01/25/2036 ^

      169          158   

6.000% due 01/25/2036

      4,278          3,902   

6.000% due 08/25/2037 ^

      432          391   

Lehman Mortgage Trust

  

6.000% due 07/25/2036 ^

      1,596          1,252   

6.000% due 07/25/2037

      495          453   

MASTR Alternative Loan Trust

  

6.750% due 07/25/2036

      3,002          2,224   

Merrill Lynch Mortgage Investors Trust

  

2.845% due 03/25/2036 ^

      1,169          807   

Morgan Stanley Mortgage Loan Trust

  

4.884% due 05/25/2036

      4,571          3,641   

6.000% due 02/25/2036 ^

      3,735          3,699   

New Century Alternative Mortgage Loan Trust

  

6.173% due 07/25/2036 ^

      7,433          5,176   
 

 

See Accompanying Notes   ANNUAL REPORT   OCTOBER 31, 2014    23


Table of Contents

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

 

 

 

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

Residential Accredit Loans, Inc. Trust

  

0.382% due 05/25/2037 ^

  $     447      $     112   

3.416% due 12/26/2034

      4,114          3,538   

6.000% due 06/25/2036

      1,124          933   

6.000% due 06/25/2036 ^

      903          750   

6.000% due 08/25/2036 ^

      3,756          3,046   

6.000% due 09/25/2036 ^

      3,255          2,354   

6.000% due 12/25/2036 ^

      4,028          3,317   

Residential Asset Mortgage Products Trust

  

6.500% due 12/25/2031

      1,375          1,456   

Residential Asset Securitization Trust

  

4.924% due 06/25/2046

      2,758          1,975   

6.000% due 02/25/2036

      1,132          913   

6.000% due 09/25/2036 ^

      760          509   

6.000% due 11/25/2036

      3,747          2,770   

6.000% due 03/25/2037 ^

      2,341          1,805   

6.000% due 05/25/2037 ^

      3,086          2,760   

6.250% due 09/25/2037 ^

      3,599          2,628   

Residential Funding Mortgage Securities, Inc. Trust

  

3.401% due 02/25/2037

      3,042          2,433   

6.000% due 01/25/2037 ^

      1,431          1,321   

6.250% due 08/25/2036 ^

      1,815          1,659   

6.500% due 03/25/2032

      286          298   

Sequoia Mortgage Trust

  

2.442% due 02/20/2047

      668          580   

6.224% due 07/20/2037 ^

      1,328          1,275   

Structured Adjustable Rate Mortgage Loan Trust

  

2.453% due 11/25/2036

      4,710          3,854   

4.867% due 05/25/2036

      3,990          3,142   

4.886% due 03/25/2037

      6,219          4,591   

5.020% due 01/25/2036 ^

      4,050          3,070   

5.122% due 07/25/2035 ^

      1,981          1,728   

5.225% due 07/25/2036

      9,179            6,168   

5.283% due 07/25/2036 ^

      1,403          1,218   

Suntrust Adjustable Rate Mortgage Loan Trust

  

2.664% due 02/25/2037 ^

      699          609   

2.742% due 04/25/2037 ^

      1,322          1,125   

WaMu Mortgage Pass-Through Certificates Trust

  

2.120% due 07/25/2037 ^

      809          699   

2.237% due 09/25/2036 ^

      552          499   

2.354% due 03/25/2037

      166          158   

2.374% due 02/25/2037 ^

      798          705   

4.531% due 02/25/2037 ^

      1,277          1,175   

4.598% due 07/25/2037 ^

      2,164          2,036   

6.076% due 10/25/2036 ^

      4,327          3,678   

Washington Mutual Mortgage Pass-Through Certificates Trust

   

0.875% due 04/25/2047 ^

      63          2   

0.955% due 05/25/2047 ^

      640          59   

6.000% due 10/25/2035 ^

      3,340          2,552   

Wells Fargo Alternative Loan Trust

  

6.000% due 07/25/2037

      1,449          1,389   

Wells Fargo Mortgage-Backed Securities Trust

  

2.610% due 07/25/2036 ^

      873          809   

2.613% due 05/25/2036 ^

      164          156   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

2.615% due 04/25/2036

  $     416      $     401   

2.615% due 08/25/2036

      7,250          6,950   

5.708% due 10/25/2036

      910          886   

6.000% due 07/25/2037 ^

      867          859   
       

 

 

 

Total Mortgage-Backed Securities
(Cost $247,602)

      262,052   
       

 

 

 
       
ASSET-BACKED SECURITIES 5.5%   

Bear Stearns Asset-Backed Securities Trust

  

6.500% due 10/25/2036

      429          364   

Countrywide Asset-Backed Certificates

  

5.188% due 07/25/2036

      2,849          2,800   

5.250% due 10/25/2046 ^

      9,948          8,603   

Greenpoint Manufactured Housing

  

8.140% due 03/20/2030

      1,917          1,971   

GSAA Home Equity Trust

  

6.295% due 06/25/2036 ^

      1,919          1,142   

IndyMac Home Equity Mortgage Loan Asset-Backed Trust

   

0.312% due 07/25/2037

      13,087          7,794   

JPMorgan Mortgage Acquisition Trust

  

4.942% due 01/25/2037 ^

      8,158          6,308   

Mid-State Trust

  

6.340% due 10/15/2036

      1,462          1,546   

8.330% due 04/01/2030

      1,789          1,819   

Morgan Stanley Mortgage Loan Trust

  

6.250% due 07/25/2047 ^

      1,073          821   
       

 

 

 

Total Asset-Backed Securities
(Cost $33,104)

    33,168   
       

 

 

 
       
SOVEREIGN ISSUES 9.1%   

Brazil Letras do Tesouro Nacional

  

0.000% due 01/01/2017

  BRL     174,800          54,922   
       

 

 

 

Total Sovereign Issues
(Cost $55,689)

    54,922   
       

 

 

 
       
        SHARES            
PREFERRED SECURITIES 4.5%   
       
BANKING & FINANCE 4.5%   

Citigroup Capital

  

7.875% due 10/30/2040

      120,000          3,194   

Farm Credit Bank of Texas

  

10.000% due 12/15/2020 (d)

    15,300          19,818   

GMAC Capital Trust

  

8.125% due 02/15/2040

      144,400          3,860   
       

 

 

 

Total Preferred Securities
(Cost $26,209)

    26,872   
       

 

 

 
 

 

24   PIMCO CLOSED-END FUNDS     See Accompanying Notes


Table of Contents

October 31, 2014

 

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
SHORT-TERM INSTRUMENTS 10.3%   
       
REPURCHASE AGREEMENTS (e) 2.7%   
      $     16,164   
       

 

 

 
       
SHORT-TERM NOTES 6.8%   

Fannie Mae

  

0.071% due 04/27/2015

  $     7,100          7,098   

0.076% due 05/01/2015

      1,300          1,300   

0.081% due 05/01/2015

      900          900   

Federal Home Loan Bank

       

0.081% due 04/06/2015

      2,400          2,399   

0.088% due 04/24/2015

      1,000          1,000   

Freddie Mac

       

0.071% due
03/25/2015 - 04/10/2015

      28,100          28,094   
       

 

 

 
            40,791   
       

 

 

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

0.038% due 03/26/2015 - 04/30/2015 (c)(g)(i)

  $     4,951      $     4,950   
       

 

 

 
Total Short-Term Instruments
(Cost $61,901)
          61,905   
       

 

 

 
Total Investments in Securities
(Cost $723,417)
          760,639   
       

 

 

 
Total Investments 126.8%
(Cost $723,417)
      $     760,639   

Financial Derivative Instruments (f)(h) 0.3%

(Cost or Premiums, net $(446))

    1,546   
Preferred Shares (28.2%)            (169,000
Other Assets and Liabilities,
net 1.1%
    6,795   
       

 

 

 
Net Assets Applicable to
Common Shareholders 100.0%
      $     599,980   
       

 

 

 
 

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) Payment in-kind bond security.
(c) Coupon represents a weighted average yield to maturity.
(d) Perpetual maturity; date shown, if applicable, represents next contractual call date.

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(e)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
  Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
Received,
at Value
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received (1)
 

SAL

  0.160%     10/31/2014        11/03/2014      $     14,600      U.S. Treasury Notes
2.625% due 11/15/2020
  $ (14,911   $ 14,600      $ 14,600   

SSB

  0.000%     10/31/2014        11/03/2014        1,564      Freddie Mac 2.000% due 11/02/2022     (1,600     1,564        1,564   
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

  

        $     (16,511   $     16,164      $     16,164   
           

 

 

   

 

 

   

 

 

 

 

(1) 

Includes accrued interest.

 

See Accompanying Notes   ANNUAL REPORT   OCTOBER 31, 2014    25


Table of Contents

Schedule of Investments PIMCO Corporate & Income Strategy Fund (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 (received) as of October 31, 2014:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
    Payable for
Short Sales
    Total
Borrowings and
Other Financing
Transactions
    Collateral
(Received)
    Net
Exposure  (2)
 

Global/Master Repurchase Agreement

             

SAL

  $     14,600      $     0      $     0      $     0      $     14,600      $     (14,911   $     (311

SSB

    1,564        0        0        0        1,564        (1,600     (36
 

 

 

   

 

 

   

 

 

   

 

 

       

Total Borrowings
and Other
Financing Transactions

    $    16,164      $ 0      $ 0      $ 0         
 

 

 

   

 

 

   

 

 

   

 

 

       

 

(2) 

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 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

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

 

SWAP AGREEMENTS:

 

INTEREST RATE SWAPS

 

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

Receive

  

3-Month USD-LIBOR

    2.000     06/18/2019      $     215,300      $     (4,806   $     (3,313   $ 255      $ 0   

Pay

  

3-Month USD-LIBOR

    2.250     12/17/2019        89,600        1,831        (478     0        (128

Receive

  

3-Month USD-LIBOR

    3.750     09/17/2043        209,000        (23,651     (8,566     1,274        0   

Pay

  

3-Month USD-LIBOR

    3.500     06/19/2044        209,000        22,203        29,022        0        (1,221

Receive

  

3-Month USD-LIBOR

    3.500     12/17/2044        22,100        (1,983     (1,109     134        0   
          

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

        $     (6,406   $ 15,556      $     1,663      $     (1,349
          

 

 

   

 

 

   

 

 

   

 

 

 

 

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 October 31, 2014:

 

(g) Securities with an aggregate market value of $3,220 and cash of $3,481 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of October 31, 2014. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

    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      $     1,663      $     1,663        $     0      $     0      $     (1,349)      $     (1,349)   
 

 

 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

26   PIMCO CLOSED-END FUNDS     See Accompanying Notes


Table of Contents

October 31, 2014

 

 

 

(h)  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

     11/2014         GBP        3,441       $          5,626      $ 121       $ 0   
     11/2014       $          5,908         GBP        3,667        0         (43
     12/2014         EUR        235       $          300        5         0   
     12/2014         GBP        3,667           5,907        43         0   
     06/2015         EUR        33           45        3         0   
     06/2016           93           127        9         0   
     06/2016       $          5         EUR        4        0         0   
                 

BPS

     11/2014         EUR        3,629       $          4,628        80         0   
     06/2015           15           20        1         0   
                 

BRC

     11/2014           648           825        13         0   
     12/2014         BRL        371           151        2         0   
     06/2015         EUR        19           26        2         0   
     06/2016           17           23        2         0   
                 

CBK

     01/2015         BRL        74,302           29,554        82         0   
     06/2015         EUR        16           22        2         0   
     06/2015       $          32         EUR        24        0         (2
                 

DUB

     12/2014         BRL        833       $          339        6         0   
     06/2016         EUR        10           14        1         0   
                 

FBF

     12/2014         BRL        290           118        2         0   
     04/2015         EUR        8,025           10,880        812         0   
     06/2015           27           37        3         0   
                 

GLM

     11/2014           198           251        3         0   
     12/2014         BRL        462           188        3         0   
     12/2014         GBP        38           60        0         0   
     02/2015         MXN        819           60        0         (1
     06/2015       $          37         EUR        28        0         (2
                 

HUS

     11/2014         EUR        433       $          551        8         0   
     11/2014       $          8,060         EUR        6,250        0         (227
                 

JPM

     11/2014         EUR        1,868       $          2,394        53         0   
     11/2014         GBP        226           363        2         0   
                 

MSB

     01/2015         BRL        61,836           24,617        90         0   
     06/2015         EUR        23           32        3         0   
     06/2016           24           33        3         0   
                 

NAB

     06/2015           19           26        2         0   
     06/2016           53           73        6         0   
                 

UAG

     11/2014           661           840        12         0   
     11/2014       $          1,518         EUR        1,187        0         (31
     12/2014           840           661        0         (11
     06/2015           132           100        0         (6
              

 

 

    

 

 

 

Total Forward Foreign Currency Contracts

  

  $   1,374       $   (323
              

 

 

    

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   OCTOBER 31, 2014    27


Table of Contents

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

 

 

 

 

SWAP AGREEMENTS:

 

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

 

Counterparty

 

Reference Entity

  Fixed Deal
Receive Rate
  Maturity
Date
         Implied
Credit Spread at
October 31, 2014 (2)
    Notional
Amount  (3)
    Premiums
(Received)
    Unrealized
Appreciation
    Swap Agreements,
at Value
 
                  Asset     Liability  
BPS  

Novo Banco S.A.

  5.000%     12/20/2019          4.650%        EUR    300      $ (5   $ 13      $ 8      $ 0   
                   
BRC  

Novo Banco S.A.

  5.000%     12/20/2019          4.650%        800        (13     33        20        0   
             

 

 

   

 

 

   

 

 

   

 

 

 
              $     (18   $     46      $     28      $     0   
             

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 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.

(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 an indicator 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.

 

INTEREST RATE SWAPS

 

Counterparty

 

Pay/Receive
Floating Rate

  Floating Rate Index  

Fixed
Rate

   

Maturity
Date

 

Notional
Amount

   

Premiums
(Received)

   

Unrealized
Appreciation/
(Depreciation)

    Swap Agreements,
at Value
 
                Asset     Liability  
BOA  

Pay

  3-Month USD-LIBOR     2.200%      01/14/2020     $        150,600      $ (342   $ 848      $ 506      $ 0   
                   
UAG  

Pay

  1-Year BRL-CDI     11.250%      01/04/2021     BRL        57,700        (86     (267     0        (353
             

 

 

   

 

 

   

 

 

   

 

 

 
              $ (428   $ 581      $ 506      $ (353
             

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

  

        $     (446   $     627      $     534      $     (353
             

 

 

   

 

 

   

 

 

   

 

 

 

 

28   PIMCO CLOSED-END FUNDS     See Accompanying Notes


Table of Contents

October 31, 2014

 

 

 

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 (received)/pledged as of October 31, 2014:

 

(i) Securities with an aggregate market value of $1,730 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of October 31, 2014.

 

    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
(Received)/
Pledged
    Net
Exposure  (4)
 

BOA

  $ 181      $ 0      $ 506      $ 687        $ (43   $ 0      $ 0      $ (43   $ 644      $ (540   $ 104   

BPS

    81        0        8        89          0        0        0        0        89        0        89   

BRC

    19        0        20        39          0        0        0        0        39        0        39   

CBK

    84        0        0        84          (2     0        0        (2     82        780        862   

DUB

    7        0        0        7          0        0        0        0        7        0        7   

FBF

    817        0        0        817          0        0        0        0        817        (830     (13

GLM

    6        0        0        6          (3     0        0        (3     3        0        3   

HUS

    8        0        0        8          (227     0        0        (227     (219     0        (219

JPM

    55        0        0        55          0        0        0        0        55        0        55   

MSB

    96        0        0        96          0        0        0        0        96        620        716   

NAB

    8        0        0        8          0        0        0        0        8        0        8   

UAG

    12        0        0        12          (48     0        (353     (401     (389     330        (59
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

       

Total Over the Counter

  $ 1,374      $ 0      $ 534      $ 1,908        $ (323   $ 0      $ (353   $ (676      
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

       

 

(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 7, Principal Risks, 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 October 31, 2014:

 

<
    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      $ 0      $ 0      $ 0      $ 1,663      $ 1,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 1,374      $ 0      $ 1,374   

Swap Agreements

    0        28        0        0        506        534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $     28      $ 0      $ 1,374      $ 506      $ 1,908   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 28      $     0      $     1,374      $