PIMCO High Income Fund PHK S
December 26, 2008 - 10:59am EST by
sparky371
2008 2009
Price: 5.52 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 650 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT
Borrow Cost: NA

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Description

This is a short idea. I believe there is a misperception in the market which will be corrected shortly and thus this is a fleeting opportunity and the write-up will be necessarily brief.
 
PHK is a closed end fund specializing in high yield sub-IG bonds.
 
PHK, like many other funds, and amazingly many Pimco funds, utilized leverage via ARPS's and found itself breaking covenants that require that their assets to debt ratio be >200% in order for them to be able to pay dividends. Thus, they suspended their Oct and Nov divvies while they worked to sell assets and buy ARPS's back. This caused both the stock price to crater. The NAV also degraded as they sold assets. The discount to NAV widened incredibly. (It had some times in the happier past traded to an 8-12% premium). The Fund has delevered to approximately 38% leverage now.
 
They recently put out a PR reinstating the two passed divvies with record dates in October.  The stock rallied to an 8% discount to NAV, where I sold mine. Then, they put out a subsequent PR wherein they aggregated the Nov and Dec divvies and made the Ex Date 12/24/08. Thus, instead of having two 12+cts divvies, they are paying one 24+cts divvie. This caused the stock to rally hugely to a 12% premium.
 
I believe that the run up in the stock is due to it showing up on stock screeners as having a 24+cts monthly divvie and thus an almost 50% yield.
 
Further, I have spoken with the Fund. I told them that my expectation was that due to the forced deleveraging that the 12ct monthly dividend will be cut. They said I was wise to expect such a reduction.
 
Thus, I expect that the next dividend announcement will not only NOT be the 24cts the mkt expects, but more likely 8 or 9cts due to the deleveraging. I believe this will cause the stock to sell back down to a 10% discount to NAV, or more. I have shorted PHK against my portfolio of many other names trading at 15-25% discounts to NAV.

Catalyst

Dividend cut, likely for the January dividend.
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