PIMCO have released their September earnings and if we dis-aggregate the NII for September relative to the distributions of the individual funds it looks pretty good! All funds earned more than their distributions.
If we zoom out a bit, however, the story is not as cheery – September looks like an outlier following months of low earnings.
Our view here is that the traditional distribution metrics provided by PIMCO such as NII, UNII and coverage are not super helpful to gauge distribution stability or coverage right now given the clearly unusual couple of months we have gone through. Can we use something else in its place? Our view is yes and it requires getting to the brass tacks of what drives distribution coverage. At its most basic, stronger distribution coverage requires a larger amount of income-producing assets (the numerator) and a lower distribution rate (the denominator).
If we plot the funds’ leverage (a proxy for the relative amount of income-producing assets) against their NAV distribution rates, we see some wide variation. Funds with stronger distribution coverage figures are going to be those in the upper left of the matrix – i.e. those with high leverage and low NAV distribution rates – the funds in the green oval.
Ultimately, we will need to wait for the new portfolio holdings reports to nail down exactly why earnings took a dive over the previous few months and whether September is what we should expect going forward.