PIMCO California Municipal Income Fund II
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 811-21077

 

 

PIMCO California Municipal Income Fund II

(Exact name of registrant as specified in charter)

 

 

 

1633 Broadway, New York, New York   10019
(Address of principal executive offices)   (Zip code)

 

 

Lawrence G. Altadonna - 1633 Broadway, New York, New York 10019

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: 212-739-3371

Date of fiscal year end: May 31, 2013

Date of reporting period: May 31, 2013

 

 

 


Table of Contents

Item 1. REPORT TO SHAREHOLDERS

 

PIMCO Municipal Income Fund II

PIMCO California Municipal Income Fund II

PIMCO New York Municipal Income Fund II

 

Annual Report

May 31, 2013

 

LOGO

 

LOGO


Table of Contents

Contents

 

 

  2-3      Letter to Shareholders
  4      Fund Insights
  5-6      Fund Performance and Statistics
  7-28      Schedules of Investments
  29      Statements of Assets and Liabilities
  30      Statements of Operations
  32-33      Statements of Changes in Net Assets
  34-47      Notes to Financial Statements
  48-50      Financial Highlights
  51      Report of Independent Registered Public Accounting Firm
  52      Tax Information
  53      Annual Shareholder Meeting Results
  54-55      Privacy Policy/Proxy Voting Policies & Procedures
  56-57      Dividend Reinvestment Plan
  58-59      Board of Trustees
  60      Fund Officers


Table of Contents

Letter from the Chairman

and President & CEO

 

LOGO

Hans W. Kertess

Chairman of the Board of Trustees

 

LOGO

Brian S. Shlissel

President & Chief Executive Officer

 

Dear Shareholder:

Despite periodic setbacks, the municipal bond market generated positive results during the fiscal 12-month reporting period ended May 31, 2013. In particular, longer-term, lower credit municipals were particularly favorable during the period as investors were drawn to higher yielding securities.

For the fiscal 12-month period ended May 31, 2013:

 

n   PIMCO Municipal Income Fund II advanced 8.86% on net asset value (“NAV”) and 3.41% on market price.

 

n   PIMCO California Municipal Income Fund II rose 12.22% on NAV and 11.41% on market price.

 

n   PIMCO New York Municipal Income Fund II increased 6.60% on NAV and 4.14% on market price.

Twelve Months in Review

The US economy continued to grow during the fiscal 12-month reporting period, but the pace of the expansion was far from robust. 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, grew at an annual pace of 1.3% during the second quarter of 2012. GDP growth accelerated to a 3.1% annual pace during the third quarter of 2012, before declining to a 0.4% annual pace during the fourth quarter of 2012. GDP growth rebounded to an 1.8% annual rate during the first quarter of 2013.

The Federal Reserve (the “Fed”) initiated a number of actions to support the economy and reduce unemployment. In September 2012, the Fed introduced a third round of “quantitative easing” which entailed purchasing $40 billion of mortgage securities each month. Toward the end of 2012, the Fed revealed that it would continue

the purchase of $40 billion mortgage securities each month, in addition to purchasing $45 billion per month of longer-term Treasuries on an open-ended basis. At its meeting in December 2012, the Fed indicated that it expected to maintain the Fed Funds rate in the 0.0% to 0.25% range “…as long as the unemployment rate remains above 6.5%,” provided that inflation remains well contained. The Fed maintained this stance at its meetings in January, March and May 2013.

US Treasury bond yields moved higher during the 12-months ended May 31, 2013. At the beginning of the fiscal period, the benchmark ten-year Treasury bond was yielding 1.59%, ending the period at 2.16%. In July 2012, the yield on the benchmark ten-year Treasury bond fell to a record low 1.43%. This downward trend reflected a variety of factors, such as Europe’s ongoing sovereign debt crisis, uncertainties regarding fiscal policy and decelerating global economic growth. The benchmark ten-year Treasury bond moved sharply higher in May 2013, due to generally positive economic data and concerns that the Fed may begin to taper its quantitative easing program later in the year.

Overall, the municipal bond market was aided by solid demand and attractive yields. As the economy continued to expand, tax revenues increased, which supported many municipalities and helped to improve their fiscal situations. In addition, many municipalities initiated actions to reduce expenditures and address pension funding issues. That being said, the municipal bond market, along with the overall taxable fixed income market, weakened toward the end of the reporting period as Treasury yields increased sharply.

 

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Table of Contents

Outlook

While unemployment remains well above the Fed’s 6.5% target, there has been an increase in market volatility and rising Treasury yields. This was partially triggered by expectations that the Fed may begin tapering the amount of quantitative easing. Our belief is that the Fed will want more evidence that the economy is on solid footing prior to adjusting monetary policy. We expect tapering could be more of an issue in 2014. That being said, we may continue to experience

 

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periods of heightened volatility given incoming economic data and the market’s attempts to anticipate future Fed actions.

For specific information on the Funds and their performance, please review the following pages. If you have any questions regarding the information provided, we encourage you to contact your financial advisor or call the Funds’ shareholder servicing agent at (800) 254-5197. In addition, a wide range of information and resources is available on our website, us.allianzgi.com/closedendfunds.

Together with Allianz Global Investors Fund Management LLC, the Funds’ investment manager, and Pacific Investment Management Company LLC (“PIMCO”), the Funds’ sub-adviser, we thank you for investing with us.

We remain dedicated to serving your investment needs.

Sincerely,

 

LOGO   LOGO
Hans W. Kertess   Brian S. Shlissel
Chairman of the Board of Trustees   President & Chief Executive Officer

 

Annual Report  |   May 31, 2013     3   


Table of Contents

Fund Insights

PIMCO Municipal Income Fund II

PIMCO California Municipal Income Fund II

PIMCO New York Municipal Income Fund II

 

PIMCO Municipal Income Fund II advanced 8.86% on net asset value (“NAV”) and 3.41% on market price.

PIMCO California Municipal Income Fund II rose 12.22% on NAV and 11.41% on market price.

PIMCO New York Municipal Income Fund II increased 6.60% on NAV and 4.14% on market price.

The municipal bond market generated positive results during the fiscal 12-month reporting period ended May 31, 2013. The overall municipal market, as measured by the Barclays Municipal Bond Index (the “Index”), posted positive returns during five of the first six months of the period. During this time, many states benefited from positive year-over-year tax receipts and new issuance was not sufficient to meet robust investor demand. The Index declined in December 2012, as investor sentiment weakened due to uncertainties related to the “fiscal cliff” and future tax-favored status of municipal bonds. The Index again rallied in January and February 2013, as municipal bonds maintained their tax-exempt status and solid demand resumed. However, there was another sell-off in March, as new supply increased sharply, demand waned and Treasury yields moved higher. After another rally in April, the market declined in May amid sharply rising Treasury yields. All told, during the 12-month period, the Index returned 3.05%. In comparison, the overall taxable fixed income

market, as measured by the Barclays US Aggregate Bond Index, gained 0.91% during the same period.

A shorter duration than the benchmark contributed positively to the performance of Municipal II as municipal yields moved higher across the yield curve during the 12-month reporting period. Conversely, duration positioning detracted from the performance of New York Municipal Income II and California Municipal Income II.

Each of the Funds benefited from an overweighting to the Industrial Revenue and Tobacco sectors given their outperformance versus the Index. Municipal Income II and California Municipal II were rewarded for their overweighting to revenue-backed municipal bonds as they outperformed the Index. Municipal II and New York Municipal II held overweight positions in the Health Care sector, which was beneficial as the sector outperformed the Index.

An underweight exposure to the Transportation sector detracted from the returns of all three Funds as this sector outperformed in comparison to the Index. Municipal II’s and California Municipal II’s underweighting to the Education sector was detrimental given its outperformance versus the Index. New York Municipal II’s exposure to the Water and Sewer Utility sector detracted from results during the reporting period.

 

 

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Fund Performance and Statistics

PIMCO Municipal Income Funds II

May 31, 2013 (unaudited)

 

Municipal Income II

Total Return(1):

  Market Price      NAV  

1 Year

    3.41%         8.86%   

5 Year

    4.47%         4.91%   

10 Year

    4.97%         5.08%   

Commencement of Operations (6/28/02) to 5/31/13

    5.02%         5.47%   

 

Market Price/NAV Performance:    

Commencement of Operations (6/28/02) to 5/31/13

 

LOGO

Market Price/NAV:       

Market Price

     $12.19   

NAV

     $12.17   

Premium to NAV

     0.16%   

Market Price Yield(2)

     6.40%   

Leverage Ratio(3)

     35.68%   

Moody’s Rating

(as a % of total investments)

 

LOGO

 

 

California Municipal Income II

Total Return(1):

  Market Price      NAV  

1 Year

    11.41%         12.22%   

5 Year

    2.48%         1.45%   

10 Year

    4.09%         2.99%   

Commencement of Operations (6/28/02) to 5/31/13

    4.13%         3.47%   

 

Market Price/NAV Performance:    

Commencement of Operations (6/28/02) to 5/31/13

 

LOGO

Market Price/NAV:  

Market Price

     $10.51   

NAV

     $8.93   

Premium to NAV

     17.69%   

Market Price Yield(2)

     6.43%   

Leverage Ratio(3)

     41.61%   

Moody’s Rating

(as a % of total investments)

 

LOGO

 

 

Annual Report   |   May 31, 2013     5   


Table of Contents

Fund Performance and Statistics

PIMCO Municipal Income Funds II

May 31, 2013 (unaudited) (continued)

 

New York Municipal Income II

Total Return(1):

  Market Price      NAV  

1 Year

    4.14%         6.60%   

5 Year

    3.70%         3.82%   

10 Year

    4.80%         4.51%   

Commencement of Operations (6/28/02) to 5/31/13

    4.73%         4.72%   

 

Market Price/NAV Performance:    

Commencement of Operations (6/28/02) to 5/31/13

 

LOGO

Market Price/NAV:       

Market Price

     $12.01   

NAV

     $11.32   

Premium to NAV

     6.10%   

Market Price Yield(2)

     6.62%   

Leverage Ratio(3)

     41.35%   

Moody’s Rating

(as a % of total investments)

 

LOGO

 

 

(1) Past performance is no guarantee of future results. Total return is calculated by determining the percentage change in NAV or market price (as applicable) in the specified period. The calculation assumes that all dividends and distributions, if any, have been reinvested. Total return does not reflect broker commissions or sales charges in connection with the purchase or sale of Fund shares.

Performance at market price will differ from results at NAV. Although market price returns typically reflect investment results over time, during shorter periods returns at market price can also be influenced by factors such as changing views about the Funds, market conditions, supply and demand for each Fund’s shares, or changes in each Fund’s dividends.

An investment in the Funds involves risk, including the loss of principal. Total return, market price, market price yield and NAV will fluctuate with changes in market conditions. This data is provided for information purposes only and is not intended for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. There is a one time public offering and once issued, shares of closed-end funds are traded in the open market through a stock exchange. NAV is equal to total assets attributable to common shareholders less total liabilities divided by the number of common shares outstanding. Holdings are subject to change daily.

(2) Market Price Yield is determined by dividing the annualized current monthly dividend per common share (comprised of net investment income) by the market price per common share at May 31, 2013.

(3) Represents Floating Rate Note transactions and Preferred Shares outstanding (collectively “Leverage”), as a percentage of total managed assets. Total managed assets refer to total assets (including assets attributable to Leverage) minus accrued liabilities (other than liabilities representing Leverage).

 

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Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013

 

Principal
Amount
(000s)
              Value  
  Municipal Bonds & Notes – 98.5%            
  Alabama – 1.3%      
$ 10,000     

Birmingham-Baptist Medical Centers Special Care Facs. Financing Auth. Rev.,

Baptist Health Systems, Inc., 5.00%, 11/15/30, Ser. A

    $ 10,400,700   
  1,235     

Montgomery BMC Special Care Facs. Financing Auth. Rev.,

5.00%, 11/15/29, Ser. B (NPFGC)

      1,238,149   
  2,000     

State Docks Department Rev., 6.00%, 10/1/40

      2,374,500   
                  14,013,349   
  Arizona – 6.8%      
 

Health Facs. Auth. Rev., Banner Health,

     
  3,500     

5.00%, 1/1/35, Ser. A

      3,683,680   
  2,860     

5.50%, 1/1/38, Ser. D

      3,150,433   
 

Pima Cnty. Industrial Dev. Auth. Rev.,

     
  29,700     

5.00%, 9/1/39

      30,942,648   
  1,500     

Tucson Electric Power Co., 5.25%, 10/1/40, Ser. A

      1,636,800   
 

Pinal Cnty. Electric Dist. No. 3 Rev.,

     
  1,750     

5.25%, 7/1/36

      1,899,590   
  3,700     

5.25%, 7/1/41

      3,974,022   
  10,000      Salt River Project Agricultural Improvement & Power Dist. Rev.,
5.00%, 1/1/39, Ser. A (h)
      11,198,800   
  17,900     

Salt Verde Financial Corp. Rev., 5.00%, 12/1/37

      19,642,207   
                  76,128,180   
  California – 15.4%      
 

Bay Area Toll Auth. Rev., San Francisco Bay Area,

     
  6,000     

5.00%, 10/1/29

      6,838,380   
  1,430     

5.00%, 4/1/34, Ser. F-1

      1,590,031   
  1,565     

Foothill-Eastern Transportation Corridor Agcy. Rev., 5.875%, 1/15/26 (IBC-NPFGC)

      1,602,341   
 

Golden State Tobacco Securitization Corp. Rev.,

     
  2,000     

5.00%, 6/1/45, Ser. A

      2,079,020   
  10,000     

5.30%, 6/1/37, Ser. A-2

      9,393,500   
  20,035     

5.75%, 6/1/47, Ser. A-1

      18,816,872   
  2,000     

Hayward Unified School Dist., GO, 5.00%, 8/1/33

      2,121,360   
 

Health Facs. Financing Auth. Rev.,

     
  1,500     

Scripps Health, 5.00%, 11/15/36, Ser. A

      1,624,275   
  6,300     

Sutter Health, 5.00%, 11/15/42, Ser. A (IBC-NPFGC)

      6,633,270   
  2,000     

Sutter Health, 5.00%, 8/15/52, Ser. A

      2,122,940   
  3,000     

Sutter Health, 6.00%, 8/15/42, Ser. B

      3,567,660   
  1,500     

Indian Wells Redev. Agcy., Tax Allocation, Whitewater Project,

4.75%, 9/1/34, Ser. A (AMBAC)

      1,395,465   
  2,000     

Los Angeles Community College Dist., GO, 5.00%, 8/1/32, Ser. A (FGIC-NPFGC)

      2,224,540   
  4,000     

Los Angeles Department of Water & Power Rev., 5.00%, 7/1/39, Ser. A-1 (AMBAC)

      4,304,440   
  5,000     

Los Angeles Unified School Dist., GO, 5.00%, 7/1/30, Ser. E (AMBAC)

      5,334,500   
  1,750     

M-S-R Energy Auth. Rev., 6.50%, 11/1/39, Ser. B

      2,310,508   
  2,000     

Montebello Unified School Dist., GO, 5.00%, 8/1/33 (AGM)

      2,201,720   
  2,985     

Municipal Finance Auth. Rev., Azusa Pacific Univ. Project, 7.75%, 4/1/31, Ser. B

      3,510,748   
  3,000     

Newport Beach Rev., Hoag Memorial Hospital Presbyterian, 5.875%, 12/1/30

      3,614,700   

 

Annual Report  |   May 31, 2013     7   


Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
  California (continued)      
$ 500     

Peralta Community College Dist., GO, 5.00%, 8/1/39, Ser. C

    $ 542,630   
  2,000     

San Diego Cnty. Water Auth., CP, 5.00%, 5/1/38, Ser. 2008-A (AGM)

      2,202,240   
  3,300     

San Marcos Unified School Dist., GO, 5.00%, 8/1/38, Ser. A

      3,589,806   
  2,000     

Santa Clara Cnty. Financing Auth. Rev., El Camino Hospital,

5.75%, 2/1/41, Ser. A (AMBAC)

      2,190,360   
 

State, GO,

     
  2,925     

5.00%, 11/1/32

      3,208,988   
  1,590     

5.00%, 6/1/37

      1,713,050   
  5,200     

5.125%, 8/1/36

      5,742,308   
  2,500     

5.25%, 3/1/38

      2,759,425   
  5,945     

5.25%, 11/1/40

      6,655,368   
  5,750     

5.50%, 3/1/40

      6,674,140   
  9,500     

6.00%, 4/1/38

      11,302,150   
 

Statewide Communities Dev. Auth. Rev.,

     
  2,970     

California Baptist Univ., 5.75%, 11/1/17, Ser. B (a)(d)

      3,216,569   
  785     

California Baptist Univ., 6.50%, 11/1/21

      922,665   
  1,000     

Cottage Health, 5.00%, 11/1/40

      1,080,140   
  4,890     

Methodist Hospital Project, 6.625%, 8/1/29 (FHA)

      5,940,617   
  17,415     

Methodist Hospital Project, 6.75%, 2/1/38 (FHA)

      20,768,258   
  5,690     

Sutter Health, 6.00%, 8/15/42, Ser. A

      6,766,662   
  4,725     

Torrance Rev., Torrance Memorial Medical Center, 5.00%, 9/1/40, Ser. A

      5,062,082   
                  171,623,728   
  Colorado – 1.8%      
  5,800     

Aurora Rev., Children’s Hospital Assoc., 5.00%, 12/1/40

      6,216,324   
  1,000     

Denver Health & Hospital Auth. Rev., 5.625%, 12/1/40

      1,105,620   
 

Health Facs. Auth. Rev., Ser. A,

     
  1,000     

American Baptist Homes, 5.90%, 8/1/37

      1,009,790   
  2,500     

Catholic Health Initiatives, 5.00%, 2/1/41

      2,678,675   
  500     

Evangelical Lutheran, 6.125%, 6/1/38 (Pre-refunded @ $100 6/1/14) (c)

      528,945   
  6,045     

Sisters of Charity of Leavenworth Health System, 5.00%, 1/1/40

      6,506,899   
  1,430     

Public Auth. for Colorado Energy Rev., 6.50%, 11/15/38

      1,916,457   
                  19,962,710   
  Connecticut – 0.3%      
  1,250     

Harbor Point Infrastructure Improvement Dist., Tax Allocation,

7.875%, 4/1/39, Ser. A

      1,422,925   
  2,000     

State Health & Educational Fac. Auth. Rev., Hartford Healthcare,

5.00%, 7/1/41, Ser. A

      2,128,240   
                  3,551,165   
  District of Columbia – 0.9%      
  8,070     

Dist. of Columbia Rev., 5.00%, 12/1/23, Ser. A

        9,871,708   
  Florida – 4.8%      
  1,000     

Brevard Cnty. Health Facs. Auth. Rev., Health First, Inc. Project, 7.00%, 4/1/39

      1,213,960   
 

Broward Cnty. Airport System Rev.,

     
  12,100     

5.00%, 10/1/42, Ser. Q-1

      13,082,157   
  600     

5.375%, 10/1/29, Ser. O

      680,376   

 

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Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
  Florida (continued)      
$ 8,500     

Broward Cnty. Water & Sewer Utility Rev., 5.25%, 10/1/34, Ser. A (h)

    $ 9,666,880   
  1,000     

Clearwater Water & Sewer Rev., 5.25%, 12/1/39, Ser. A

      1,105,680   
  340     

Dev. Finance Corp. Rev., Renaissance Charter School, 6.50%, 6/15/21, Ser. A

      393,570   
  3,000     

Highlands Cnty. Health Facs. Auth. Rev., Adventist Health System,

5.625%, 11/15/37, Ser. B

      3,394,440   
  6,795     

Jacksonville Health Facs. Auth. Rev., Ascension Health, 5.25%, 11/15/32, Ser. A

      6,875,453   
  3,000     

Leesburg Hospital Rev., Leesburg Regional Medical Center Project, 5.50%, 7/1/32

      3,002,430   
  500     

Sarasota Cnty. Health Facs. Auth. Rev., 5.75%, 7/1/37

      495,470   
  7,900     

State Board of Education, GO, 5.00%, 6/1/38, Ser. D (h)

      8,930,476   
  5,000     

Sumter Landing Community Dev. Dist. Rev., 4.75%, 10/1/35, Ser. A (NPFGC)

      5,073,250   
                  53,914,142   
  Georgia – 0.4%      
  1,500     

Atlanta Airport Rev., 5.00%, 1/1/40, Ser. A

      1,646,730   
  2,775     

Medical Center Hospital Auth. Rev., Spring Harbor Green Island Project,

5.25%, 7/1/37

      2,759,876   
                  4,406,606   
  Illinois – 6.4%      
 

Chicago,

     
  2,500     

GO, 5.00%, 1/1/34, Ser. C

      2,631,350   
  2,758     

Special Assessment, Lake Shore East, 6.625%, 12/1/22

      2,824,661   
  5,856     

Special Assessment, Lake Shore East, 6.75%, 12/1/32

      5,995,314   
  1,250     

Chicago Motor Fuel Tax Rev., 5.00%, 1/1/38, Ser. A (AGC)

      1,295,900   
 

Finance Auth. Rev.,

     
  2,500     

Christian Homes, Inc., 5.75%, 5/15/31, Ser. A

      2,644,100   
  250     

Leafs Hockey Club Project, 6.00%, 3/1/37, Ser. A (b)(e)

      85,000   
  700     

OSF Healthcare System, 7.125%, 11/15/37, Ser. A

      837,592   
  2,000     

Provena Health, 6.00%, 5/1/28, Ser. A

      2,305,620   
  5,000     

Univ. of Chicago, 5.50%, 7/1/37, Ser. B (h)

      5,821,650   
  37,000     

Sports Facs. Auth. Rev., 5.50%, 6/15/30 (AMBAC)

      39,358,380   
 

Village of Hillside, Tax Allocation, Mannheim Redev. Project,

     
  3,880     

6.55%, 1/1/20

      4,026,199   
  2,900     

7.00%, 1/1/28

      2,889,328   
                  70,715,094   
  Indiana – 0.5%      
  1,500     

Finance Auth. Rev., Duke Energy Indiana, Inc., 6.00%, 8/1/39, Ser. B

      1,683,900   
 

Vigo Cnty. Hospital Auth. Rev., Union Hospital, Inc.,

     
  990     

5.80%, 9/1/47 (a)(d)

      1,030,946   
  1,900     

7.50%, 9/1/22

      2,450,772   
                  5,165,618   
  Iowa – 2.4%      
 

Finance Auth. Rev.,

     
  250     

Deerfield Retirement Community, Inc., 5.50%, 11/15/27, Ser. A

      161,845   
  1,075     

Deerfield Retirement Community, Inc., 5.50%, 11/15/37, Ser. A

      695,063   
  4,500     

Edgewater LLC Project, 6.75%, 11/15/42

      4,758,840   
  5,000     

Fertilizer Company Project, 5.25%, 12/1/25

      5,162,900   

 

Annual Report  |   May 31, 2013     9   


Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
  Iowa (continued)      
$ 5,000     

Fertilizer Company Project, 5.50%, 12/1/22

    $ 5,228,400   
  10,350     

Tobacco Settlement Auth. Rev., 5.60%, 6/1/34, Ser. B

      10,311,912   
                  26,318,960   
  Kansas – 0.1%      
  500     

Dev. Finance Auth. Rev., Adventist Health, 5.75%, 11/15/38

      567,475   
  850     

Manhattan Rev., Meadowlark Hills Retirement, 5.00%, 5/15/36, Ser. A

      852,389   
                  1,419,864   
  Kentucky – 0.1%      
  1,000     

Economic Dev. Finance Auth. Rev., Owensboro Medical Healthcare Systems,

6.375%, 6/1/40, Ser. A

        1,173,490   
  Louisiana – 1.5%      
 

Local Gov’t Environmental Facs. & Community Dev. Auth Rev.,

     
  450     

Westlake Chemical Corp., 6.50%, 11/1/35, Ser. A-2

      536,409   
  750     

Woman’s Hospital Foundation, 5.875%, 10/1/40, Ser. A

      877,868   
  1,000     

Woman’s Hospital Foundation, 6.00%, 10/1/44, Ser. A

      1,173,590   
 

Public Facs. Auth. Rev., Ochsner Clinic Foundation Project,

     
  3,300     

5.50%, 5/15/47, Ser. B

      3,504,864   
  2,000     

6.50%, 5/15/37

      2,426,860   
  7,750     

Tobacco Settlement Financing Corp. Rev.,

5.875%, 5/15/39, Ser. 2001-B

      7,785,882   
                  16,305,473   
  Maryland – 0.9%      
 

Health & Higher Educational Facs. Auth. Rev.,

     
  1,000     

Adventist Healthcare, 5.75%, 1/1/25, Ser. A

      1,011,790   
  1,400     

Charlestown Community, 6.25%, 1/1/41

      1,597,120   
  1,010     

King Farm Presbyterian Community, 5.30%, 1/1/37, Ser. A

      978,266   
  2,380     

Medstar Health, 5.00%, 8/15/41

      2,549,908   
  4,050     

Washington Cnty. Hospital, 6.00%, 1/1/43

      4,376,471   
                  10,513,555   
  Massachusetts – 0.9%      
 

Dev. Finance Agcy. Rev.,

     
  4,610     

Adventcare Project, 6.75%, 10/15/37, Ser. A

      4,894,437   
  580     

Adventcare Project, 7.625%, 10/15/37

      657,099   
  1,000     

Foxborough Regional Charter School, 7.00%, 7/1/42, Ser. A

      1,142,870   
  2,900     

State College Building Auth. Rev., 5.50%, 5/1/39, Ser. A

      3,345,556   
                  10,039,962   
  Michigan – 2.3%      
  1,000     

Detroit, GO, 5.25%, 11/1/35

      1,068,160   
  5,000     

Detroit Water and Sewerage Dept. Rev., 5.25%, 7/1/39, Ser. A

      5,326,450   
  5,000     

Detroit Water Supply System Rev., 5.25%, 7/1/41, Ser. A

      5,247,850   
  800     

Public Educational Facs. Auth. Rev., Bradford Academy, 6.50%, 9/1/37 (a)(d)

      438,304   
  3,000     

Royal Oak Hospital Finance Auth. Rev., William Beaumont Hospital, 8.25%, 9/1/39

      3,786,330   
  10,510     

Tobacco Settlement Finance Auth. Rev., 6.00%, 6/1/48, Ser. A

      9,746,974   
                  25,614,068   

 

10   May 31, 2013  |   Annual Report


Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
  Minnesota – 0.6%      
$ 1,500     

Minneapolis Rev., Providence Project, 5.75%, 10/1/37, Ser. A

    $ 1,513,455   
 

North Oaks Rev., Presbyterian Homes North Oaks,

     
  2,640     

6.00%, 10/1/33

      2,794,836   
  1,530     

6.125%, 10/1/39

      1,623,468   
  500     

Oronoco Rev., Wedum Shorewood Campus Project, 5.40%, 6/1/41

      501,635   
  400     

St. Louis Park Rev., Nicollett Health Services, 5.75%, 7/1/39

      441,700   
                  6,875,094   
  Mississippi – 0.0%      
  70     

Dev. Bank Special Obligation Rev., Capital Projects and Equipment Acquisition,

5.00%, 7/1/24, Ser. A-2 (AMBAC)

        70,234   
  Missouri – 0.1%      
  645     

Lee’s Summit, Tax Allocation, Summit Fair Project, 5.625%, 10/1/23

        686,170   
  Nevada – 0.9%      
  10,000     

Clark Cnty., GO, 4.75%, 11/1/35 (FGIC-NPFGC) (h)

        10,511,700   
  New Hampshire – 0.2%      
  2,000     

Business Finance Auth. Rev., Elliot Hospital, 6.125%, 10/1/39, Ser. A

        2,244,700   
  New Jersey – 6.0%      
  950     

Burlington Cnty. Bridge Commission Rev., The Evergreens Project, 5.625%, 1/1/38

      978,263   
 

Economic Dev. Auth., Special Assessment, Kapkowski Road Landfill Project,

     
  4,000     

5.75%, 10/1/21

      4,378,480   
  11,405     

5.75%, 4/1/31

      12,824,010   
 

Economic Dev. Auth. Rev.,

     
  525     

Arbor Glen, 6.00%, 5/15/28, Ser. A

      524,942   
  2,000     

MSU Student Housing Project, 5.875%, 6/1/42

      2,255,240   
 

Health Care Facs. Financing Auth. Rev.,

     
  1,500     

AHS Hospital Corp., 6.00%, 7/1/37

      1,799,025   
  1,500     

St. Peters Univ. Hospital, 5.75%, 7/1/37

      1,625,100   
  2,000     

State Turnpike Auth. Rev., 5.25%, 1/1/40, Ser. E

      2,196,980   
 

Tobacco Settlement Financing Corp. Rev., Ser. 1-A,

     
  3,300     

4.75%, 6/1/34

      2,915,352   
  23,705     

5.00%, 6/1/41

      20,975,843   
  15,000     

Transportation Trust Fund Auth. Rev., 5.00%, 6/15/42, Ser. B

      16,170,600   
                  66,643,835   
  New Mexico – 0.2%      
  2,000     

Farmington Pollution Control Rev., 5.90%, 6/1/40, Ser. D

        2,236,140   
  New York – 14.1%      
  34,500     

Hudson Yards Infrastructure Corp. Rev., 5.25%, 2/15/47, Ser. A

        38,074,890   
 

Liberty Dev. Corp. Rev.,

     
  1,000     

Bank of America Tower at One Bryant Park Project, 5.125%, 1/15/44

      1,086,520   
  2,500     

Bank of America Tower at One Bryant Park Project, 5.625%, 7/15/47

      2,815,725   
  1,250     

Bank of America Tower at One Bryant Park Project, 6.375%, 7/15/49

      1,462,825   
  10,000     

Goldman Sachs Headquarters, 5.25%, 10/1/35 (h)

      11,590,400   
  1,505     

Goldman Sachs Headquarters, 5.25%, 10/1/35

      1,744,355   
  3,880     

Metropolitan Transportation Auth. Rev., 5.00%, 11/15/36, Ser. D

      4,257,641   

 

Annual Report  |   May 31, 2013     11   


Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
  New York (continued)      
$ 1,100     

Nassau Cnty. Industrial Dev. Agcy. Rev., Amsterdam at Harborside,

6.70%, 1/1/43, Ser. A

    $ 623,854   
 

New York City Water & Sewer System Rev.,

     
  2,830     

5.00%, 6/15/37, Ser. D (h)

      3,031,807   
  4,000     

Second Generation Resolutions, 4.75%, 6/15/35, Ser. DD (h)

      4,326,840   
  2,000     

Second Generation Resolutions, 5.00%, 6/15/39, Ser. GG-1

      2,205,140   
 

New York Liberty Dev. Corp. Rev.,

     
  10,000     

1 World Trade Center Project, 5.00%, 12/15/41

      11,020,100   
  54,000     

4 World Trade Center Project, 5.75%, 11/15/51

      62,218,260   
  1,750     

State Dormitory Auth. Rev., The New School, 5.50%, 7/1/40

      1,968,715   
  10,005     

State Thruway Auth. Rev., 5.00%, 1/1/42, Ser. I

      10,891,343   
                  157,318,415   
  North Carolina – 0.1%      
 

Medical Care Commission Rev.,

     
  550     

Salemtowne, 5.10%, 10/1/30

      561,743   
  1,000     

Village at Brookwood, 5.25%, 1/1/32

      1,025,790   
                  1,587,533   
  North Dakota – 0.4%      
  3,710     

Stark Cnty. Healthcare Rev., Benedictine Living Communities,

6.75%, 1/1/33

        4,018,709   
  Ohio – 3.6%      
  24,140     

Buckeye Tobacco Settlement Financing Auth. Rev.,

6.50%, 6/1/47, Ser. A-2

      23,464,321   
  4,000     

Hamilton Cnty. Healthcare Rev., Christ Hospital Project, 5.00%, 6/1/42

      4,231,360   
  3,900     

Hamilton Cnty. Sales Tax Rev., 5.00%, 12/1/30, Ser. A

      4,290,312   
  1,000     

Higher Educational Fac. Commission Rev., Univ. Hospital Health Systems,

6.75%, 1/15/39, Ser. 2009-A (Pre-refunded @ $100, 1/15/15) (c)

      1,103,070   
  2,000     

JobsOhio Beverage System Rev., 5.00%, 1/1/38, Ser. A

      2,194,400   
  1,000     

Montgomery Cnty. Rev., Miami Valley Hospital, 6.25%, 11/15/39, Ser. A

(Pre-refunded @ $100, 11/15/14) (c)

      1,086,300   
  3,000     

State Rev., Cleveland Clinic Health System, 5.50%, 1/1/39, Ser. B

      3,347,910   
                  39,717,673   
  Oregon – 0.2%      
  1,000     

Clackamas Cnty. Hospital Fac. Auth. Rev., Legacy Health System,

5.50%, 7/15/35, Ser. A

      1,089,050   
  1,155     

State Department of Administrative Services, CP, 5.25%, 5/1/39, Ser. A

      1,254,261   
                  2,343,311   
  Pennsylvania – 4.7%      
  10,000     

Berks Cnty. Municipal Auth. Rev., Reading Hospital Medical Center,

5.00%, 11/1/44, Ser. A

      10,719,400   
 

Cumberland Cnty. Municipal Auth. Rev., Messiah Village Project, Ser. A,

     
  750     

5.625%, 7/1/28

      790,988   
  670     

6.00%, 7/1/35

      710,113   
  3,250     

Harrisburg Auth. Rev., Harrisburg Univ. of Science, 6.00%, 9/1/36, Ser. B (e)

      2,375,197   
 

Higher Educational Facs. Auth. Rev.,

     
  850     

Edinboro Univ. Foundation, 6.00%, 7/1/43

      951,566   

 

12   May 31, 2013  |   Annual Report


Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
  Pennsylvania (continued)      
$ 400     

Thomas Jefferson Univ., 5.00%, 3/1/40

    $ 430,988   
  500     

Luzerne Cnty. Industrial Dev. Auth. Rev., Pennsylvania American Water Co.,

5.50%, 12/1/39

      543,380   
  8,500     

Montgomery Cnty. Industrial Dev. Auth. Rev., New Regional Medical Center,

5.375%, 8/1/38 (FHA)

      9,575,165   
  17,000     

Philadelphia, GO, 5.25%, 12/15/32, Ser. A (AGM)

      18,403,350   
  6,000     

Philadelphia Hospitals & Higher Education Facs. Auth. Rev., Temple Univ. Health

System, 5.625%, 7/1/42, Ser. A

      6,401,280   
  500     

Philadelphia Water & Wastewater Rev., 5.25%, 1/1/36, Ser. A

      548,445   
  1,000     

Westmoreland Cnty. Industrial Dev. Auth. Rev., Excela Health Project,

5.125%, 7/1/30

      1,096,410   
                  52,546,282   
  Rhode Island – 5.2%      
  56,200     

Tobacco Settlement Financing Corp. Rev., 6.25%, 6/1/42, Ser. 2002-A

        57,330,744   
  South Carolina – 0.1%      
  1,000     

Greenwood Cnty. Rev., Self Regional Healthcare, 5.375%, 10/1/39

        1,078,400   
  Tennessee – 1.2%      
  1,750     

Claiborne Cnty. Industrial Dev. Board Rev., Lincoln Memorial Univ. Project,

6.625%, 10/1/39

      1,971,988   
  1,000     

Johnson City Health & Educational Facs. Board Rev., Mountain States Health

Alliance, 6.00%, 7/1/38, Ser. A

      1,162,880   
  500     

Sullivan Cnty. Health Educational & Housing Facs. Board Rev., Wellmont Health

Systems Project, 5.25%, 9/1/36, Ser. C

      529,535   
 

Tennessee Energy Acquisition Corp. Rev., Ser. C,

     
  3,000     

5.00%, 2/1/23

      3,415,980   
  6,000     

5.00%, 2/1/27

      6,727,200   
                  13,807,583   
  Texas – 12.1%      
  130     

Aubrey Independent School Dist., GO, 5.50%, 2/15/33 (GTD-PSF)

      134,167   
  6,500     

Brazos Cnty. Health Facs. Dev. Corp. Rev., 5.375%, 1/1/32

      6,531,785   
  2,500     

Dallas Rev., Dallas Civic Center, 5.25%, 8/15/38 (AGC)

      2,734,325   
  4,000     

Dallas/Fort Worth International Airport Rev., 5.00%, 11/1/33, Ser. G

      4,377,400   
 

Harris Cnty. Cultural Education Facs. Finance Corp. Rev.,

     
  2,000     

Baylor College of Medicine, 5.00%, 11/15/37

      2,152,720   
  3,750     

Texas Children’s Hospital Project, 5.25%, 10/1/29

      4,297,537   
  12,700     

Texas Children’s Hospital Project, 5.50%, 10/1/39

      14,228,064   
  700     

HFDC of Central Texas, Inc. Rev., Village at Gleannloch Farms,

5.50%, 2/15/37, Ser. A

      692,622   
  5,000     

Municipal Gas Acquisition & Supply Corp. III Rev., 5.00%, 12/15/26

      5,438,300   
 

North Harris Cnty. Regional Water Auth. Rev.,

     
  10,300     

5.25%, 12/15/33

      11,394,890   
  10,300     

5.50%, 12/15/38

      11,447,317   
 

North Texas Tollway Auth. Rev.,

     
  5,750     

5.00%, 1/1/38

      6,188,437   
  1,300     

5.50%, 9/1/41, Ser. A

      1,499,706   
  5,000     

5.625%, 1/1/33, Ser. B

      5,602,150   

 

Annual Report  |   May 31, 2013     13   


Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
  Texas (continued)      
$ 1,200     

5.75%, 1/1/33, Ser. F

    $ 1,339,980   
  1,920     

Private Activity Bond Surface Transportation Corp. Rev.,

7.00%, 6/30/40

      2,328,192   
  250     

San Juan Higher Education Finance Auth. Rev., 6.70%, 8/15/40, Ser. A

      294,745   
 

State, Mobility Fund, GO (h),

     
  10,025     

4.75%, 4/1/35, Ser. A

      10,552,616   
  17,500     

4.75%, 4/1/36

      18,863,775   
  1,000     

State Public Finance Auth. Charter School Finance Corp. Rev.,

5.875%, 12/1/36, Ser. A

      1,080,610   
  3,000     

Tarrant Cnty. Cultural Education Facs. Finance Corp. Rev., Baylor Health Care

Systems Project, 6.25%, 11/15/29

      3,502,740   
  15,300     

Texas Municipal Gas Acquisition & Supply Corp. I Rev.,

6.25%, 12/15/26, Ser. D

      19,273,257   
  1,000     

Wise Cnty. Rev., Parker Cnty. Junior College Dist., 8.00%, 8/15/34

      1,194,370   
                  135,149,705   
  Virginia – 0.2%      
  1,000     

Fairfax Cnty. Industrial Dev. Auth. Rev., Inova Health Systems,

5.50%, 5/15/35, Ser. A

      1,139,260   
       

James City Cnty. Economic Dev. Auth. Rev., United Methodist Home, Ser. A,

         
  412     

2.00%, 10/1/48

      10,900   
  1,273     

6.00%, 6/1/43

      1,183,555   
                  2,333,715   
  Washington – 1.5%      
 

Health Care Facs. Auth. Rev.,

     
  1,300     

Multicare Health Systems, 6.00%, 8/15/39, Ser. B (AGC)

      1,477,957   
  1,000     

Seattle Cancer Care Alliance, 7.375%, 3/1/38

      1,251,170   
  13,000     

Virginia Mason Medical Center, 6.125%, 8/15/37, Ser. A

      14,203,020   
                  16,932,147   
  West Virginia – 0.2%      
  2,000     

Hospital Finance Auth. Rev., Highland Hospital, 9.125%, 10/1/41

        2,549,560   
  Wisconsin – 0.1%      
  1,000     

Health & Educational Facs. Auth. Rev., Prohealth Care, Inc.,

6.625%, 2/15/39

      1,148,880   
       

Total Municipal Bonds & Notes (cost-$996,831,488)

        1,097,868,202   
       
  Variable Rate Notes – 1.5%            
  California – 0.5%      
  5,000     

Health Facs. Financing Auth. Rev., 8.04%, 11/15/36, Ser. 3193 (a)(d)(f)(g)

        5,927,700   
  Florida – 0.2%      
  1,830     

Highlands Cnty. Health Facs. Auth. Rev., Adventist Health System,

5.00%, 11/15/31, Ser. C (g)

        1,893,300   
  Texas – 0.6%      
  5,365     

State, GO, 7.603%, 4/1/37, Ser. 3197 (a)(d)(f)(g)

        6,364,338   

 

14   May 31, 2013  |   Annual Report


Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
  West Virginia – 0.2%      
$ 2,000     

Economic Dev. Auth. Rev., Appalachian Power,

5.375%, 12/1/38, Ser. A (g)

    $ 2,232,600   
       

Total Variable Rate Notes (cost-$13,982,612)

        16,417,938   
       
  Short-Term Investments – 0.0%            
  U.S. Treasury Obligations – 0.0%      
  100     

U.S. Treasury Bills, 0.084%, 2/6/14 (i)

      99,943   
  100     

U.S. Treasury Notes, 1.25%, 4/15/14

      100,961   
       

Total U.S. Treasury Obligations (cost-$200,916)

        200,904   
        Total Investments (cost-$1,011,015,016) – 100.0%         $1,114,487,044   

Industry classification of portfolio holdings as a percentage of total investments at May 31, 2013 was as follows:

 

Revenue Bonds:

   

Health, Hospital & Nursing Home Revenue

    25.3  

Tobacco Settlement Funded

    14.6     

Industrial Revenue

    7.2     

Miscellaneous Taxes

    6.9     

Natural Gas Revenue

    5.3     

Miscellaneous Revenue

    4.6     

Water Revenue

    4.4     

Port, Airport & Marina Revenue

    3.0     

Highway Revenue Tolls

    2.9     

Lease (Appropriation)

    2.8     

College & University Revenue

    2.7     

Electric Power & Light Revenue

    2.3     

Income Tax Revenue

    0.9     

Sewer Revenue

    0.5     

Sales Tax Revenue

    0.4     

Transit Revenue

    0.4     

Resource Recovery Revenue

    0.2     

Fuel Sales Tax Revenue

    0.1     

Local or Guaranteed Housing

    0.1     

Lease Revenue

    0.1     

Recreational Revenue

    0.0     
 

 

 

   

Total Revenue Bonds

      84.7

General Obligation

      11.8   

Special Assessment

      2.3   

Tax Allocation

      0.9   

Certificates of Participation

      0.3   

U.S. Treasury Notes

      0.0   

U.S. Treasury Bills

      0.0   
   

 

 

 

Total Investments

      100.0
   

 

 

 

 

Annual Report  |   May 31, 2013     15   


Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

Notes to Schedule of Investments:

 

(a)   Private Placement – Restricted as to resale and may not have a readily available market. Securities with an aggregate value of $16,977,857, representing 1.5% of total investments.  

 

(b)   Illiquid.  

 

(c)   Pre-refunded bonds are collateralized by U.S. Government or other eligible securities which are held in escrow and used to pay principal and interest and retire the bonds at the earliest refunding date (payment date).  

 

(d)   144A – Exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, typically only to qualified institutional buyers. Unless otherwise indicated, these securities are not considered to be illiquid.  

 

(e)   In default.  

 

(f)   Inverse Floater – The interest rate shown bears an inverse relationship to the interest rate on another security or the value of an index. The interest rate disclosed reflects the rate in effect on May 31, 2013.  

 

(g)   Variable Rate Notes – Instruments whose interest rates change on specified date (such as a coupon date or interest payment date) and/or whose interest rates vary with changes in a designated base rate (such as the prime interest rate). The interest rate disclosed reflects the rate in effect on May 31, 2013.  

 

(h)   Residual Interest Bonds held in Trust – Securities represent underlying bonds transferred to a separate securitization trust established in a tender option bond transaction in which the Fund acquired the residual interest certificates. These securities serve as collateral in a financing transaction.  

 

(i)   Rates reflect the effective yields at purchase date.  

 

(j)   Floating Rate Notes for the year ended May 31, 2013: The weighted average daily balance of Floating Rate Notes outstanding during the year ended May 31, 2013 was $49,317,277 at a weighted average interest rate, including fees, of 0.79%.  

 

(k)   Interest rate swap agreements outstanding at May 31, 2013:  

 

OTC   swap agreements:  

 

   

Notional
Amount
(000s)

    Termination
Date
   

Rate Type

   

Value

   

Upfront
Premiums
Received

   

Unrealized
Appreciation

 
Swap
Counterparty
      Payments
Made
  Payments
Received
       

Bank of America

  $ 89,000        9/5/18      3-Month USD-LIBOR     1.60   $ 218,940      $ (69,190   $ 288,130   

Citigroup

    47,000        11/20/22      3-Month USD-LIBOR     2.65     11,750        (34,420     46,170   
         

 

 

   

 

 

   

 

 

 
          $ 230,690      $ (103,610   $ 334,300   
         

 

 

   

 

 

   

 

 

 

 

(l)   Fair Value Measurements – See Note 1(b) in the Notes to Financial Statements.  

 

     Level 1
Quoted Prices
    Level 2
Other Significant
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Value at
5/31/13
 
Investments in Securities – Assets        

Municipal Bonds & Notes

  $      $ 1,097,868,202      $      $ 1,097,868,202   

Variable Rate Notes

           16,417,938               16,417,938   

Short-Term Investments

           200,904               200,904   
             1,114,487,044               1,114,487,044   
Other Financial Instruments* – Assets        

Interest Rate Contracts

           334,300               334,300   
Totals   $      $ 1,114,821,344      $      $ 1,114,821,344   

 

16   May 31, 2013  |   Annual Report


Table of Contents

Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2013 (continued)

 

At May 31, 2013, there were no transfers between Levels 1 and 2.

 

*   Other financial instruments are derivatives, such as swap agreements, which are valued at the unrealized appreciation (depreciation) of the instrument.  

 

(m)   The following is a summary of the derivative instruments categorized by risk exposure:  

The effect of derivatives on the Statement of Assets and Liabilities at May 31, 2013:

 

Location   Interest
Rate
Contracts
 
Asset derivatives:  

Unrealized appreciation of OTC swaps

  $ 334,300   
 

 

 

 

The effect of derivatives on the Statement of Operations for the year ended May 31, 2013:

 

Location   Interest
Rate
Contracts
 
Net realized loss on:  

Futures contracts

  $ (372,078

Swaps

    (334,300
 

 

 

 
Total net realized loss   $ (706,378
 

 

 

 
Net change in unrealized appreciation/depreciation of:  

Futures contracts

  $ 203,238   

Swaps

    334,300   
 

 

 

 
Total net change in unrealized appreciation/depreciation   $ 537,538   
 

 

 

 

The average volume (measured at each fiscal quarter-end) of derivative activity during the year ended May 31, 2013:

 

    

Futures

Contracts
Short(1)

  Interest
Rate Swap
Agreements(2)
 
    (20)   $ 27,200   

 

(1)    Number of contracts  
(2)   Notional Amount (in thousands)  

Glossary:

 

AGC     -      insured by Assured Guaranty Corp.
AGM     -      insured by Assured Guaranty Municipal Corp.
AMBAC     -      insured by American Municipal Bond Assurance Corp.
CP     -      Certificates of Participation
FGIC     -      insured by Financial Guaranty Insurance Co.
FHA     -      insured by Federal Housing Administration
GO     -      General Obligation Bond
GTD     -      Guaranteed
IBC     -      Insurance Bond Certificate
LIBOR     -      London Inter-Bank Offered Rate
NPFGC     -      insured by National Public Finance Guarantee Corp.
OTC     -      Over-the-Counter
PSF     -      Public School Fund

 

See accompanying Notes to Financial Statements  |     May 31, 2013  |     Annual Report     17   


Table of Contents

Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2013

 

Principal
Amount
(000s)
              Value  
  California Municipal Bonds & Notes – 86.5%            
$ 2,000     

Alhambra Rev., Atherton Baptist Homes, 7.625%, 1/1/40, Ser. A

    $ 2,210,780   
  20,000     

Bay Area Toll Auth. Rev., San Francisco Bay Area, 5.00%, 4/1/39 (g)

      21,999,600   
 

Chabot-Las Positas Community College Dist., GO, Ser. C,

     
  17,305     

zero coupon, 8/1/36 (AMBAC)

      5,453,498   
  5,000     

zero coupon, 8/1/37 (AMBAC)

      1,493,850   
  15,000     

zero coupon, 8/1/43 (AMBAC)

      3,298,950   
  1,000     

Chula Vista Rev., San Diego Gas & Electric, 5.875%, 2/15/34, Ser. B

      1,180,540   
  300     

City & Cnty. of San Francisco, Capital Improvement Projects, CP,

5.25%, 4/1/31, Ser. A

      324,465   
  9,145     

Coronado Community Dev. Agcy., Tax Allocation, 4.875%, 9/1/35 (AMBAC)

      9,413,040   
  25,000     

Desert Community College Dist., GO, zero coupon, 8/1/46, Ser. C (AGM)

      4,341,500   
  8,300     

El Dorado Irrigation Dist. & El Dorado Water Agcy., CP, 5.75%, 8/1/39, Ser. A (AGC)

      8,692,590   
  1,500     

Foothill-Eastern Transportation Corridor Agcy. Rev., 5.875%, 1/15/27 (IBC-NPFGC)

      1,535,145   
  1,440     

Fremont Community Facs. Dist. No. 1, Special Tax, Pacific Commons,

5.30%, 9/1/30

      1,458,965   
 

Golden State Tobacco Securitization Corp. Rev.,

     
  13,885     

5.00%, 6/1/45 (AMBAC-TCRS)

      14,433,596   
  3,500     

5.00%, 6/1/45, Ser. A

      3,638,285   
  6,000     

5.00%, 6/1/45, Ser. A (FGIC-TCRS)

      6,237,060   
  8,500     

5.125%, 6/1/47, Ser. A-1

      7,448,635   
  30,415     

5.75%, 6/1/47, Ser. A-1

      28,565,768   
 

Health Facs. Financing Auth. Rev.,

     
  250     

Adventist Health System, 5.75%, 9/1/39, Ser. A

      287,460   
  3,000     

Catholic Healthcare West, 6.00%, 7/1/39, Ser. A

      3,512,490   
  1,000     

Children’s Hospital of Los Angeles, 5.00%, 11/15/34, Ser. A

      1,070,680   
  500     

Children’s Hospital of Orange Cnty., 6.50%, 11/1/38, Ser. A

      596,780   
  9,000     

Scripps Health, 5.00%, 11/15/40, Ser. A

      9,821,250   
  3,700     

Stanford Hospital, 5.25%, 11/15/40, Ser. A-2

      4,135,342   
  1,000     

Sutter Health, 5.00%, 8/15/35, Ser. D

      1,085,230   
  4,220     

Sutter Health, 5.00%, 11/15/42, Ser. A (IBC-NPFGC)

      4,443,238   
  6,000     

Sutter Health, 5.00%, 8/15/52, Ser. A

      6,368,820   
  12,195     

Sutter Health, 5.25%, 11/15/46, Ser. A (g)

      12,987,553   
  4,500     

Imperial Irrigation Dist. Rev., 5.00%, 11/1/41, Ser. B

      4,791,735   
  175     

Infrastructure & Economic Dev. Bank Rev., 5.25%, 2/1/38

      189,450   
  515     

Irvine Unified School Dist., Special Tax, 6.70%, 9/1/35

      573,195   
  1,000     

Lancaster Redev. Agcy., Tax Allocation, 6.875%, 8/1/39

      1,120,680   
  500     

Long Beach Airport Rev., 5.00%, 6/1/40, Ser. A

      531,160   
  7,500     

Long Beach Bond Finance Auth. Rev., Long Beach Natural Gas,

5.50%, 11/15/37, Ser. A

      8,815,125   
  10,000     

Long Beach Unified School Dist., GO, 5.25%, 8/1/33, Ser. A (g)

      11,578,200   
  2,000     

Los Angeles Department of Airports Rev., 5.00%, 5/15/40, Ser. D

      2,195,120   
 

Los Angeles Department of Water & Power Rev.,

     
  15,000     

4.75%, 7/1/30, Ser. A-2 (AGM) (g)

      15,789,150   
  8,000     

5.00%, 7/1/36, Ser. B

      8,945,440   
  500     

5.00%, 7/1/43, Ser. B

      551,720   

 

18   May 31, 2013  |   Annual Report


Table of Contents

Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
$ 11,000     

Los Angeles Unified School Dist., GO, 5.00%, 1/1/34, Ser. I

    $ 12,427,690   
  3,200     

M-S-R Energy Auth. Rev., 6.50%, 11/1/39, Ser. B

      4,224,928   
  10,000     

Manteca Redev. Agcy., Tax Allocation, 5.00%, 10/1/36 (AMBAC)

      9,850,400   
  4,000     

Merced Cnty., Juvenile Justice Correctional Fac., CP, 5.00%, 6/1/32 (AMBAC)

      4,004,840   
  5,000     

Metropolitan Water Dist. of Southern California Rev., 5.00%, 7/1/37, Ser. A (g)

      5,456,700   
  1,175     

Municipal Finance Auth. Rev., Azusa Pacific Univ. Project, 7.75%, 4/1/31, Ser. B

      1,381,953   
  5,000     

Oakland Unified School Dist., Alameda Cnty., GO, 6.125%, 8/1/29, Ser. A

      5,477,250   
  4,750     

Palomar Pomerado Health, CP, 6.75%, 11/1/39

      5,321,947   
  10,000     

Placentia-Yorba Linda Unified School Dist., CP, 5.00%, 10/1/32 (FGIC-NPFGC)

      10,360,700   
  1,500     

Pollution Control Financing Auth. Rev., American Water Capital Corp. Project,

5.25%, 8/1/40 (a)(d)

      1,615,590   
 

Poway Unified School Dist., GO,

     
  11,000     

zero coupon, 8/1/40

      2,954,490   
  16,000     

zero coupon, 8/1/46

      3,152,320   
  1,950     

Riverside, CP, 5.00%, 9/1/33 (AMBAC) (Pre-refunded @ $100, 9/1/13) (c)

      1,972,386   
  2,000     

Roseville Redev. Agcy., Tax Allocation, 5.00%, 9/1/32, Ser. B (NPFGC)

      2,008,480   
  1,375     

Ross Valley School Dist., GO, 5.00%, 8/1/42, Ser. B

      1,535,311   
  1,000     

San Diego Public Facs. Financing Auth. Sewer Rev., 5.25%, 5/15/39, Ser. A

      1,140,340   
  4,000     

San Diego Public Facs. Financing Auth. Water Rev., 5.25%, 8/1/38, Ser. A

      4,508,200   
  2,800     

San Diego Regional Building Auth. Rev., Cnty. Operations Center & Annex,

5.375%, 2/1/36, Ser. A

      3,187,156   
  2,800     

San Diego Unified School Dist., GO, 4.75%, 7/1/27, Ser. D-2 (AGM)

      2,936,136   
  1,000     

San Jose Hotel Tax Rev., Convention Center Expansion, 6.50%, 5/1/36

      1,187,350   
  1,300     

San Marcos Unified School Dist., GO, 5.00%, 8/1/38, Ser. A

      1,414,166   
  1,260     

Santa Cruz Cnty., CP, 5.25%, 8/1/32

      1,276,267   
  1,500     

Santa Cruz Cnty. Redev. Agcy., Tax Allocation, Live Oak/Soquel Community,

7.00%, 9/1/36, Ser. A

      1,771,575   
 

State, GO,

     
  2,500     

5.00%, 9/1/31

      2,732,350   
  10,000     

6.00%, 4/1/38

      11,897,000   
 

State Public Works Board Rev.,

     
  3,000     

5.75%, 10/1/30, Ser. G-1

      3,464,280   
  2,000     

California State Univ., 6.00%, 11/1/34, Ser. J

      2,360,000   
  2,000     

Judicial Council Projects, 5.00%, 12/1/29, Ser. D

      2,192,500   
  2,500     

Judicial Council Projects, 5.00%, 3/1/38, Ser. A (b)

      2,689,425   
  7,915     

Regents Univ., 5.00%, 3/1/33, Ser. A

      8,715,681   
 

Statewide Communities Dev. Auth. Rev.,

     
  1,165     

Bentley School, zero coupon, 7/1/50 (b)

      52,076   
  3,760     

Bentley School, 7.00%, 7/1/40, Ser. A

      4,304,598   
  1,520     

Catholic Healthcare West, 5.50%, 7/1/31, Ser. D

      1,681,196   
  1,520     

Catholic Healthcare West, 5.50%, 7/1/31, Ser. E

      1,681,196   
  250     

Huntington Park Charter School Project, 5.15%, 7/1/30, Ser. A

      237,725   
  1,250     

Huntington Park Charter School Project, 5.25%, 7/1/42, Ser. A

      1,155,537   
  500     

International School of the Peninsula Project, 5.00%, 11/1/29

      491,195   
  1,000     

Lancer Student Housing Project, 7.50%, 6/1/42

      1,138,530   
  9,700     

Los Angeles Jewish Home, 5.50%, 11/15/33 (CA Mtg. Ins.)

      9,847,537   

 

Annual Report  |   May 31, 2013     19   


Table of Contents

Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
$ 2,135     

Methodist Hospital Project, 6.625%, 8/1/29 (FHA)

    $ 2,593,705   
  7,860     

Methodist Hospital Project, 6.75%, 2/1/38 (FHA)

      9,373,443   
  3,700     

St. Joseph Health System, 5.75%, 7/1/47, Ser. A (FGIC)

      4,127,424   
  5,600     

Sutter Health, 6.00%, 8/15/42, Ser. A

      6,659,632   
  4,500     

Univ. of California Irvine E. Campus, 5.375%, 5/15/38

      4,920,660   
  1,800     

Tobacco Securitization Agcy. Rev., Stanislaus Cnty., 5.875%, 6/1/43, Ser. A

      1,802,196   
  3,100     

Torrance Rev., Torrance Memorial Medical Center, 5.00%, 9/1/40, Ser. A

      3,321,154   
  1,000     

Tustin Unified School Dist., Special Tax, 6.00%, 9/1/40, Ser. 2006-1

      1,048,880   
  15,000     

Univ. of California Rev., 5.00%, 5/15/42, Ser. G

      16,569,300   
       

Total California Municipal Bonds & Notes (cost-$363,905,040)

        415,339,480   
       
  California Variable Rate Notes (a)(d)(e)(f) – 5.9%            
  6,035     

Desert Community College Dist., GO, 7.99%, 8/1/32, Ser. 3016-1 (AGC)

      7,386,237   
  7,500     

JPMorgan Chase Putters/Drivers Trust Rev., 8.015%, 5/15/40, Ser. 3838

      8,943,750   
  4,000     

Los Angeles Community College Dist., GO, 11.746%, 8/1/33, Ser. 3096

      5,385,920   
  5,000     

San Diego Community College Dist., GO, 8.463%, 2/1/17

      6,462,150   
       

Total California Variable Rate Notes (cost-$22,311,952)

        28,178,057   
       
  Other Municipal Bonds & Notes – 5.2%            
  Arizona – 1.5%      
  6,400     

Salt Verde Financial Corp. Rev., 5.00%, 12/1/37

        7,022,912   
  New Jersey – 0.7%      
 

Tobacco Settlement Financing Corp. Rev., Ser. 1-A,

     
  1,300     

4.75%, 6/1/34

      1,148,472   
  2,700     

5.00%, 6/1/41

      2,389,149   
                  3,537,621   
  New York – 0.7%      
  1,250     

Liberty Dev. Corp. Rev., Goldman Sachs Headquarters, 5.25%, 10/1/35

      1,448,800   
  1,900     

TSASC, Inc. Rev., 5.00%, 6/1/34, Ser. 1

      1,685,243   
                  3,134,043   
  Rhode Island – 2.3%      
  11,000     

Tobacco Settlement Financing Corp. Rev., 6.25%, 6/1/42, Ser. 2002-A

      11,221,320   
       

Total Other Municipal Bonds & Notes (cost-$20,883,563)

        24,915,896   
                     
  Short-Term Investments – 2.4%            
  U.S. Treasury Obligations – 2.4%      
  4,300     

U.S. Treasury Bills, 0.084%, 2/6/14 (h)

      4,297,536   
 

U.S. Treasury Notes,

     
  5,500     

0.25%, 4/30/14

      5,505,803   
  538     

1.25%, 2/15/14

      542,329   
  262     

1.25%, 3/15/14

      264,313   
  800     

1.875%, 4/30/14

      812,625   
       

Total U.S. Treasury Obligations (cost-$11,422,438)

        11,422,606   
        Total Investments (cost-$418,522,993) – 100.0%       $ 479,856,039   

 

20   May 31, 2013  |   Annual Report


Table of Contents

Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2013 (continued)

 

Industry classification of portfolio holdings as a percentage of total investments at May 31, 2013 was as follows:

 

Revenue Bonds:

   

Health, Hospital & Nursing Home Revenue

    17.9  

Tobacco Settlement Funded

    16.4     

College & University Revenue

    5.8     

Highway Revenue Tolls

    4.9     

Natural Gas Revenue

    4.4     

Water Revenue

    4.4     

Electric Power & Light Revenue

    4.3     

Lease (Abatement)

    2.9     

Port, Airport & Marina Revenue

    2.4     

Local or Guaranteed Housing

    1.0     

Private Schools

    1.0     

Miscellaneous Revenue

    0.3     

Lease Revenue

    0.3     

Hotel Occupancy Tax

    0.3     

Sewer Revenue

    0.2     

Recreational Revenue

    0.0     
 

 

 

   

Total Revenue Bonds

      66.5

General Obligation

      18.7   

Certificates of Participation

      6.7   

Tax Allocation

      5.0   

U.S. Treasury Notes

      1.5   

U.S. Treasury Bills

      0.9   

Special Tax

      0.7   
   

 

 

 

Total Investments

      100.0
   

 

 

 

Notes to Schedule of Investments:

 

(a)   Private Placement – Restricted as to resale and may not have a readily available market. Securities with an aggregate value of $29,793,647, representing 6.2% of total investments.  

 

(b)   Illiquid.  

 

(c)   Pre-refunded bonds are collateralized by U.S. Government or other eligible securities which are held in escrow and used to pay principal and interest and retire the bonds at the earliest refunding date (payment date).  

 

(d)   144A – Exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, typically only to qualified institutional buyers. Unless otherwise indicated, these securities are not considered to be illiquid.  

 

(e)   Inverse Floater – The interest rate shown bears an inverse relationship to the interest rate on another security or the value of an index. The interest rate disclosed reflects the rate in effect on May 31, 2013.  

 

(f)   Variable Rate Notes – Instruments whose interest rates change on specified date (such as a coupon date or interest payment date) and/or whose interest rates vary with changes in a designated base rate (such as the prime interest rate). The interest rate disclosed reflects the rate in effect on May 31, 2013.  

 

(g)   Residual Interest Bonds held in Trust – Securities represent underlying bonds transferred to a separate securitization trust established in a tender option bond transaction in which the Fund acquired the residual interest certificates. These securities serve as collateral in a financing transaction.  

 

(h)   Rates reflect the effective yields at purchase date.  

 

(i)   Floating Rate Notes for the year ended May 31, 2013: The weighted average daily balance of Floating Rate Notes outstanding during the year ended May 31, 2013 was $41,133,596 at a weighted average interest rate, including fees, of 0.77%.  

 

Annual Report  |   May 31, 2013     21   


Table of Contents

Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2013 (continued)

 

 

(j)   Interest rate swap agreements outstanding at May 31, 2013:  

 

OTC   swap agreements:  

 

   

Notional
Amount
(000s)

   

Termination
Date

   

Rate Type

   

Value

   

Upfront
Premiums
Received

   

Unrealized
Appreciation

 
Swap Counterparty       Payments
Made
  Payments
Received
       

Bank of America

  $ 38,000        9/5/18      3-Month USD-LIBOR     1.60   $ 93,451      $ (11,485   $ 104,936   

Citigroup

    15,000        11/20/22      3-Month USD-LIBOR     2.65     3,740        (10,985     14,725   
         

 

 

   

 

 

   

 

 

 
          $ 97,191      $ (22,470   $ 119,661   
         

 

 

   

 

 

   

 

 

 

 

(k)   Fair Value Measurements – See Note 1(b) in the Notes to Financial Statements.  

 

     Level 1
Quoted Prices
    Level 2
Other Significant
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Value at
5/31/13
 
Investments in Securities – Assets        

California Municipal Bonds & Notes

  $      $ 415,339,480      $      $ 415,339,480   

California Variable Rate Notes

           28,178,057               28,178,057   

Other Municipal Bonds & Notes

           24,915,896               24,915,896   

Short-Term Investments

           11,422,606               11,422,606   
             479,856,039               479,856,039   
Other Financial Instruments* – Assets        

Interest Rate Contracts

           119,661               119,661   
Totals   $      $ 479,975,700      $      $ 479,975,700   

At May 31, 2013, there were no transfers between Levels 1 and 2.

A roll forward of fair value measurements using significant unobservable inputs (Level 3) for the year ended May 31, 2013, was as follows:

 

     Beginning
Balance
5/31/12
  Purchases   Sales   Accrued
Discount
(Premiums)
    Net
Realized
Gain (Loss)
    Net Change
in Unrealized
Appreciation/
Depreciation
    Transfers
into
Level 3
    Transfers
out of
Level 3
    Ending
Balance
5/31/13
 

Investments in Securities – Assets

             

California Municipal Bonds & Notes

  $941,850   $—   $(532,612)   $      $ (832,388   $ 423,150      $      $      $   
 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*   Other financial instruments are derivatives, such as swap agreements, which are valued at the unrealized appreciation (depreciation) of the instrument.  

Net realized gain (loss) and net change in unrealized appreciation/depreciation are reflected on the Statement of Operations.

 

22   May 31, 2013  |   Annual Report


Table of Contents

Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2013 (continued)

 

 

(l)   The following is a summary of the derivative instruments categorized by risk exposure:  

The effect of derivatives on the Statement of Assets and Liabilities at May 31, 2013:

 

Location   Interest
Rate
Contracts
 
Asset derivatives:  

Unrealized appreciation of OTC swaps

  $ 119,661   
 

 

 

 

The effect of derivatives on the Statement of Operations for the year ended May 31, 2013:

 

Location   Interest
Rate
Contracts
 
Net realized loss on:  

Swaps

  $ (119,700
 

 

 

 
Net change in unrealized appreciation/depreciation of:  

Swaps

  $ 119,661   
 

 

 

 

The average volume (measured at each fiscal quarter-end) of derivative activity during the year ended May 31, 2013:

 

Interest Rate Swap Agreements(1)   $10,600

 

(1)   Notional Amount (in thousands)  

 

 

Glossary:

 

AGC     -      insured by Assured Guaranty Corp.
AGM     -      insured by Assured Guaranty Municipal Corp.
AMBAC     -      insured by American Municipal Bond Assurance Corp.
CA Mtg. Ins.     -      insured by California Mortgage Insurance
CP     -      Certificates of Participation
FGIC     -      insured by Financial Guaranty Insurance Co.
FHA     -      insured by Federal Housing Administration
GO     -      General Obligation Bond
IBC     -      Insurance Bond Certificate
LIBOR     -      London Inter-Bank Offered Rate
NPFGC     -      insured by National Public Finance Guarantee Corp.
OTC     -      Over-the-Counter
TCRS     -      Temporary Custodian Receipts

 

See accompanying Notes to Financial Statements  |     May 31, 2013  |     Annual Report     23   


Table of Contents

Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2013

 

Principal
Amount
(000s)
              Value  
  New York Municipal Bonds & Notes – 91.1%            
$ 1,000     

Chautauqua Cnty. Industrial Dev. Agcy. Rev., Dunkirk Power Project,

5.875%, 4/1/42

    $ 1,123,460   
  150     

Erie Cnty. Industrial Dev. Agcy. Rev., Orchard Park, Inc. Project,

6.00%, 11/15/36, Ser. A

      153,119   
 

Hudson Yards Infrastructure Corp. Rev., Ser. A,

     
  1,000     

5.25%, 2/15/47

      1,103,620   
  9,000     

5.75%, 2/15/47

      10,296,360   
 

Liberty Dev. Corp. Rev.,

     
  1,400     

Bank of America Tower at One Bryant Park Project, 5.625%, 7/15/47

      1,576,806   
  1,300     

Bank of America Tower at One Bryant Park Project, 6.375%, 7/15/49

      1,521,338   
  4,120     

Goldman Sachs Headquarters, 5.25%, 10/1/35 (g)

      4,775,245   
  3,000     

Goldman Sachs Headquarters, 5.25%, 10/1/35

      3,477,120   
  3,500     

Goldman Sachs Headquarters, 5.50%, 10/1/37

      4,194,925   
  500     

Long Island Power Auth. Rev., 5.00%, 9/1/34, Ser. A (AMBAC)

      512,235   
 

Metropolitan Transportation Auth. Rev.,

     
  2,000     

5.00%, 11/15/30, Ser. D

      2,251,460   
  2,000     

5.00%, 11/15/34, Ser. B

      2,214,240   
  3,000     

5.00%, 11/15/43, Ser. B

      3,233,880   
  5,000     

5.50%, 11/15/39, Ser. A

      5,712,500   
  7,000     

Monroe Cnty. Industrial Dev. Corp. Rev., Unity Hospital Rochester Project,

5.50%, 8/15/40 (FHA)

      7,871,500   
  2,400     

Nassau Cnty. Industrial Dev. Agcy. Rev., Amsterdam at Harborside,

6.70%, 1/1/43, Ser. A

      1,361,136   
  1,500     

New York City Health & Hospital Corp. Rev., 5.00%, 2/15/30, Ser. A

      1,670,085   
 

New York City Industrial Dev. Agcy. Rev.,

     
  1,415     

Liberty Interactive Corp., 5.00%, 9/1/35

      1,459,318   
  1,500     

Pilot Queens Baseball Stadium, 6.50%, 1/1/46 (AGC)

      1,699,995   
  1,500     

United Jewish Appeal Federation Project, 5.00%, 7/1/27, Ser. A

      1,565,805   
  750     

Yankee Stadium, 5.00%, 3/1/31 (FGIC)

      791,918   
  1,900     

Yankee Stadium, 5.00%, 3/1/36 (NPFGC)

      1,990,668   
  4,900     

Yankee Stadium, 7.00%, 3/1/49 (AGC)

      5,914,496   
 

New York City Transitional Finance Auth. Rev.,

     
  10     

5.00%, 11/1/27, Ser. B

      10,033   
  4,850     

5.00%, 5/1/39, Ser. F-1

      5,394,509   
  5,000     

5.25%, 1/15/39, Ser. S-3

      5,695,900   
  2,000     

New York City Trust for Cultural Res. Rev., Wildlife Conservation Society,

5.00%, 8/1/33, Ser. A

      2,319,360   
 

New York City Water & Sewer System Rev.,

     
  1,000     

5.25%, 6/15/40, Ser. EE

      1,127,330   
  500     

Second Generation Resolutions, 5.00%, 6/15/39, Ser. GG-1

      551,285   
 

New York Liberty Dev. Corp. Rev.,

     
  3,000     

1 World Trade Center Project, 5.00%, 12/15/41

      3,306,030   
  10,000     

4 World Trade Center Project, 5.75%, 11/15/51

      11,521,900   
  1,000     

Onondaga Cnty. Rev., Syracuse Univ. Project, 5.00%, 12/1/36

      1,112,440   
  1,400     

Port Auth. of New York & New Jersey Rev., JFK International Air Terminal,

6.00%, 12/1/36

      1,654,086   

 

24   May 31, 2013  |   Annual Report


Table of Contents

Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
 

State Dormitory Auth. Rev.,

     
$ 3,000     

5.00%, 3/15/38, Ser. A

    $ 3,319,350   
  2,500     

5.00%, 2/15/40, Ser. D

      2,761,125   
  4,000     

5.00%, 7/1/42, Ser. A

      4,439,840   
  7,490     

5.50%, 5/15/31, Ser. A (AMBAC)

      9,370,364   
  2,600     

Catholic Health of Long Island, 5.10%, 7/1/34

      2,687,854   
  1,500     

Fordham Univ., 5.50%, 7/1/36, Ser. A

      1,698,075   
  2,750     

Memorial Sloan-Kettering Cancer Center, 5.00%, 7/1/35, Ser. 1

      2,914,367   
  2,000     

Memorial Sloan-Kettering Cancer Center, 5.00%, 7/1/36, Ser. A-1

      2,165,320   
  2,000     

Mount Sinai Hospital, 5.00%, 7/1/31, Ser. A

      2,218,240   
  2,100     

New York Univ., 5.00%, 7/1/38, Ser. A

      2,329,572   
  1,000     

New York Univ. Hospital Center, 5.625%, 7/1/37, Ser. B

      1,104,340   
  600     

North Shore-Long Island Jewish Health System, 5.50%, 5/1/37, Ser. A

      665,526   
  5,000     

Rochester General Hospital, 5.00%, 12/1/35 (Radian)

(Pre-refunded @ $100 12/1/15) (c)

      5,565,050   
  3,000     

Teachers College, 5.50%, 3/1/39

      3,234,900   
  1,000     

The New School, 5.50%, 7/1/40

      1,124,980   
  3,000     

Yeshiva Univ., 5.125%, 7/1/34 (AMBAC)

      3,063,510   
  5,000     

State Environmental Facs. Corp. Rev., 5.125%, 6/15/38, Ser. A

      5,721,150   
 

State Thruway Auth. Rev.,

     
  1,000     

4.75%, 1/1/29, Ser. G (AGM)

      1,051,990   
  3,800     

5.00%, 1/1/42, Ser. I

      4,136,642   
  6,000     

State Urban Dev. Corp. Rev., 5.00%, 3/15/36, Ser. B-1 (g)

      6,648,780   
  5,000     

Triborough Bridge & Tunnel Auth. Rev., 5.25%, 11/15/34, Ser. A-2 (g)

      5,750,700   
  3,435     

Troy Capital Res. Corp. Rev., Rensselaer Polytechnic Institute Project,

5.125%, 9/1/40, Ser. A

      3,711,449   
 

TSASC, Inc. Rev., Ser. 1,

     
  5,000     

5.00%, 6/1/26

      4,943,550   
  5,000     

5.00%, 6/1/34

      4,434,850   
  1,815     

Ulster Cnty. Industrial Dev. Agcy. Rev., 6.00%, 9/15/37, Ser. A (b)

      1,271,408   
  2,000     

Warren & Washington Cntys. Industrial Dev. Agcy. Rev., Glens Falls Hospital

Project, 5.00%, 12/1/35, Ser. A (AGM)

      2,013,440   
  1,490     

Westchester Cnty. Healthcare Corp. Rev., 6.125%, 11/1/37, Ser. C-2

      1,736,818   
  1,000     

Yonkers Economic Dev. Corp. Rev., Charter School of Educational Excellence

Project, 6.00%, 10/15/30, Ser. A

      1,054,590   
  600     

Yonkers Industrial Dev. Agcy. Rev., Sarah Lawrence College Project,

6.00%, 6/1/41, Ser. A

      679,026   
       

Total New York Municipal Bonds & Notes (cost-$176,329,874)

        190,980,908   
       
  Other Municipal Bonds & Notes – 4.7%            
  Florida – 0.5%      
  1,000     

Clearwater Water & Sewer Rev., 5.25%, 12/1/39, Ser. A

        1,105,680   
  Louisiana – 0.6%      
  1,000     

East Baton Rouge Sewerage Commission Rev., 5.25%, 2/1/39, Ser. A

        1,132,320   

 

Annual Report  |   May 31, 2013     25   


Table of Contents

Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2013 (continued)

 

Principal
Amount
(000s)
              Value  
  Ohio – 3.1%      
 

Buckeye Tobacco Settlement Financing Auth. Rev., Ser. A-2,

     
$ 1,435     

5.875%, 6/1/47

    $ 1,292,921   
  5,315     

6.50%, 6/1/47

      5,166,233   
                  6,459,154   
  U.S. Virgin Islands – 0.5%      
  1,000     

Public Finance Auth. Rev., 6.00%, 10/1/39, Ser. A

        1,118,380   
       

Total Other Municipal Bonds & Notes (cost-$9,170,199)

        9,815,534   
       
  New York Variable Rate Notes – 3.0%            
  5,000     

JPMorgan Chase Putters/Drivers Trust Rev.,

7.961%, 7/1/33, Ser. 3382 (a)(d)(e)(f) (cost-$4,884,076)

        6,309,850   
                     
  Short-Term Investments – 1.2%            
  U.S. Treasury Obligations – 1.2%      
 

U.S. Treasury Notes,

     
  200     

0.125%, 12/31/13

      200,047   
  1,800     

0.25%, 4/30/14

      1,801,899   
  262     

1.25%, 3/15/14

      264,313   
  300     

1.875%, 4/30/14

      304,734   
       

Total U.S. Treasury Obligations (cost-$2,570,857)

        2,570,993   
        Total Investments (cost-$192,955,006) – 100.0%       $ 209,677,285   

Industry classification of portfolio holdings as a percentage of total investments at May 31, 2013 was as follows:

 

Revenue Bonds:

   

Health, Hospital & Nursing Home Revenue

    15.9  

College & University Revenue

    13.2     

Industrial Revenue

    10.3     

Miscellaneous Revenue

    9.6     

Income Tax Revenue

    8.7     

Tobacco Settlement Funded

    7.6     

Transit Revenue

    6.4     

Miscellaneous Taxes

    5.4     

Highway Revenue Tolls

    5.2     

Lease (Abatement)

    4.5     

Recreational Revenue

    4.1     

Water Revenue

    4.1     

Port, Airport & Marina Revenue

    2.4     

Economic Development Revenue

    0.7     

Sewer Revenue

    0.5     

Electric Power & Light Revenue

    0.2     
 

 

 

   

Total Revenue Bonds

      98.8

U.S. Treasury Notes

      1.2   
   

 

 

 

Total Investments

      100.0
   

 

 

 

 

26   May 31, 2013  |   Annual Report


Table of Contents

Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2013 (continued)

 

Notes to Schedule of Investments:

 

(a)   Private Placement – Restricted as to resale and may not have a readily available market. Security with a value of $6,309,850, representing 3.0% of total investments.  

 

(b)   Illiquid.  

 

(c)   Pre-refunded bonds are collateralized by U.S. Government or other eligible securities which are held in escrow and used to pay principal and interest and retire the bonds at the earliest refunding date (payment date).  

 

(d)   144A – Exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, typically only to qualified institutional buyers. Unless otherwise indicated, these securities are not considered to be illiquid.  

 

(e)   Inverse Floater – The interest rate shown bears an inverse relationship to the interest rate on another security or the value of an index. The interest rate disclosed reflects the rate in effect on May 31, 2013.  

 

(f)   Variable Rate Notes – Instruments whose interest rates change on specified date (such as a coupon date or interest payment date) and/or whose interest rates vary with changes in a designated base rate (such as the prime interest rate). The interest rate disclosed reflects the rate in effect on May 31, 2013.  

 

(g)   Residual Interest Bonds held in Trust – Securities represent underlying bonds transferred to a separate securitization trust established in a tender option bond transaction in which the Fund acquired the residual interest certificates. These securities serve as collateral in a financing transaction.  

 

(h)   Floating Rate Notes for the year ended May 31, 2013: The weighted average daily balance of Floating Rate Notes outstanding during the year ended May 31, 2013 was $13,657,374 at a weighted average interest rate, including fees, of 0.81%.  

 

(i)   Interest rate swap agreements outstanding at May 31, 2013:  

 

OTC   swap agreements:  

 

    Notional
Amount
(000s)
    Termination
Date
   

Rate Type

    Value     Upfront
Premiums
Received
    Unrealized
Appreciation
 
Swap
Counterparty
      Payments
Made
  Payments
Received
       

Bank of America

  $ 24,000        9/5/18      3-Month USD-LIBOR     1.60   $ 59,040      $ (18,658   $ 77,698   

Citigroup

    12,000        11/20/22      3-Month USD-LIBOR     2.65     2,992        (8,788     11,780   
         

 

 

   

 

 

   

 

 

 
          $ 62,032      $ (27,446   $ 89,478   
         

 

 

   

 

 

   

 

 

 

 

(j)   Fair Value Measurements – See Note 1(b) in the Notes to Financial Statements.  

 

     Level 1
Quoted Prices
    Level 2
Other Significant
Observable
Inputs
    Level 3
Significant
Unobservable
Inputs
    Value at
5/31/13
 
Investments in Securities – Assets        

New York Municipal Bonds & Notes

  $      $ 190,980,908      $      $ 190,980,908   

Other Municipal Bonds & Notes

           9,815,534               9,815,534   

New York Variable Rate Notes

           6,309,850               6,309,850   

Short-Term Investments

           2,570,993               2,570,993   
             209,677,285               209,677,285   
Other Financial Instruments* – Assets        

Interest Rate Contracts

           89,478               89,478   
Totals   $      $ 209,766,763      $      $ 209,766,763   

At May 31, 2013, there were no transfers between Levels 1 and 2.

 

*   Other financial instruments are derivatives, such as swap agreements, which are valued at the unrealized appreciation (depreciation) of the instrument.  

 

Annual Report  |   May 31, 2013     27   


Table of Contents

Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2013 (continued)

 

 

(k)   The following is a summary of the derivative instruments categorized by risk exposure:  

The effect of derivatives on the Statement of Assets and Liabilities at May 31, 2013:

 

Location   Interest
Rate
Contracts
 
Asset derivatives:  

Unrealized appreciation of OTC swaps

  $ 89,478   
 

 

 

 

The effect of derivatives on the Statement of Operations for the year ended May 31, 2013:

 

Location   Interest
Rate
Contracts
 
Net realized loss on:  

Futures contracts

  $ (74,416

Swaps

    (89,486
 

 

 

 
Total net realized loss   $ (163,902
 

 

 

 
Net change in unrealized appreciation/depreciation of:  

Futures contracts

  $ 40,648   

Swaps

    89,478   
 

 

 

 
Total net change in unrealized appreciation/depreciation   $ 130,126   
 

 

 

 

The average volume (measured at each fiscal quarter-end) of derivative activity during the year ended May 31, 2013:

 

    

Futures

Contracts
Short(1)

  Interest
Rate Swap
Agreements(2)
  (4)   $7,200

 

(1)    Number of contracts  
(2)    Notional Amount (in thousands)  

Glossary:

 

AGC     -      insured by Assured Guaranty Corp.
AGM     -      insured by Assured Guaranty Municipal Corp.
AMBAC     -      insured by American Municipal Bond Assurance Corp.
FGIC     -      insured by Financial Guaranty Insurance Co.
FHA     -      insured by Federal Housing Administration
LIBOR     -      London Inter-Bank Offered Rate
NPFGC     -      insured by National Public Finance Guarantee Corp.
OTC     -      Over-the-Counter
Radian     -      insured by Radian Guaranty, Inc.

 

28   Annual Report  |     May 31, 2013  |     See accompanying Notes to Financial Statements


Table of Contents

Statements of Assets and Liabilities

PIMCO Municipal Income Funds II

May 31, 2013

 

        Municipal II         California
Municipal II
        New York
Municipal II
 
     
Assets:                  

Investments, at value (cost-$1,011,015,016, $418,522,993 and $192,955,006, respectively)

      $1,114,487,044          $479,856,039          $209,677,285   

Cash

      482,006          544,377          541,722   

Receivable for investments sold

      61,191,542          17,435,740          6,787,070   

Interest receivable

      18,573,668          6,921,871          3,051,130   

Unrealized appreciation of OTC swaps

      334,300          119,661          89,478   

Prepaid expenses and other assets

      50,691          45,800          22,437   

Total Assets

      1,195,119,251          504,923,488          220,169,122   
     
Liabilities:                  

Payable for Floating Rate Notes issued

      44,317,277          38,098,801          8,186,394   

Payable for investments purchased

      37,043,552          18,997,029          8,004,908   

Payable for swaps purchased

      230,690          97,230          62,040   

Dividends payable to common and preferred shareholders

      3,964,524          1,978,978          725,323   

Investment management fees payable

      619,414          249,008          113,642   

Swap premiums received

      103,610          22,470          27,446   

Interest payable

      88,847          63,496          14,760   

Accrued expenses and other liabilities

      383,784          235,541          349,451   

Total Liabilities

      86,751,698          59,742,553          17,483,964   
Preferred Shares ($0.00001 par value and $25,000 liquidation preference per share applicable to an aggregate of 14,680, 6,520 and 3,160 shares issued and outstanding, respectively)       367,000,000          163,000,000          79,000,000   
Net Assets Applicable to Common Shareholders       $741,367,553          $282,180,935          $123,685,158   
     
Composition of Net Assets Applicable to Common Shareholders:                  

Common Shares:

                 

Par value ($0.00001 per share)

      $609          $316          $109   

Paid-in-capital in excess of par

      810,503,939          411,555,250          147,871,647   

Undistributed (dividends in excess of) net investment income

      22,643,835          (2,098,678)          1,873,593   

Accumulated net realized loss

      (195,580,458)          (188,730,715)          (42,861,946)   

Net unrealized appreciation

      103,799,628          61,454,762          16,801,755   
Net Assets Applicable to Common Shareholders       $741,367,553          $282,180,935          $123,685,158   

Common Shares Issued and Outstanding

      60,896,627          31,610,327          10,927,322   
Net Asset Value Per Common Share       $12.17          $8.93          $11.32   

 

See accompanying Notes to Financial Statements  |     May 31, 2013  |     Annual Report     29   


Table of Contents

Statements of Operations

PIMCO Municipal Income Funds II

Year ended May 31, 2013

 

        Municipal II         California
Municipal II
        New York
Municipal II
 
     
Investment Income:                  

Interest

      $59,149,149          $25,520,084          $10,406,726   
     
Expenses:                  

Investment management

      7,250,067          2,904,736          1,338,320   

Auction agent and commissions

      582,297          275,949          131,823   

Interest

      390,570          316,631          110,695   

Custodian and accounting agent

      135,990          97,828          65,920   

Shareholder communications

      94,261          39,926          23,277   

Trustees

      84,057          32,434          14,709   

New York Stock Exchange listing

      50,171          26,007          21,976   

Audit and tax services

      46,274          61,351          42,546   

Legal

      35,613          14,997          11,603   

Transfer agent

      34,396          34,397          32,433   

Insurance

      24,838          12,323          7,969   

Miscellaneous

      15,905          13,644          11,991   

Total Expenses

      8,744,439          3,830,223          1,813,262   

Less: investment management fees waived

      (44,626)          (17,814)          (8,296)   

custody credits earned on cash balances

      (3,948)          (2,157)          (3,219)   

Net Expenses

      8,695,865          3,810,252          1,801,747   
     
Net Investment Income       50,453,284          21,709,832          8,604,979   
     
Realized and Change in Unrealized Gain (Loss):                  

Net realized gain (loss) on:

                 

Investments

      4,812,483          3,227,999          456,665   

Futures contracts

      (372,078)                   (74,416)   

Swaps

      (334,300)          (119,700)          (89,486)   

Net change in unrealized appreciation/depreciation of:

               

Investments

      9,181,525          7,580,345          (743,057)   

Futures contracts

      203,238                   40,648   

Swaps

      334,300          119,661          89,478   

Net realized and change in unrealized gain (loss)

      13,825,168          10,808,305          (320,168)   
Net Increase in Net Assets Resulting from Investment Operations       64,278,452          32,518,137          8,284,811   
Dividends on Preferred Shares from Net Investment Income       (901,014)          (402,646)          (194,449)   
Net Increase in Net Assets Applicable to Common Shareholders Resulting from Investment Operations       $63,377,438          $32,115,491          $8,090,362   

 

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Table of Contents

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Table of Contents

Statements of Changes in Net Assets

Applicable to Common Shareholders

PIMCO Municipal Income Funds II

 

        Municipal II  
        Year ended
May 31, 2013
        Year ended
May 31, 2012
 
Investment Operations:            

Net investment income

      $50,453,284          $53,422,247   

Net realized gain (loss)

      4,106,105          (14,470,319)   

Net change in unrealized appreciation/depreciation

      9,719,063          117,235,329   

Net increase in net assets resulting from investment operations

      64,278,452          156,187,257   
Dividends on Preferred Shares from Net Investment Income       (901,014)          (844,983)   

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

      63,377,438          155,342,274   
   
Dividends to Common Shareholders from:            

Net investment income

      (47,407,514)          (47,201,725)   

Return of capital

                 

Total dividends and distributions to common shareholders

      (47,407,514)          (47,201,725)   
   
Common Share Transactions:            

Reinvestment of dividends

      3,236,891          3,220,671   

Total increase in net assets applicable to common shareholders

      19,206,815          111,361,220   
   
Net Assets Applicable to Common Shareholders:            

Beginning of year

      722,160,738          610,799,518   

End of year*

      $741,367,553          $722,160,738   

*Including undistributed (dividends in excess of) net investment income of:

      $22,643,835          $20,835,879   
   
Common Shares Issued in Reinvestment of Dividends       257,784          295,661   

 

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Table of Contents

Statements of Changes in Net Assets

Applicable to Common Shareholders (continued)

PIMCO Municipal Income Funds

 

California Municipal II         New York Municipal II  
Year ended
May 31, 2013
      Year ended
May 31, 2012
        Year ended
May 31, 2013
        Year ended
May 31, 2012
 
                   
$21,709,832       $22,432,123          $8,604,979          $9,095,315   
3,108,299       (6,106,658)          292,763          (3,777,108)   

7,700,006

      47,433,034          (612,931)          17,268,915   
32,518,137       63,758,499          8,284,811          22,587,122   
(402,646)       (383,285)          (194,449)          (181,888)   
    
32,115,491
      63,375,214          8,090,362          22,405,234   
       
                   
(21,313,126)       (22,056,823)          (8,669,854)          (8,629,270)   

(2,354,016)

      (1,522,981)                     
(23,667,142)       (23,579,804)          (8,669,854)          (8,629,270)   
       
                   
1,162,949       1,288,406          597,357          635,052   
9,611,298       41,083,816          17,865          14,411,016   
       
                   
272,569,637       231,485,821          123,667,293          109,256,277   
$282,180,935       $272,569,637          $123,685,158          $123,667,293   
    
$(2,098,678)
      $(1,973,038)          $1,873,593          $2,232,908   
       
113,525       142,977          47,813          58,575   

 

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Table of Contents

Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

1. Organization and Significant Accounting Policies

 

PIMCO Municipal Income Fund II (‘‘Municipal II’’), PIMCO California Municipal Income Fund II (‘‘California Municipal II’’) and PIMCO New York Municipal Income Fund II (‘‘New York Municipal II’’), (each a “Fund” and collectively referred to as the ‘‘Funds’’ or ‘‘PIMCO Municipal Income Funds II’’), were organized as Massachusetts business trusts on March 29, 2002. Prior to commencing operations on June 28, 2002, the Funds had no operations other than matters relating to their organization and registration as non-diversified, closed-end management investment companies registered under the Investment Company Act of 1940 and the rules and regulations thereunder, as amended. Allianz Global Investors Fund Management LLC (the “Investment Manager”) and Pacific Investment Management Company LLC (“PIMCO” or the “Sub-Adviser”) serve as the Funds’ investment manager and sub-adviser, respectively, and are both indirect, wholly-owned subsidiaries of Allianz Asset Management of America L.P. (“AAM”). AAM is an indirect, wholly-owned subsidiary of Allianz SE, a publicly traded European insurance and financial services company. Each Fund has authorized an unlimited amount of common shares with $0.00001 par value.

Under normal market conditions, Municipal II invests substantially all of its assets in a portfolio of municipal bonds, the interest from which is exempt from U.S. federal income taxes. Under normal market conditions, California Municipal II invests substantially all of its assets in municipal bonds which pay interest that is exempt from federal and California state income taxes. Under normal market conditions, New York Municipal II invests substantially all of its assets in municipal bonds which pay interest that is exempt from federal, New York State and New York City income taxes. There can be no

assurance that the Funds will meet their stated objectives. The Funds will generally seek to avoid investing in bonds generating interest income which could potentially subject individuals to alternative minimum tax. The issuers’ abilities to meet their obligations may be affected by economic and political developments in a specific state or region.

The preparation of the Funds’ financial statements in accordance with accounting principles generally accepted in the United States of America requires the Funds’ management to make estimates and assumptions that affect the reported amounts and disclosures in each Fund’s financial statements. Actual results could differ from those estimates.

In the normal course of business, the Funds enter into contracts that contain a variety of representations that provide general indemnifications. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred.

In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2011-11, “Disclosures About Offsetting Assets and Liabilities”, as amended in January 2013 by the issued ASU No. 2013-01, which requires enhanced disclosures that will enable users to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. The amendments are effective for fiscal years beginning on or after January 1, 2013. The Funds’ management is currently evaluating the effect that the guidance may have on the Funds’ financial statements.

 

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Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

1. Organization and Significant Accounting Policies (continued)

 

The following is a summary of significant accounting policies consistently followed by the Funds:

(a) Valuation of Investments

Portfolio securities and other financial instruments for which market quotations are readily available are stated at market value. Market value is generally determined on the basis of last reported sales prices, or if no sales are reported, on the basis of quotes obtained from a quotation reporting system, established market makers, or independent pricing services. The Funds’ investments are valued daily using prices supplied by an independent pricing service or dealer quotations, or by using the last sale price on the exchange that is the primary market for such securities, or the mean between the last quoted bid and ask price. Independent pricing services use information provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics.

The Board of Trustees (the “Board”) has adopted procedures for valuing portfolio securities and other financial derivative instruments in circumstances where market quotes are not readily available, and has delegated the responsibility for applying the valuation methods to the Investment Manager and Sub-Adviser. The Funds’ Valuation Committee was established by the Board to oversee the implementation of the Funds’ valuation methods and to make fair value determinations on behalf of the Board, as instructed. The Sub-Adviser monitors the continued appropriateness of methods applied and determines if adjustments should be made in light of market changes, events affecting the issuer, or other factors. If the Sub-Adviser determines that a valuation method may no longer be appropriate, another valuation

method may be selected, or the Valuation Committee will be convened to consider the matter and take any appropriate action in accordance with procedures set forth by the Board. The Board shall review the appropriateness of the valuation methods and these methods may be amended or supplemented from time to time by the Valuation Committee.

Short-term securities maturing in 60 days or less are valued at amortized cost, if their original term to maturity was 60 days or less, or by amortizing their value on the 61st day prior to maturity, if the original term to maturity exceeded 60 days.

The prices used by the Funds to value investments may differ from the value that would be realized if the investments were sold, and these differences could be material to the Funds’ financial statements. Each Fund’s net asset value (“NAV”) is normally determined as of the close of regular trading (normally, 4:00 p.m. Eastern time) on the New York Stock Exchange (“NYSE”) on each day the NYSE is open for business.

(b) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. The three levels of the fair value hierarchy are described below:

 

n   Level 1 – quoted prices in active markets for identical investments that the Funds have the ability to access
n   Level 2 – valuations based on other significant observable inputs, which may include, but are not limited to, quoted prices for similar assets or liabilities, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates or other market corroborated inputs

 

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Table of Contents

Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

1. Organization and Significant Accounting Policies (continued)

 

n   Level 3 – valuations based on significant unobservable inputs (including the Sub-Adviser’s or Valuation Committee’s own assumptions and securities whose price was determined by using a single broker’s quote)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following are certain inputs and techniques that the Funds generally use to evaluate how to classify each major category of assets and liabilities for Level 2 and Level 3, in accordance with Generally Accepted Accounting Principles (“GAAP”).

U.S. Treasury Obligations – U.S. Treasury obligations are valued by independent pricing services based on pricing models that evaluate the mean between the most recently quoted bid and ask price. The models also take into consideration data received from active market makers and broker-dealers, yield curves, and the spread over comparable U.S. Treasury issues. The spreads change daily in response to market conditions and are generally obtained from the new issue market and broker-dealer sources. To the extent that these inputs are observable, the values of U.S. Treasury obligations are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.

Municipal Bonds & Notes and Variable Rate Notes – Municipal bonds & notes and variable rate notes are valued by independent pricing services based on pricing models that take into account, among other factors, information received from market makers and broker-dealers, current trades, bid-want lists, offerings, market movements, the callability of the bond, state of issuance, benchmark yield curves, and

bond or note insurance. To the extent that

these inputs are observable, the values of municipal bonds & notes and variable rate notes are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.

Interest Rate Swaps – Over-the-counter (“OTC”) interest rate swaps are valued by independent pricing services using pricing models that are based on real-time intraday snapshots of relevant interest rate curves that are built using the most actively traded securities for a given maturity. The pricing models also incorporate cash and money market rates. In addition, market data pertaining to interest rate swaps is monitored regularly to ensure that interest rates are properly depicting the current market rate. To the extent that these inputs are observable, the values of interest rate swaps are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.

The valuation techniques used by the Funds to measure fair value during the year ended May 31, 2013 were intended to maximize the use of observable inputs and to minimize the use of unobservable inputs.

The Funds’ policy is to recognize transfers between levels at the end of the reporting period. An investment asset’s or liability’s level within the fair value hierarchy is based on the lowest level input, individually or in aggregate, that is significant to the fair value measurement. The objective of fair value measurement remains the same even when there is a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation techniques used. Investments categorized as Level 1 or 2 as of period end may have been transferred between Levels 1 and 2 since the prior period due to changes in the valuation method utilized in valuing the investments.

 

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Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

1. Organization and Significant Accounting Policies (continued)

 

(c) Investment Transactions and Investment Income

Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on an identified cost basis. Interest income adjusted for the accretion of discount and amortization of premiums is recorded on an accrual basis. Discounts or premiums on debt securities purchased are accreted or amortized, respectively, to interest income.

(d) Federal Income Taxes

The Funds intend to distribute all of their taxable income and to comply with the other requirements of Subchapter M of the U.S. Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required.

Accounting for uncertainty in income taxes establishes for all entities, including pass-through entities such as the Funds, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. Funds’ management has determined that its evaluation of the positions taken in the tax returns has resulted in no material impact to the Funds’ financial statements at May 31, 2013. The federal income tax returns for the prior three years remain subject to examination by the Internal Revenue Service.

(e) Dividends and Distributions – Common Shares

The Funds declare dividends from net investment income to common shareholders monthly. Distributions of net realized capital gains, if any, are paid at least annually. The Funds record dividends and distributions on the

ex-dividend date. The amount of dividends from net investment income and distributions from net realized capital gains is determined in accordance with federal income tax regulations, which may differ from GAAP. These “book-tax” differences are considered either temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal income tax treatment; temporary differences do not require reclassification. To the extent dividends and/or distributions exceed current and accumulated earnings and profits for federal income tax purposes, they are reported as dividends and/or distributions to shareholders from return of capital.

(f) Inverse Floating Rate Transactions – Residual Interest Municipal Bonds (“RIBs”)/ Residual Interest Tax Exempt Bonds (“RITEs”)

The Funds invest in RIBs and RITEs (“Inverse Floaters”), whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. In inverse floating rate transactions, the Funds sell a fixed rate municipal bond (“Fixed Rate Bond”) to a broker who places the Fixed Rate Bond in a special purpose trust (“Trust”) from which floating rate bonds (“Floating Rate Notes”) and Inverse Floaters are issued. The Funds simultaneously or within a short period of time, purchase the Inverse Floaters from the broker. The Inverse Floaters held by the Funds provide the Funds with the right to: (1) cause the holders of the Floating Rate Notes to tender their notes at par, and (2) cause the broker to transfer the Fixed-Rate Bond held by the Trust to the Funds, thereby collapsing the Trust. The Funds account for the transaction described above as a secured borrowing by including the Fixed Rate Bond in their Schedules of Investments, and account for the Floating Rate Notes as a liability under the caption “Payable for Floating Rate Notes issued”

 

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Table of Contents

Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

1. Organization and Significant Accounting Policies (continued)

 

in the Funds’ Statements of Assets and Liabilities. The Floating Rate Notes have interest rates that generally reset weekly and their holders have the option to tender their notes to the broker for redemption at par at each reset date.

The Funds may also invest in Inverse Floaters without transferring a fixed rate municipal bond into a Trust, which are not accounted for as secured borrowings. The Funds may also invest in Inverse Floaters for the purpose of increasing leverage.

The Inverse Floaters are created by dividing the income stream provided by the underlying bonds to create two securities, one short-term and one long-term. The interest rate on the short-term component is reset by an index or auction process typically every 7 to 35 days. After income is paid on the short-term securities at current rates, the residual income from the underlying bond(s) goes to the long-term securities. Therefore, rising short-term rates result in lower income for the long-term component and vice versa. The longer-term bonds may be more volatile and less liquid than other municipal bonds of comparable maturity. Investments in Inverse Floaters typically will involve greater risk than in an investment in Fixed Rate Bonds.

In addition to general market risks, the Funds’ investments in Inverse Floaters may involve greater risk and volatility than an investment in a fixed rate bond, and the value of Inverse Floaters may decrease significantly when market interest rates increase. Inverse Floaters have varying degrees of liquidity, and the market for these securities may be volatile. These securities tend to underperform the market for fixed rate bonds in a rising interest rate environment, but tend to outperform the market for fixed rate bonds when interest rates

decline or remain relatively stable. Although volatile, Inverse Floaters typically offer the potential for yields exceeding the yields available on fixed rate bonds with comparable credit quality, coupon, call provisions and maturity. Trusts in which Inverse Floaters may be held could be terminated due to market, credit or other events beyond the Funds’ control, which could require the Funds to reduce leverage and dispose of portfolio investments at inopportune times and prices.

(g) U.S. Government Agencies or Government-Sponsored Enterprises

Securities issued by U.S. Government agencies or government-sponsored enterprises may not be guaranteed by the U.S. Treasury. The Government National Mortgage Association (“GNMA” or “Ginnie Mae”), a wholly-owned U.S. Government corporation, is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA and backed by pools of mortgages insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Government-related guarantors not backed by the full faith and credit of the U.S. Government include the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the U.S. Government. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but its participation certificates are not backed by the full faith and credit of the U.S. Government.

(h) Restricted Securities

The Funds are permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally

 

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Table of Contents

Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

1. Organization and Significant Accounting Policies (continued)

 

may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expenses, and prompt sale at an acceptable price may be difficult.

(i) Repurchase Agreements.

The Funds enter into transactions with their custodian bank or securities brokerage firms whereby they purchase securities under agreements to resell such securities at an agreed upon price and date (“repurchase agreements”). The Funds, through their custodian, take possession of securities collateralizing the repurchase agreement. Such agreements are carried at the contract amount in the financial statements, which is considered to represent fair value. Collateral pledged (the securities received), which consists primarily of U.S. government obligations and asset-backed securities, is held by the custodian bank for the benefit of the Funds until maturity of the repurchase agreement. Provisions of the repurchase agreements and the procedures adopted by the Funds require that the market value of the collateral, including accrued interest thereon, be sufficient in the event of default by the counterparty. If the counterparty defaults and the value of the collateral declines or if the counterparty enters an insolvency proceeding, realization of the collateral by the Funds may be delayed or limited.

(j) When-Issued/Delayed-Delivery Transactions.

When-issued or delayed-delivery transactions involve a commitment to purchase or sell securities for the predetermined price or yield, with payment and delivery taking place beyond the customary settlement period. When delayed-delivery purchases are outstanding, the Funds will set aside and maintain until the settlement

date in a designated account, liquid assets in an amount sufficient to meet the purchase price. When purchasing a security on a delayed-delivery basis, the Funds assume the rights and risks of ownership of the security, including the risk of price and yield fluctuations; consequently, such fluctuations are taken into account when determining the net asset value. The Funds may dispose of or renegotiate a delayed-delivery transaction after it is entered into, and may sell when-issued securities before they are delivered, which may result in a realized gain or loss. When a security is sold on delayed-delivery basis, the Funds do not participate in future gains and losses with respect to the security.

(k) Interest Expense

Interest expense primarily relates to the Funds’ participation in Floating Rate Notes held by third parties in conjunction with Inverse Floater transactions.

(l) Custody Credits on Cash Balances

The Funds may benefit from an expense offset arrangement with their custodian bank, whereby uninvested cash balances may earn credits that reduce monthly custodian and accounting agent expenses. Had these cash balances been invested in income-producing securities, they would have generated income for the Funds. Cash overdraft charges, if any, are included in custodian and accounting agent fees.

2. Principal Risks

In the normal course of business, the Funds trade financial instruments and enter into financial transactions where risk of potential loss exists due to, among other things, changes in the market (market risk) or failure of the other party to a transaction to perform (counterparty risk). The Funds are also exposed to other risks such as, but not limited to, interest rate, credit and leverage risks.

Interest rate risk is the risk that fixed income securities will decline in value because of

 

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Table of Contents

Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

2. Principal Risks (continued)

 

changes in interest rates. As nominal interest rates rise, the values of certain fixed income securities held by the Funds are likely to decrease. A nominal interest rate can be described as the sum of a real interest rate and an expected inflation rate. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations. Duration is used primarily as a measure of the sensitivity of a fixed income security’s market price to interest rate (i.e. yield) movements.

Variable and floating rate securities generally are less sensitive to interest rate changes but may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not generally increase in value if interest rates decline. Inverse floating rate securities may decrease in value if interest rates increase. Inverse floating rate securities may also exhibit greater price volatility than a fixed rate obligation with similar credit quality. When a Fund holds variable or floating rate securities, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities and the NAV of the Funds’ shares.

The Funds are exposed to credit risk, which is the risk of losing money if the issuer or guarantor of a fixed income security is unable or unwilling, or is perceived (whether by market participants, rating agencies, pricing services or otherwise) as unable or unwilling, to make timely principal and/or interest payments, or to otherwise honor its obligations. Securities are subject to varying degrees of credit risk, which are often reflected in credit ratings.

The market values of securities may decline due to general market conditions (market risk)

which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. Equity securities and equity-related investments generally have greater market price volatility than fixed income securities.

The Funds are exposed to counterparty risk, or the risk that an institution or other entity with which the Funds have unsettled or open transactions will default. The potential loss to the Funds could exceed the value of the financial assets recorded in the Funds’ financial statements. Financial assets, which potentially expose the Funds to counterparty risk, consist principally of cash due from counterparties and investments. The Sub-Adviser seeks to minimize the Funds’ counterparty risk by performing reviews of each counterparty and by minimizing concentration of counterparty risk by undertaking transactions with multiple customers and counterparties on recognized and reputable exchanges. Delivery of securities sold is only made once the Funds have received payment. Payment is made on a purchase once the securities have been delivered by the counterparty. The trade will fail if either party fails to meet its obligation.

The Funds are exposed to risks associated with leverage. Leverage may cause the value of the Funds’ shares to be more volatile than if the Funds did not use leverage. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the Funds’ portfolio securities. The Funds may engage in transactions or purchase instruments that give rise to forms of leverage. In addition, to the extent the Funds employ leverage, dividend and interest costs may not be recovered by any

 

40   May 31, 2013  |   Annual Report


Table of Contents

Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

2. Principal Risks (continued)

 

appreciation of the securities purchased with the leverage proceeds and could exceed the Funds’ investment returns, resulting in greater losses.

The Funds are party to International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreements”) with select counterparties that govern transactions, over-the-counter derivatives and foreign exchange contracts entered into by the Funds and those counterparties. The ISDA Master Agreements contain provisions for general obligations, representations, agreements, collateral and events of default or termination. Events of termination include conditions that may entitle counterparties to elect to terminate early and cause settlement of all outstanding transactions under the applicable ISDA Master Agreement. Any election to terminate early could be material to the financial statements of the Funds.

The considerations and factors surrounding the settlement of certain purchases and sales made on a delayed-delivery basis are governed by Master Securities Forward Transaction Agreements (“Master Forward Agreements”) between the Funds and select counterparties. The Master Forward Agreements maintain provisions for, among other things, initiation and confirmation, payment and transfer, events of default, termination, and maintenance of collateral.

The Funds are also a party to Master Repurchase Agreements (“Master Repo Agreements”) with select counterparties. The Master Repo Agreements maintain provisions for initiation, income payments, events of default, and maintenance of collateral.

3. Financial Derivative Instruments

Disclosure about derivatives and hedging activities requires qualitative disclosure regarding objectives and strategies for using derivatives, quantitative disclosure about fair value amounts of gains and losses on derivatives, and disclosure about credit-risk-related contingent features in derivative agreements. The disclosure requirements distinguish between derivatives, which are accounted for as “hedges”, and those that do not qualify for such accounting. Although the Funds at times use derivatives for hedging purposes, the Funds reflect derivatives at fair value and recognize changes in fair value through the Funds’ Statements of Operations, and such derivatives do not qualify for hedge accounting treatment.

(a) Futures Contracts

The Funds use futures contracts to manage their exposure to the securities markets or the movements in interest rates and currency values. A futures contract is an agreement between two parties to buy and sell a financial instrument at a set price on a future date. Upon entering into such a contract, the Funds are required to pledge to the broker an amount of cash or securities equal to the minimum “initial margin” requirements of the exchange. Pursuant to the contracts, the Funds agree to receive from or pay to the broker an amount of cash or securities equal to the daily fluctuation in the value of the contracts. Such receipts or payments are known as “variation margin” and are recorded by the Funds as unrealized appreciation or depreciation. When the contracts are closed, the Funds record a realized gain or loss equal to the difference between the value of the contracts at the time they were opened and the value at the time they were closed. Any unrealized appreciation or depreciation recorded is simultaneously reversed. The use of futures transactions involves various risks, including the risk of an

 

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Table of Contents

Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

3. Financial Derivative Instruments (continued)

 

imperfect correlation in the movements in the price of futures contracts, interest rates and underlying hedging assets, and possible inability or unwillingness of counterparties to meet the terms of their contracts.

(b) Swap Agreements

Swap agreements are bilaterally negotiated agreements between the Funds and a counterparty to exchange or swap investment cash flows, assets, foreign currencies or market or event-linked returns at specified, future intervals. Swap agreements may be privately negotiated in the over-the-counter market (“OTC swaps”) or may be executed in a multilateral or other trade facility platform, such as a registered commodities exchange (“centrally cleared swaps”). The Funds may enter into credit default, cross-currency, interest rate, total return, variance and other forms of swap agreements in order, among other things, to manage their exposure to credit, currency and interest rate risk. In connection with these agreements, securities may be identified as collateral or margin in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default or bankruptcy/insolvency.

OTC swap payments received or made at the beginning of the measurement period are reflected as such on the Funds’ Statements of Assets and Liabilities and represent payments made or received upon entering into the swap agreement to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors). These upfront payments are recorded as realized gains or losses on the Funds’ Statements of Operations upon termination or maturity of the swap. A liquidation payment received or made at the

termination of the swap is recorded as realized gain or loss on the Funds’ Statements of Operations. Net periodic payments received or paid by the Funds are included as part of realized gains or losses on the Funds’ Statements of Operations. Changes in market value, if any, are reflected as a component of net changes in unrealized appreciation/depreciation on the Funds’ Statements of Operations. Daily changes in valuation of centrally cleared swaps, if any, are recorded as a receivable or payable, as applicable, for variation margin on centrally cleared swaps on the Funds’ Statements of Assets and Liabilities.

Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Funds’ Statements of Assets and Liabilities. Such risks include the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligation to perform or disagree as to the meaning of contractual terms in the agreements and that there may be unfavorable changes in interest rates.

Interest Rate Swap Agreements – Interest rate swap agreements involve the exchange by the Funds with a counterparty of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments, with respect to the notional amount of principal. Certain forms of interest rate swap agreements may include: (i) interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”, (ii) interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor”, (iii) interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself

 

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Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

3. Financial Derivative Instruments (continued)

 

against interest rate movements exceeding given minimum or maximum levels, (iv) callable interest rate swaps, under which the counterparty may terminate the swap transaction in whole at zero cost by a predetermined date and time prior to the maturity date, (v) spreadlocks, which allow the interest rate swap users to lock in the forward differential (or spread) between the interest rate swap rate and a specified benchmark, or (vi) basis swaps, under which two parties can exchange variable interest rates based on different money markets.

4. Investment Manager/Sub-Adviser

Each Fund has an Investment Management Agreement (each an “Agreement”) with the Investment Manager. Subject to the supervision of each Fund’s Board, the Investment Manager is responsible for managing, either directly or through others selected by it, the Funds’ investment activities, business affairs and administrative matters. Pursuant to each Agreement, the Investment Manager receives an annual fee, payable monthly, at an annual

rate of 0.65% of each Fund’s average daily net assets, inclusive of net assets attributable to any Preferred Shares that were outstanding. For the period July 1, 2011 through June 30, 2012, the Investment Manager voluntarily agreed to waive a portion of its fee for each Fund at the annual rate of 0.05% of each Fund’s average daily net assets, inclusive of net assets attributable to any Preferred Shares that were outstanding. For the year ended May 31, 2013, each Fund paid investment management fees at an effective rate of 0.65% of each Fund’s average daily net assets, inclusive of net assets attributable to any Preferred Shares that were outstanding.

The Investment Manager has retained the Sub-Adviser to manage the Funds’ investments. Subject to the supervision of the Investment Manager, the Sub-Adviser is responsible for making all of the Funds’ investment decisions. The Investment Manager, not the Funds, pays a portion of the fees it receives as Investment Manager to the Sub-Adviser in return for its services.

 

 

5. Investments in Securities

For the year ended May 31, 2013, purchases and sales of investments, other than short-term securities were:

 

     Municipal II     California
Municipal II
    New York
Municipal II
 

Purchases

  $ 183,996,310      $ 63,006,662      $ 53,803,166   

Sales

    201,363,349        74,943,662        56,678,342   

6. Income Tax Information

The tax character of dividends paid was:

 

    Year ended
May 31, 2013
          Year ended
May 31, 2012
       
     Ordinary
Income
    Tax
Exempt
Income
    Return of
Capital
    Ordinary
Income
    Tax
Exempt
Income
    Return of
Capital
 

Municipal II

  $ 458,232      $ 47,850,296      $      $ 465,597      $ 47,581,111      $   

California Municipal II

    583,738        21,132,034        2,354,016        705,738        21,734,370        1,522,981   

New York Municipal II

    76,412        8,787,891               51,714        8,759,444          

 

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Table of Contents

Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2013

 

6. Income Tax Information (continued)

 

At May 31, 2013, the components of distributable earnings were:

 

   

Tax
Exempt
Income

  Capital loss
Caryforwards(1)
    Post-October
Capital loss(2)
 
         Short-Term     Long-Term  

Municipal II

  $22,978,135   $ 196,721,637      $      $   

California Municipal II

      188,566,070                 

New York Municipal II

  1,963,079     42,820,315        20,433