Fitch Ratings has assigned 'AA' long-term ratings to the Series 2053 Remarketable Variable Rate MuniFund Term Preferred Shares (RVMTP shares) issued across the following six municipal closed-end funds (CEFs, collectively, the Funds), managed by Pacific Investment Management Company LLC (PIMCO).

$10.2 million of Series 2053 RVMTP shares issued by PIMCO California Municipal Income Fund (PCQ);

$29.2million of Series 2053 RVMTP shares issued by PIMCO California Municipal Income Fund II (PCK);

$10.5 million of Series 2053 RVMTP shares issued by PIMCO California Municipal Income Fund III (PZC);

$20.4 million of Series 2053 RVMTP shares issued by PIMCO Municipal Income Fund (PMF);

$55.5 million of Series 2053 RVMTP shares issued by PIMCO Municipal Income Fund II (PML); and

$23.9 million of Series 2053 RVMTP shares issued by PIMCO Municipal Income Fund III (PMX).

On Aug. 14, 2023, the six CEFs commenced a tender offer to purchase up to 100% of their outstanding auction rate preferred shares (ARPS), and the tender offer expired on Sep. 18, 2023 at which time certain ARPS holders tendered certain amounts of their ARPS, and the CEFs will purchase such tendered ARPS. To replace certain amounts of the leverage associated with the tendered ARPS, the CEFs issued the Series 2053 shares.

There is no impact to the Series 2051 RVMTP shares rated 'AA' by Fitch as a result of either the ARPS tender offer actions or the Series 2053 RVMTP share issuances.

KEY RATING DRIVERS

The ratings are supported by the following:

Sufficient asset coverage provided to the preferred shares as calculated per the Funds' over-collateralization (OC) tests;

The structural protections afforded by mandatory collateral maintenance and deleveraging provisions in the event of asset coverage declines;

The legal and regulatory parameters that govern the Funds' operations;

The capabilities of PIMCO as investment manager.

FUND PROFILES

PCQ, PCK, PZC, PMF, PML and PMX are closed-end management investment companies regulated by the Investment Company Act of 1940 (the Act). The Funds may invest up to 20% of their managed assets in municipal securities that at the time of investment are in the 'BB' or 'B' or lower rating categories, or that are unrated but judged to be of comparable quality by PIMCO.

PMF, PML and PMX are funds that invest primarily in a portfolio of municipal bonds and seek to provide current income exempt from federal income tax. PCQ, PCK and PZC are funds that invest primarily in California municipal bonds and seek to provide current income exempt from federal and California income taxes.

REMARKETING TERMS

The Series 2051 and Series 2053 RVMTP shares are subject to a mandatory tender event upon the 36th month anniversary of Sept. 20, 2023 or upon the end of a special terms period (each an early term redemption date), subject to the option of the holders to retain the RVMTP shares. RVMTP shares that are neither retained by the holder nor successfully remarketed by the early term redemption date will be redeemed by the fund. Please see below for additional discussion of the special terms period.

SPECIAL TERMS PERIOD

At any time after the 12-month anniversary of the date of original issue of a series of RVMTP shares (the date of original issue being Sept. 20, 2023 for the Series 2053 Shares), the Funds may designate a special-terms period (STP) pursuant to a notice of special terms. Upon designation of the STP, the applicable series of RVMTP shares will be remarketed unless the holders elect to retain their shares. In order for the special terms to become effective, among other preconditions, the RVMTP shares of any holders who do not elect to retain their RVMTP shares for the STP must be successfully remarketed.

Special terms may involve changes to terms of the RVMTP shares' governing documents, including but not limited to the dividend terms, redemption provisions, required effective leverage ratio and additional amount payment provisions. If special terms become effective, Fitch will reevaluate the structure for any impact on the assigned rating.

Special terms may not affect the parity ranking of the RVMTP shares relative to any other series of preferred shares.

In addition, to become effective, special terms require approval of the board of the Funds and 100% of the Holders of the RVMTP shares. After the STP elapses, terms will revert to those which were in effect as provided in the RVMTP shares' governing documents.

LEVERAGE

Total leverage for PCQ, PCK, PZC, PMF, PML and PMX as of Aug. 31, 2023, the review date, consists of the rated Series 2051 RVMTP shares, the ARPS, and tender option bonds (TOBs). Because the Series 2053 RVMTP shares are being issued as a form of replacement financing for a certain portion of the tendered ARPS, the Funds' total leverage will not be materially impacted. Fitch has treated the ARPS and the newly issued Series 2053 shares interchangeably when calculating leverage and coverage metrics. The governing documents of the RVMTP shares issued by these funds limit the effective leverage ratio to a maximum of 50% (or 51% due solely to market value fluctuations). Effective leverage is a ratio measuring a fund's structural leverage as a percentage of its total assets.

In a TOB transaction, the Funds transfer municipal bonds into a trust that issues two types of securities: short-term floating rate securities sold to third-party investors, and residual inverse floating rate interests, which are issued to the fund that provides the municipal bond collateral to the TOB trust. Cash received from the sale of the short-term floating rating securities can be used by each fund to purchase additional fund assets.

As of the review date, effective leverage levels for the Funds were generally in the 44%-45% range. These levels, while below the maximum levels allowed under the governing documents are elevated relative to prior periods due to net asset value declines caused by market volatility in 2022 and 2023.

SUBORDINATION AND REFINANCE RISK

Although the TOBs, as applicable, create a degree of subordination risk for the Funds' preferred share investors, Fitch believes the risks are manageable. The rights of these creditors to receive payments of principal and interest are fully secured by the collateral of the applicable fund and are senior to the rights of holders of the rated preferred shares to receive dividends and other distributions, and upon liquidation. The Fitch net OC test quantifies subordination risk by assessing asset coverage to the rated obligations after first repaying liabilities that are senior in the capital structure. All Funds have Fitch net OC test results in excess of 100% at the assigned rating level.

Fitch believes there is minimal refinancing risk associated with the preferred shares of the Funds. The Fitch OC test results indicate the Funds are sufficiently liquid to fully repay all of their leverage within a relatively brief 45- to 60-day exposure period, even during a time of substantial market stress.

DERIVATIVES

The Funds are permitted to utilize derivatives to supplement investment, however, as of the review date, the Funds did not utilize derivatives.

PREFERRED SHARE ASSET COVERAGE

As of the review date, the asset coverage ratio for each of the Funds, as calculated in accordance with the Act, is in excess of the asset coverage requirement threshold of 200% required by the governing documents of the applicable shares of PCQ, PCK, PZC, PMF, PML and PMX. Fitch notes that the impact of the TOBs leverage is not captured under the asset coverage ratio as calculated in accordance with the Act, but is accounted for under the Fitch OC tests and the effective leverage ratio.

As of the review date, the Funds' effective leverage ratios were below the maximum leverage ratio allowed by the applicable preferred shares governing documents of 50% (51% if due to market value fluctuation).

As of the review date, each Fund's asset coverage ratios, as calculated in accordance with Fitch total and net Fitch OC tests per the 'AA' rating guidelines, were in excess of 100%.

RVMTP SHARE STRUCTURAL PROTECTIONS

Under the governing documents of the RVMTP shares, in the event of a breach of the effective leverage ratio threshold and following a cure period, the applicable fund is required to redeem a sufficient number of preferred shares (including the RVMTP shares and any ARPS on a pro rata basis), and/or reduce the amount of TOBs the fund has outstanding in order to restore compliance, unless the fund receives the prior written consent of all RVMTP shareholders of the applicable fund. The time allowed for the fund to restore compliance is consistent with Fitch's criteria guideline.

In the event of a 1940 Act asset coverage decline below the applicable 200% threshold as discussed above, the governing documents of the applicable RVMTP shares require the applicable fund to reduce leverage in order to restore compliance with the 1940 Act asset coverage test. Failure to cure a breach of the asset coverage requirement by the allotted cure date results in mandatory redemption of sufficient preferred shares (including the RVMTP shares and any outstanding ARPS on a pro rata basis) to restore compliance with the 1940 Act coverage requirement. The time allowed for the fund to restore compliance is consistent with Fitch's criteria guideline.

STRESS TESTS

Certain key governing documents of the Funds' preferred shares do not require the Funds to take corrective action in the event of a breach of the Fitch OC tests, although based on discussions with management, Fitch believes it is the Funds' intention. In addition, the intention to take corrective action in the event of a Fitch test breach is noted in the Funds' RVMTP offering memorandum.

In the absence of a corrective action requirement in key governing documents, Fitch performs a stress test on the municipal funds in order to assess the strength of the structural protections available to the preferred shares compared with the stresses outlined in Fitch's 'Closed-End Fund Rating Criteria'. This test provided for a one rating notch downgrade relative to the unstressed base case. The Fitch OC tests in this stress scenario exceeded 100% at the assigned rating level for each fund discussed in this release.

Based on the stress test results, document review and management discussions, Fitch views each Fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with the assigned rating levels.

INVESTMENT MANAGER

PIMCO is the investment manager and is responsible for the Funds' overall investment strategies and implementation. PIMCO had approximately $1.8 trillion of assets under management as of Jun. 30, 2023.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Rating upgrades are not currently envisioned for the 'AA' rated preferred shares as Fitch criteria effectively caps closed end fund ratings at 'AA';

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The ratings may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the Funds' assets, as described above;

A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be downgraded by Fitch;

The Funds have the ability to assume economic leverage through derivative transactions that may not be captured by the minimum asset coverage test or effective leverage ratio. The Funds do not currently engage in speculative derivative activity. Any material speculative derivative exposures in the future could have potential negative rating implications if they adversely affect asset coverage available to rated securities;

The ratings could be downgraded if asset coverage cushions erode as a result of market volatility, or if Fitch believes the assets the Funds invest in are unlikely to retain sufficient liquidity and price stability at the current rating stress levels. Based on portfolio compositions as of Aug. 31, 2023, the Funds could withstand market value declines within a relatively narrow range of 10% (PCK) to 15% (PMF) before breaching Fitch's OC Test results at the assigned rating levels.

Fitch deems a sustained breach in Fitch OC test coverage as unlikely, as Fitch believes the Funds would delever or alter the portfolio composition toward lower discount factor assets to the extent needed to cause the rated securities to maintain passing Fitch OC test margins at the assigned rating levels.

(C) 2023 Electronic News Publishing, source ENP Newswire