Neutral collateral value by alicejenny


									Investment Workshop Series:
“The Expanding Credit Universe –
Avoiding Black Holes and Supernovas”

August 2004


  Mark T. Hudoff
  Mr. Hudoff is an Executive Vice President and portfolio manager. Mr. Hudoff joined the firm in 1996, previously having been associated with Bank
  Credit Analyst Research Group where he worked as a fixed income strategist. He also has been associated with International City Managers
  Association, Quantitative Risk Management Group and Martin Marietta Corporation as a financial analyst. He has 16 years of investment
  experience and holds a bachelor’s degree in economics from Arizona State University, and an MBA in finance from the University of Chicago
  School of Business.

  Curtis A. Mewbourne
  Mr. Mewbourne is an Executive Vice President, portfolio manager and a senior member of PIMCO’s portfolio management and strategy groups. He
  is an Emerging Market and Investment Grade Credit specialist. He joined the firm in 1999, having spent the previous seven years trading fixed
  income securities at Salomon Brothers and Lehman Brothers. Mr. Mewbourne has 12 years of investment experience, and holds a degree in
  Computer Science Engineering from the University of Pennsylvania.

  Charles Wyman
  Mr. Wyman is an Executive Vice President and head of global credit research. Mr. Wyman joined the firm in 2001 from Morgan Stanley, where he
  was a principal and the senior telecom analyst in high yield. He previously covered the energy sector in high yield at Morgan Stanley and was
  ranked second in Institutional Investor's annual poll for 1999 and 2000. Prior to Morgan Stanley, Mr. Wyman spent ten years at Lehman Brothers in
  mergers and acquisitions, corporate finance, and equity capital markets, and as an analyst for oil exploration and production companies. He has 18
  years of investment experience and holds a bachelor’s degree from Harvard University and an MBA from Harvard Business School.



          Credit Research Process

          Global Credit

          Global High Yield

Credit Research Objectives

     Identify and communicate investment actions that generate measurable excess return
      through specific investments made or investments avoided.

     Identify, quantify, and manage credit risk in specialist and generalist portfolios.

Credit Research Functions

Objective                        Description                                      Measurement

 Avoid black holes               Avoidance of defaults                          Tracked and included in year-end evaluation

 Review of new issues and new   New issue calendar dictates pace of review      Quantitative performance of recommendations
  idea generation                Every addition to the portfolio requires note   Qualitative review of responsiveness to PM
                                  from the analyst                                 requests and clarity of recommendations
                                 Cooperative effort between PM‘s &

 Credit monitoring              Monitor issuer performance with written         Quantitative measurement of productivity by
                                  responses to earnings reports & headline         number of notes written
                                  events                                          Qualitative review of note content and clarity
                                 Regular company visits and meetings
                                  with management

 Model portfolio alpha          Analyst prepare quarterly model                 Alpha generated versus benchmark
                                  portfolios for their sectors with
                                  recommendations for sector
                                  weightings, issuer weights, and security

Focus on accountability, investment performance, and productivity.

      Coverage Universe

          Coverage universe represents roughly €3 trillion of corporate assets: 2/3 U.S., 1/3 Europe; 80%
           investment grade, 20% high yield.

          Pimco has rated over 40% of issuers in the coverage universe, which accounts for 60% of
           market value and 66% of risk dollars.

Coverage Universe
($millions except for issuer data, € at 31-Mar-04)
                                                                                 Merrill Lynch     Merrill Lynch
                                   Lehman                  Merrill Lynch        euro investment    euro 3% high
                               investment grade             high yield               grade             yield
                                  corporates                 master               corporates        corporates       total
   Market Value                       $1,241,234                $404,564             $912,626            $58,872   $2,617,296
   Risk Dollars                       $1,455,273                $958,153             $495,793            $89,244   $2,998,463
   Parent Issuers                              621                     909                393                134        1,914

   Market Value                                47%                     15%                35%                 2%         100%
   Risk Dollars 1.                             49%                     32%                17%                 3%         100%
   Parent Issuers                              32%                     47%                21%                 7%         107%

1. Risk dollars = (bond exposure x beta corp)/ (beta corp for total holdings)
2. 7% of issuers in the universe have both USD and Euro issues outstanding.

Source: PIMCO, Lehman & Merrill Lynch index data

PIMCO’s Internal Rating System

                                         Fundamental Credit Analysis

 No bond may be purchased for                 Criteria              Rating System            Implications for Analysts
  client portfolios prior to research
  from our credit analysts
                                             Green Light
 Credit selection a two-stage          risk relative to rating is                          Ongoing review
  process                               stable to improving or                              Initial warning if exposures
                                        where any credit
     Fundamental analysis                                                                   become too large
                                        deterioration is unlikely
     Relative value                    to have any significant
                                        impact on price
 Credit opinions include five
                                             Yellow Light
     Independent credit rating
      (BBB, BB, etc.)                   presence of significant                             Close monitoring of
                                        current or prospective                               up/downgrade potential
     View on company outlook
      (positive, neutral, negative)
     Risk rating (red, yellow,
      green)                                                                                             Positive
     Analysis of relative value
     Buy/sell recommendation                  Red Light

 Color system used to assess           viability of the issuer as                          Investigate & communicate the
                                        a going concern in                                   firmwide risk position in the
  credit risk, not relative value       serious question                                     credit
                                                                                            Estimate recovery rates

                            Goal: Select the best credits and avoid defaults
                                                                                credit_phil_06 red green light
Issuer and Security Selection

                  Start with the definition of credit: what is credit?

                   Credit is the risk associated with an issuer’s ability to repay obligations as they come due.

                   Credit is not asset coverage, credit is not relative value, but both play an important role in
                    the analysis of credit.

                  Risk profile of credit differs markedly from other fixed income asset classes

                   Linkages between credit risk and broad macroeconomic trends are indirect and complex

                   Granularity of different types of credit risk is high and the relationships between those risks
                    are complex and unpredictable

                   Risk at the level of individual credits is virtually unhedgable

Issuer and Security Selection

                  Principals of Credit Analysis

                   Articulate assumptions that support our judgments on which outcomes are most likely for
                    an individual credit.

                   Marry granular analysis of individual credit with broader secular industry view to develop
                    investment action.

                   Seek credits with the strongest foundations of balance sheet, cash flow, management, and
                    industry position.

                  Three tests for an investment recommendation

                   Does the investment thesis make sense?

                   Do we as an investor have an edge and what is that edge?

                   Can we control our risk through collateral value and structure?

 Issuer and Security Selection

 Identify and prioritize by relevance the 4-5 factors tha determine success of an investment.

 Factors are different for every credit, every industry, and every phase of the industry cycle.

                                       Key Factors in Credit Selection

    Business Model                       Cash Flow                        Balance Sheet                              Structure

 • Strength &                        • Size                             Leverage                               • Seniority
   profitability of
   competitive position
 • Pace of                           • Stability                        Liquidity                              • Covenants
                                     • Visibility                       Financial flexibility
 • Access of capital
   through the cycle
 • Return on assets                  • Growth                           Asset coverage

 • Management track
   record and
 • Transparency of
   financial reports

                                                          9                                        Credit_phil_16a
                   Issuer and Security Selection: balance sheet

Analysis of Telecom Italia Net Balance Sheet

(Є millions)

Net Assets                                                         30-Jun-03               Net Capital                                          30-Jun-03

Accounts Receivables                                          17,405          31%
Inventories                                                      636            1%
Accrued income and prepaid expenses                            1,891            3%
Accounts payables                                             (5,436)        (10%)
Other payables                                                (7,427)        (13%)         Short-term debt                       4,378                       8%
Accrued expenses and deferred income                          (2,344)          (4%)        Current portion of LT debt            2,969                       5%
Advances                                                        (454)          (1%)        Due to banks                          6,857                      12%
               non financial working capital                     4,271          8%         Debentures                            25,970                     46%
                                                                                           Convertible debentures                5,677                      10%
PPE, net                                                       18,737         33%          Cash and Cash Equivalents             (5,957)                   (11%)
Investments                                                      2,864          5%         ST Financial Assets                   (3,430)                    (6%)
Intangible assets                                                6,511        12%                                     net debt               36,464         64%
Goodwill                                                       31,666         56%
Other                                                                4          0%         Minority interests                                 4,098           7%
Reserves                                                        (7,473)      (13%)         Shareholders' equity                              16,018         28%
                               Net Assets                      56,580        100%                             Net Capital                    56,580        100%

Source: PIMCO, Company reports

PIMCO may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held.

                     Issuer and Security Selection: cash flow

                      Analysis of Tyco Cash Flow

                                                                       Sep-98                    Sep-99         Sep-00            Dec-00          Mar-01
                      EBITDA             Electronics                        969                    1,213          2,918               935           1,030
                                         Telecommunications                 297                      356            589               108             101
                                         Healthcare & Specialty Products    703                    1,614          1,762               489             513
                                         Fire & Security Services           863                    1,268          1,470               480             477
                                         Financial Services                                                                           -
                                         Flow Control Products              560                       709            834         reclassified
                                                                           19%                       20%            21%
                                         subtotal                         3,392                     5,160          7,574             2,012           2,121
                      General & Administrative Expense                    (49.4)                   (114.9)        (179.9)            (54.8)          (25.3)
                      Interest Income                                      62.6                      61.5           75.2               -               -
                      EBITDA                                             $3,405                    $5,106         $7,469            $1,957          $2,096
                      Cash Interest                                        (251)                     (509)           (814)            (168)           (227)
                      Cash Taxes                                           (346)                     (210)           (455)          (332.2)         (478.8)
                      Other                                                 (55)                        37              41            87.6           322.5
                      Working Capital                                      (272)                        (7)           263             (630)            (93)
                      Capital Expenditures, net                          (5,646)                   (5,844)         (6,938)          (3,214)         (3,355)
                      Capital Stock Issuance                              1,310                       235             601             (442)           (344)
                      Dividends                                            (303)                     (188)            (86)             (22)            (22)
                      Debt assumed in acquisitions                         (260)                   (1,629)           (244)          (1,358)           (257)
                      Acquisition adjustments & other                       843                      (902)           (227)               59            124
                      Free Cash Flow                                     (1,822)                   (4,178)         (1,374)          (4,062)         (2,235)
                                                                            -                         -               -                -               -
                      Net Debt                                            4,183                     8,360           9,734           13,797          16,032

                      Source: PIMCO, Company reports

PIMCO may or may not own the securities referenced and, if such securities are owned, `no representation is being made that such securities will continue to be held.
                       Issuer and Security Selection: comparable security analysis

  Analysis of Dynegy Inc. Relative Value

                                                                                               2002                     credit                         Market 16-Apr-03
                                                                                                            ebit    ebitda   cfo/       debt/
  company             rating           issue                   EBV        debt          ebit      ebitda    cvg      lev     debt        cap      px         ytw          oas
  TXU Energy         Baa2/BBB        7% Sr. Nts. '13          3,829       4,863         1,171     1,600     3.92x    3.0x    17.7%      56%     103.88      6.46%     249

  IPALCO (AES)       Ba1/BB-         7.625% Sr Nts '11           52       1,392           299         411   3.11x    3.4x    15.4%      96%     104.50      6.92%     323

  Williams Cos       Caa1/B          8.125% Sr Nts '12        5,049      12,979           790     1,565     0.64x    8.3x    (4.2%)     72%      95.63      9.59%     573

  Dynegy Inc.        Caa2/CCC+ 8.75% Sr Nts '12               2,590       6,681           531     1,096     1.16x    6.1x        9.0%   72%      83.00     11.91%     818

  Calpine Corp.       B1/B+          8.5% Sr Nts '11          3,851      14,099           781     1,241     1.89x 11.4x          7.6%   79%      65.63     16.47%    1,296

  Mirant             Caa2/BB         8.3% Sr Nts '11          5,231       9,569         1,085     1,450     2.50x    6.6x        9.4% 65%        55.63     19.43%    1,585

  NRG Corp.          Ca/CC           7.75% Sr Nts '11         2,237       9,176           570         840   0.92x 10.9x          6.0%   80%      37.63     23.00%    1,814

Dynegy 2003E pro forma new bank line

Source: PIMCO, Company reports

  PIMCO may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held.

                     Issuer and Security Selection: asset valuation

                     Analysis of Invensys plc Collateral Value

                     (million sterling)
                                                                               ltm 30-sep 03            multiple                  net value
                                                                                 EBITDA             low         high          low         high
                      Process Systems                                                  £51         7.8x         8.8x            £400        £450
                      Eurotherm                                                         22         8.0x         9.1x             175         200
                      APV                                                               41         7.9x         9.1x             325         375
                      Rail Systems                                                      64         11.7x       13.3x             750         850
                      Climate Controls                                                  92         7.9x         9.0x             725         825
                      Appliance Controls                                                76         6.9x         7.9x             525         600
                      Powerware & LHB                                                   23         5.4x         6.5x             125         150
                                                                       subtotal        369                                    £3,025      £3,450

                      add/deduct                  Pensions                                                                       (786)        (786)
                                                  Tax                                                                            (126)        (126)
                                                  Litigation/environmental                                                       (111)        (111)
                                                  Factoring                                                                      (180)        (180)
                                                  Minority Interests, Earnouts                                                   (225)        (225)
                                                  Escrow                                                                          586          586
                                                  Cash                                                                            489          489
                      Enterprise Value                                                                                          2,672        3,097
                                                                                                    low        high
                      debt                        Term A                                              184%       214%            (350)        (350)
                                                  Term B                                              184%       214%            (450)        (450)
                                                  Revolving Credit Facility                           184%       214%            (250)        (250)
                                                  Bonding Facility                                    184%       214%            (400)        (400)
                                                  2nd Lien Facility                                   815%      1098%            (150)        (150)
                                                  Senior Notes                                        165%       230%            (650)        (650)
                                                                    total debt                                                 (2,250)      (2,250)
                      Equity Value                                                                                              £422         £847

                  Source: PIMCO, Company reports

PIMCO may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held.


          Credit Research Process

          Global Credit

          Global High Yield

 Benefits of PIMCO’s Global Credit Process

           Our global resources and expertise – portfolio managers and research

           Unique credit philosophy, multiple sources of added value in portfolio construction

           Consistent outperformance – with a focus on risk-adjusted returns

Global resources, multiple sources of alpha, and risk controls lead to consistency of performance

                                                   15                            Global_credit_orga_01a
                 Global Credit Portfolio Management
                 Drawing on Regional Expertise

                                                  Global Credit Portfolio Management Team
             Defines global themes
             Serves as risk regulator                         Hinman/Kiesel/Mewbourne
             Portfolio construction and

                 Continental                                                               Sovereign &        Emerging
                                    U.K.              U.S.          Australia    Asia                                      High Yield
                   Europe                                                                 Supranationals       Market

Lead Portfolio
Manager:          Mead            Bentley             Kiesel        Palghat     Masanao     Mariappa           El-Erian    Kennedy
                                                                                            / El-Erian

             Focus on credits within region/sector
             Handle local execution
             Monitor daily credit developments

                                                                         16                        Global_credit_orga_02
   Global Credit Research Team Organizational Structure

                                          Charles Wyman
                                       Executive Vice President
                                  Director of Global Credit Research

                                                                                                                  Ivor Schucking
                                Oversees global credit research effort                                          Senior Vice President
                                                                                                        Director of European Credit Research

                                                                                                           Oversees European research
                                                                                                    Reports to Director of Global Credit Research

                                     Credit Analysts           U.S. 14            U.K. 2        Germany (dit)* 5            Australia 1

         Financials                           Utilities                  Consumer Non-Cyclical                  Consumer Cyclical                           Auto

     Michael Chang                        Elissa Johnson                        Greg Gore                       Adam Borneleit1.                      David Andrews
       Greg Gore                         Murphy McCann                          Brian Kim                         Dhruv Mallick                       Michael Chang
        Brian Kim                           Tim Shaler                      Murphy McCann                           Greg Gore
    Rolando Rodrigues                      Sofia Ramos                       Monika Nemeth                          Brian Kim
       Bob Sahota                          Bob Sahota                       Rolando Rodrigues                   Rolando Rodrigues
     Ivor Schucking                                                         Marion Scherzinger                  Marion Scherzinger

         Industrials                           Energy                        Communications                        Basic Industry                         Workouts

     David Andrews                       Juergen Dahlhoff                    Adam Borneleit1                      Monika Nemeth                       David Behenna
     Michael Chang                         Donna Riley                        Cyrille Conseil                      Elissa Johnson                     Charles Wyman
     Juergen Dahlhoff                                                           Greg Gore                         Juergen Dahlhoff
      Elissa Johnson                                                            Brian Kim                           Donna Riley
       Bob Sahota                                                              Richard Mak
                                                                              Dhruv Mallick
                                                                               Christian Wild

* Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH
1 Adam Borneleit covers emerging market corporates with the support of the industry specialists in addition to gaming, lodging, broadcasting as the primary analyst.

                                                                             17                                            Global_HY_Orga_01
Portfolio Managers and Credit Research Interaction

                    Daily                             Weekly                                  Quarterly

     Daily credit market e-mails       Global credit team meetings             Portfolio strategy meetings

     Informal discussion of market     Determine research priorities           Investment committee input
      conditions and company news

                                        Review portfolio construction           Review of model portfolio
                                         issues relative to client guidelines
                                         and objectives
                                                                                 Establish broad portfolio targets
                                                                                  for maximizing return relative to

                                                                                 Construction and distribution of
                                                                                  GIGC model portfolio

                            The importance of good and timely communication

                                                    18                                    Global credit phil 05
PIMCO’s Alpha Generation Process

                          Relative                                Portfolio
                           Value                                Construction

 Active trading                                                          Investment Committee
 Other credit markets:                                                   PIMCO’s Risk Controls
     – European High
       Yield                                                              Cyclical / Secular
     – Bank Loans

     – High Grade                     Credit Selection
     – Convertibles

     – Emerging Markets

                                      Bottom-up research

                                      Onsite visits

                                      Financial modeling and

                                          19                         global_credit_phil_06
Global Investment Grade Credit Portfolio Construction

                                 BB /              Higher Yielding Sectors
                                                          Modest exposure in a diversified fashion

                              Bank Loans,                     Non-traditional instruments/sectors
                          Bonds, Asset-Backed
                                                                   Use tactically (relative value) versus
                          and Credit Derivatives
                                                                    comparably rated corporates/sovereigns

                                                                         Middle tier
                   Middle Tier Corporates/Sovereigns
                                                                              Improving credit fundamentals with
                                                                               compelling a structure and good
                                                                                    Core holdings

                Upper Tier Corporates/Sovereigns/Agencies                                Strong credit profiles

                                                                                         Liquid instruments

  Our focus is on upper and middle tier – most clients permit us to use, tactically, other
                             areas of the credit spectrum

                                                    20                                     Global credit phil 03
Portfolio Construction Taps Multiple Sources of Added Value

                                                                                 Top Down Strategies

   Diversified industry and issuer exposure
    constitute the core risk position
                                                    Duration/Curve             Quality                     Sector                Industry

   Only moderate risk is taken in
    each area
                                                                                        Correlation with
                                                                     Quality             US Treasuries              % of Index
   No one or two positions will drive overall
    portfolio returns                                                  AAA                     0.93                    19.71%

                                                  US                    AA                     0.93                    14.75%

                                                                         A                     0.88                    36.02%

                                                                       BBB                     0.78                    30.12%

                                                          Industry             Issuer              Capital Structure       Legal & Covenant

                                                                                Bottom Up Strategies

                                                            21                                     Global credit phil 02
Investment Grade Corporate Fundamentals

                         Positives                                                   Negatives/Risks

  Accommodative monetary policy has improved                     Current valuations of corporate bonds have factored in
 economic fundamentals                                           most of the positives with current yields in certain
                                                                 sectors not compensating for risk taken

  Risk appetite has been high, reducing risk premium
 demanded by investors, driving prices higher                     Whilst corporates have done much to strengthen
                                                                 balance sheets, leverage remains high

  Foreign demand for US corporate bonds has been
 high                                                             Corporate credit spreads set to underperform in a
                                                                 rising interest rate environment due to corporates
                                                                 maintaining higher leverage
  Corporate default rates have fallen to historical lows
 after the highs of 2002 and corporate earnings have
 been meeting or exceeding expectations

  Corporate bond supply has been muted given focus of
 companies to strengthen balance sheets and reduce
 debt – capital spending has also been subdued

  How Would We Construct A Global Credit Portfolio Today?

     Duration                                                        %
                                                                                              Sector             Quality    % DWE
          – US: Under
                                                                      27         Mortgage Securities              AAA          18
          – Euroland: Over                                                       (GNMA, FNMA, FHLMC)

          – UK: Neutral                                               48         Corporates                      AA / A        32

          – Asia: Under
                                                                       -         Governments/Swaps                AAA          40

                                                                      20         Agencies                         AAA           1
     Sector
          – Underweight Mortgages                                      1         High Yield                        BB           .5

          – Underweight Corporates
                                                                      2.5        Emerging Markets                  BB           4
          – Overweight International
                                                                       .5        Munis                            AAA           1
          – Overweight Emerging Markets

                                                                       1         Net Cash                         A1+          3.5

     Quality
                                                                    100%                                          AA+          100
          – AA / A

* Average weighted as of May 31, 2004.
  The structure of the portfolio is subject to change.
  The credit quality of the investment in the portfolio does not apply to the stability or safety of the fund.

                                                                                 23                                        Stru_1270_01

          Credit Research Process

          Global Credit

          Global High Yield

  PIMCO High Yield Background

   As of June 30, 2004

   Firm History and
   Assets                                  Founded in 1971

                                           Formed PIMCO Advisors in 1994

                                           Majority interest acquired by Allianz in 2000


                                                        Fixed Income                 $367.0 B
                                                          High Yield Mandates*         16.4 B
                                                        Equity                         24.9 B
                                                                           Total     $391.9 B

   High Yield
   Experience                               Global high yield portfolio management team in Newport Beach, London, and
                                             Munich (Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH)
                                             with extensive experience

                                            22 dedicated credit research analysts

  Past performance is no guarantee of future results.
* Does not include CDO business assets.

                                                                 25                             high_yield_asst_09d
       PIMCO’s High Yield Product Breadth
         As of June 30, 2004

                                                                         Ray Kennedy
            Charles Wyman                                          Head of High Yield Products                                       Mark Hudoff
       Director of Credit Research                                                                                                 Portfolio Manager

                                      High Yield Mandates                                                                  Specialty Products

       Euro High Yield                    U.S. High Yield               Global High Yield                        Bank Debt                   Convertibles
          $ 1.25 B*                          $ 16.2 B*                      $ 0.5 B*                              $ 5.1B*                      $ 0.2 B*

         Yuri Garbuzov                      Ray Kennedy                     Mark Hudoff                         Jason Rosiak                  Mark Hudoff
        Portfolio Manager                  Portfolio Manager              Portfolio Manager                    Portfolio Manager            Portfolio Manager

          Axel Potthof                       Mark Hudoff                   Yuri Garbuzov                         Greg Miller                 Yuri Garbuzov
        Portfolio Manager                  Portfolio Manager              Portfolio Manager                        Trader                   Portfolio Manager

          Alex Struc                         Jason Rosiak                   Alex Struc                           Bob Boyd
        Assistant Trader                        Trader                    Assistant Trader                     Assistant Trader

                                            Jason Williams
                                            Assistant Trader

                             U.S. Credit Team                                       European Credit Team                          Product Management
                              Charles Wyman                                                  Ivor Schucking                           Craig Dawson
                      Director of Global Credit Research                          Director of European Credit Research
                                                                                                                                     Nicolette Beyer
        David Andrews                               Richard Mak                              Jurgen Dahlhoff
        David Behenna                               Dhruv Mallik                             Elissa Johnson
        Workout Consultant
                                                  Murphy McCann                               Sofia Ramos
        Adam Borneleit
                                                   Monika Nemeth                        Rolando Rodrigues
        Michael Chang
                                                     Donna Riley                        Marion Scherzinger
         Cyrille Conseil
                                                     Tim Shaler                               Christian Wild
           Greg Gore
           Brian Kim                                                             Australia/Asia Credit Team
                                                                                               Bob Sahota

* Based on strategic mandates.                                                                              High_yield_products_aum
 Benefits of PIMCO’s Global High Yield Process

                         Focus on risk adjusted returns

                         Credit selection process that emphasizes credit fundamentals, but which incorporates
                          PIMCO’s macro views

                         Extensive experience in credit analysis and portfolio management

                              – Ray Kennedy has more than 17 years experience in credit research and portfolio

                              – Mark Hudoff has more than15 years experience in credit research and portfolio
                                management, including 4 years of experience focused exclusively on European high
                                yield *

                              – Global research team in the U.S. Europe and Asia with 24 analysts

                         Resources and experience to migrate among multiple sectors

                         High yield track record

                              – Consistent outperformance relative to the benchmark of the broad high yield universe

                              – Low tracking error / high information ratio

                         Focus on risk controls and processes that help to limit downside risk and reduce volatility

                         Unparalleled global platform

* Years of experience include firms other than PIMCO.

                                                               27                                Global_HY_phil_01
Global High Yield Outpaces U.S. & Non-U.S. Equity In Performance Per Risk

 Over the long run, high yield provides attractive risk-reward versus most asset classes

 Globalization of the high yield market should reinforce these results

                                                                             Annualized Returns Versus Volatility of Return (1982-2003)
                                                                                                                     S&P/BARRA 500 Value     S&P 500
                                                                                       High Yield Bonds                                                S&P/BARRA
                                                                                 (182 bps Outperform ance)                                             500 Grow th
                                               12                                                                                     Wilshire 5000
                                                                                                                                                       MSCI EAFE
                       Annualized Return (%)

                                                                                    ML Corp
                                                                                                                       U.S. LT Govt
                                                                     U.S. IT Govt                      LB AAA Corp

                                                                                      ML Mortgage
                                               6        U.S. 30 day T-Bill

                                                        U.S. Inflation

                                                    0          3                6                  9           12              15            18            21        24
                                                                                               Standard Deviation of Return (%)*

Diversification does not ensure against loss.

                                                                                              28                                          Global_HY_Review_11
Global High Yield Has a Low Long-term Correlation With Other Asset Classes

                                                                                                        Issuance of Non-U.S. Countries

 Non-U.S. High Yield

                                                             Percentage (%)
  issuance is the fastest
  growing segment of the
  Global High Yield market


                                                                                        1998     1999         2000          2001            2002   2003

 Global High Yield provides                                                                   Global
  compelling correlation                                                                        High            U.S. Mortgages          Investment
                                                                                                       Stocks                   Bonds
  advantage when combined                                                                      Yield           Stocks                      Grade
  with other asset classes               Global High Yield                                        1.00
                                         U.S. Stocks                                              0.48    1.00
                                         Non-U.S. Stocks                                          0.33    0.66    1.00
                                         Mortgages                                                0.22    0.13 -0.03       1.00
                                         Global Bonds                                             0.14    0.06 -0.11       0.78    1.00
                                         Global Investment Grade                                  0.38    0.22 -0.02       0.87    0.86        1.00

  SOURCE: Merrill Lynch & Co., J.P. Morgan, Morgan Stanley, Lehman Brothers
  Past performance is no guarantee of future results. The chart does not reflect any PIMCO product.

                                                                                   29                                Global_HY_review_09a
Upper Tier Spreads Are More-Than-Compensating Investors for Defaults

As of June 30, 2004
                                                                                                          1985-2004* PIMCO Default Study
                                                                                       Breakeven Annual Spread over Treasuries
                                                                                       10-Year Average Spread

                                                                            600                                                                              569
 The “breakeven spread                                                                                                                            540
  over treasuries” is the

                                                             Basis Points
  spread needed to offset a
  given level of default                                                    400

 Actual spreads** over                                                     200                     167
  treasuries have exceeded                                                                                          96
  breakeven levels on                                                                    14
  average over the entire                                                     0
  period                                                                                      Baa                        Ba                              B

 Higher quality segments,
  within high yield, offer the
  most compelling risk
  versus reward

     SOURCE: Moody's Investors Service, Salomon Smith Barney and PIMCO.
*    Breakeven spread =                              1 + average 10-Yr. Treasury YTM
                                                                                                                              - (1 + average 10-Yr. Treasury YTM)
                            1 - (average price – recovery rate) (default rate) + (average coupon x 0.5) (default rate)
     Assumed Recovery Rate = 35%
**   Average month-end absolute spread over 10-Year Treasury according to Salomon Smith Barney.
     Past performance is no guarantee of future results.

                                                                                  30                                      Global_HY_Review_14
                                                                                                                UPDATE ANNUALLY (Hinman updates)
Qualitative Improvements in European High Yield Markets

As of June 30, 2004

                    Bankruptcy regimes have matured and been preliminarily tested in most countries

                    Structural subordination have been reduced through industry moves to improve
                     unsecured creditor positions

                    Transparency has improved as issuers provided investors with more information and
                     maintained ratings

                    Cross-border M&A has yet to develop, but we’ve seen a strong surge in solid industrial
                     and other first time issuers that adds to diversity and depth of market

   However, European high yield remains too heavily concentrated on a stand-alone basis.
                                     As such, we like the global high yield alternative.

                   Sector                         Percentage                      Issuer                 Percentage Weight in
                                                    Weight                                                   Broad Index
      Capital Goods                                  17.4%              FIAT                                     10.2%
      Consumer Cyclicals                             15.2%              AHOLD                                    5.8%
      Basic Industries                               12.9%              ALCATEL                                  5.4%
      Technology & Electronics                       12.0%              ERICSSON                                 4.2%

 SOURCE: Merrill Lynch
 INDEX: Merrill Lynch European Currency High Yield Index (HP00)

                                                                  31                       Global_HY_Review_07
PIMCO’s High Yield Philosophy – “Buy the Best High Yield Bonds”

                          Bottom-up credit research incorporating top-down economic framework

              Core high yield approach with a total return orientation

              Upper tier quality focus

              Limit risk through issuer and sector diversification

                          Broad opportunity set resulting from expertise in all global credit fixed income sectors

  The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.
  Strategy subject to change without notice. Diversification does not ensure against loss.

                                                                            32                                                  high_yield_phil_01
    PIMCO Operates in a Unique Market Niche                                                                                  Capital Structure
                                                                                                                                       Senior Secured

                                                                                                   Investment Grade
                                                                                                     Focus is Here
       Upper / Middle tier of the high
        yield market

       Higher quality than typical high                                         Issue                                      PIMCO Operates Here
        yield manager                                                            Rating BBB                                            BB                              B
                                                                                                                                                     Most High Yield
       Result: Better
                                                                                                                                                      Operate Here
        risk / return trade off potential

                                                                                                                                       Junior Subordinated
                                                       Return              Correlation with
                               Annualized                                                              Correlation with
        Rating Tier                                   per Unit of          10-Yr Treasury
                               Return (%)(1)                                                              S&P 500
                                                      Volatility(2)           Returns
      Tiers                         11.0%                 1.79%                    0.16                         0.50
      (BB and B)*
      Lower Tier
      (B- and below)                 3.6%                 0.30%                    -0.06                        0.38

1   January 1986 – June 2004. The chart does not reflect any PIMCO product.
2   Return per unit of volatility is calculated by dividing annualized return by annualized monthly volatility of return.
* Upper / middle tier is a market weighted blend that is rebalanced annually.
    Past performance is no guarantee of future results.
    SOURCE:                       Credit           Suisse          First        Boston           Corporation,           Salomon          Smith Barney,     PIMCO.
    As defined by CSFB, Upper Tier includes split BBB, BB and split BB; Middle Tier includes B and split B; Lower Tier includes B-, CCC, split CCC and defaulted as
    rated by Moody's and/or S&P. The S&P 500 Index is an unmanaged index of U.S. companies with market capitalizations in excess of $4 billion. It is generally
    representative of the U.S. stock market.
    The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.
    Strategy subject to change without notice. Diversification does not ensure against loss.
                                                                                   33                                           high_yield_phil_07
PIMCO’s High Yield Portfolio Construction Process

                                                                                              Emerging Markets
                                                 5-15%                                        Bank Loans
                                                                    Out of                    Convertibles

                                                                                                                Attractively priced,
                           25-35%                                 Tactical                                      improving credits with
                                                                                                                0.5%-2.5% overweight

                                                                                                                              Stable credits with neutral
                                                              Core Holdings                                                   to modest overweight

                                      Goal: Enhance return with less volatility

   The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.


 Outlook - Yield Will Be The Primary Driver of Returns For Remainder of 2004


                                 +            Continued slowdown in fallen angels and a peak in default rates

Positive – Continuing            +            Modest economic growth driven by fiscal and monetary stimulus
to improve
                                 +            Emphasis on improving corporate balance sheets and raising liquidity

                                +/–           M & A activity is resulting in increased event risk

Neutral – Intermediate
maturities offer best             +/–            Spreads are wider than 2004 tights, but yields are still near
                                                 historical low levels
value with less treasury
risk                                 +           Middle and lower quality tiers offer less treasury rate sensitivity

Neutral – Market
technicals likely to                 +/–          Mutual fund outflows likely to slow; Institutional flows have been
                                                  slightly positive
remain supportive
                                     +/–          Refinancing cycle has slowed down with treasury sell-off

                                         35                                        2cs_HY_outlook_01
 Current Global Credit Sector Views

                                                      lehman credit index
sector       aggregate industry      % dur$   yield     oas  oas dur     beta cp rating              strategy                                Credits
consumer     consumer cyclical       12.0%     5.4%      146      5.7       10.3 BAA+   M arket weight autos given recent        Prefer GM to Ford. Take advantage
                                                                                           spread compression - balance sheet    of CDS market which trades wider
                                                                                           improvements (+ve) vs. earnings       than cash market.
                                                                                           pressures (-ve)
                                                                                           Underweight. Within sector focus      Buy lower rated supermarkets such
             consumer non-cyclical    8.9%    4.9%         84      6.3       7.3 A-
                                                                                           on Tobacco, Supermarkets and          as Kroger and Albertsons
financial    banking                 13.7%    4.3%         67      4.5       4.4 A+        Underweight. Decent fundamentals Overweight higher quality names
                                                                                           more than offset by rich valuations. such as Citigroup, BoA and Wells
             brokerage                6.9%    4.6%         83      5.2       5.6 A         Underweight in brokers due to rich    GS, BRK
                                                                                           valuations; otherwise,
                                                                                           M arketweight due to stable
             finance companies        4.5%    4.3%         69      4.8       5.7 AA        Underweight

             insurance                3.5%    4.9%         91      6.1       6.8 A         Underweight Life P&C. Valuations
                                                                                           are rich for Life and fair for P&C.

industrial   basic industry           3.4%    5.1%         97      6.4       8.4 BAA+ M arket weight Paper which has             Overweight Weyerhauser.
                                                                                           improving fundamentals and            Underweight commodity chemicals
                                                                                           attractive valuations. Underweight    such as Dow.

             capital goods            4.8%    4.8%         80      6.1       7.6 BAA+ M arketweight stable industrials         Overweight out of index bet on
                                                                                           such as Environmental Services and Tyco and D.R. Horton.
                                                                                           underweight interest rate sensitive
                                                                                           sectors such as Home Builders

  Current Global Credit Sector Views

                                                      lehman credit index
sector        aggregate industry     % dur$   yield     oas  oas dur     beta cp rating             strategy                                 Credits
industrial    communications         11.8%     5.3%      122      6.5       11.5 BAA+   Overweight high beta telecom and        Overweight Sprint, Newscorp and
                                                                                          cable/media. Underweight low beta     Comcast. Underwieght BLS, SBC.
              energy                  5.0%    5.2%         92      7.3       9.4 BAA+ Underweight E&P, Integrated Oils, COP, KM G, AHC
                                                                                          Oil Field Services and Refining due
                                                                                          to rich valuations.

              technology              1.6%    4.7%         84      5.8       6.6 A-       Underweight due to rich valuations. Underweight HP. IBM . M OT.

              transportation          2.3%    5.5%        126      7.0      10.0 BAA+ Slight overweight on airlines and         Focus on A class tranches of EETC
                                                                                          underweight on rails.                 for stronger carriers such as AM R
                                                                                                                                and CAL. Underweight DAL due to
                                                                                                                                headline risk.
non corp      credit non-corporate   13.9%    4.4%         65      5.3       5.0 AA-

utilities     natural gas             2.0%    5.2%        107      6.4       9.1 BAA+

              utilities               5.6%    5.0%         93      6.2       8.9 BAA+ Overweight. Focus on pipelines,           NRUC, EP, WM B
                                                                                          operating companies, nuclear deals,
                                                                                          crossovers and improving low

Grand Total                          100.0%   4.8%         91      5.7       7.3 A

Sample Credit Write-up

                         39   credit_phil_25
Sample Risk Reports

                      40   global_credit_phil_07
External Research Supplements Internal Research

              Short Sellers Views:               Independent Credit Shops:
              Behind the Numbers                   KDP and CreditSights

                                       Credit                 Industry Publications &
    Qualitative Models:               Research                 Associations: Modern
  KMV/Moody’s Risk Metric             Process                  Healthcare, Chemical
                                                                    Week, EEI

                Industry Experts:                    Web Based Tools:
                   J.S. Herold                           Multex

                                     41                         credit_phil_23
Risk Monitoring Tools and Approach


                                                                 Overexposure &

                               Risk Control Goals
                            -Actively monitor credit bets
                          -Reduce volatility & tracking error
                            -Reduce account dispersion

        Overexposure &

                                           Quality vs.

                                      42                        credit_phil_24

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