Fitch Affirms Preferred Share Ratings of 4 PIMCO Closed End Funds at 'AAA'

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Applicable Criteria and Related Research
Rating Closed-End Fund Debt and Preferred Stock
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686101
2013 Outlook: Closed-End Funds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696831
Taxable Closed-End Funds Reliant on Short-Term Debt Reap Low-Cost Funding at the Expense of Rollover Risk
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688352

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts:

Fitch Ratings
Primary Analyst
Yuriy Layvand, CFA, +1-212-908-9191
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gwen Fink-Stone, +1-212-908-9128
Associate Director
or
Committee Chairperson
Davie Rodriguez, CFA, +1-212-908-0386
Senior Director
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com
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