PIMCO Municipal Income Fund II

 

 

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: 811-21076

 

 

PIMCO 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, 2014

Date of reporting period: May 31, 2014

 

 

 


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, 2014

 

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Table of Contents

 

2 – 3   Letter from Chairman of the Board & President
4   Fund Insights
6 – 9   Performance & Statistics
10 – 30   Schedules of Investments

31

  Statements of Assets and Liabilities

32

  Statements of Operations
34 – 35   Statements of Changes in Net Assets
36 – 49   Notes to Financial Statements
50 – 52   Financial Highlights
53   Report of Independent Registered Public Accounting Firm
54   Tax Information
55   Annual Shareholder Meeting Results/Corporate Change
56 – 67   Matters Relating to the Trustees’ Consideration of the Investment Management Agreement
68 – 69   Privacy Policy/Proxy Voting Policies & Procedures
70 – 71   Dividend Reinvestment Plan
72 – 73   Board of Trustees
74   Fund Officers


Letter from Chairman of the Board & President

 

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Hans W. Kertess

Chairman

 

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Julian Sluyters

President & CEO

 

Dear Shareholder:

After three years of generally moderate growth, the US economy contracted toward the end of the 12-month fiscal reporting period ended May 31, 2014. The US taxable bond market posted a positive return. The overall municipal bond market overcame a weak start and outperformed the US taxable bond market during the reporting period.

For the fiscal twelve-month period ended May 31, 2014:

 

n   PIMCO Municipal Income Fund II returned 5.22% on net asset value (“NAV”) and 7.76% on market price.

 

n   PIMCO California Municipal Income Fund II returned 5.77% on NAV and -1.76% on market price.

 

n   PIMCO New York Municipal Income Fund II returned 4.88% on NAV and 7.83% on market price.

Twelve Months in Review

After several years of positive growth, severe winter weather in parts of the United States constrained the US economy throughout the reporting period. Gross domestic product (“GDP”), the value of goods and services produced

in the country, the broadest measure of economic activity, expanded at an annual pace of 2.5% during the second quarter of 2013. Annual GDP growth then rose 4.1% during the third quarter, the best reading since the fourth quarter of 2011. Fourth quarter 2013 GDP then expanded at a 2.6% annual pace, but contracted at an annual pace of 2.9% during the first quarter of 2014.

The Federal Reserve (the “Fed”) maintained an accommodative monetary stance during the reporting period. Announcements and actions related to the reduction of the Fed’s monthly asset purchase program contributed to bond-yield volatility over the reporting period. The markets have also been scrutinizing Fed statements related to when interest rates would begin to rise. In April, the Fed repeated that it would not raise rates in the near future, saying that it “likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

 

2   Annual Report   |  May 31, 2014


Outlook

We remain positive on the US economic recovery and expect the first-quarter GDP decline to be followed by a meaningful bounce during the second quarter. Federal Reserve officials have tied the outlook for monetary policy to incoming economic data. Based on our forecasts for growth we believe that Fed asset purchases will end in the fourth quarter of 2014, with lift-off in the Fed funds rate possible in mid-2015.

 

 

Receive this report electronically and eliminate paper mailings.

 

 

To enroll, visit;

us.allianzgi.com/edelivery.

 

 

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   Julian Sluyters
Chairman of the Board of Trustees   President & Chief Executive Officer

 

May 31, 2014  |   Annual Report     3   


Fund Insights

PIMCO Municipal Income Fund II

PIMCO California Municipal Income Fund II

PIMCO New York Municipal Income Fund II

May 31, 2014 (unaudited)

 

For the twelve-months ended May 31, 2014, PIMCO Municipal Income Fund II (“Municipal II”) returned 5.22% on net asset value (“NAV”) and 7.76% on market price.

For the twelve-months ended May 31, 2014, PIMCO California Municipal Income Fund II (“California Municipal II”) returned 5.77% on NAV and -1.76% on market price.

For the twelve-months ended May 31, 2014, PIMCO New York Municipal Income Fund II (“New York Municipal II”) returned 4.88% on NAV and 7.83% on market price.

After a challenging start, the municipal bond market rallied and generated a positive return during the 12-month reporting period ended May 31, 2014. The overall municipal market, as measured by the Barclays Municipal Bond Index (the “Index”), posted negative returns during the first three months of the reporting period. Negatively impacting the municipal market were rising interest rates, as well as generally weak demand given concerns over the city of Detroit’s bankruptcy filing and credit issues in Puerto Rico. However, the municipal bond market then strengthened and generated positive returns during seven of the last nine months of the reporting period. This turnaround was due to several factors, including improving fundamentals, attractive valuations and generally falling interest rates. In addition, investor demand improved, while new municipal supply fell sharply over the first five months of 2014. All told, the Index gained 3.05% during the 12-month reporting period. In comparison, the overall taxable fixed income market, as measured by the Barclays US Aggregate Index, returned 2.71%.

Municipal II’s overweighting to the Revenue-Backed, High Yield Tobacco and Industrial Revenue sectors enhanced its results as all three sectors outperformed the Index. An overweight duration relative to the Index detracted from Municipal II’s performance as municipal yields moved higher during the 12 months ended May 31, 2014. Municipal II’s underweighting to the Transportation and Education sectors hindered results as they outperformed the Index.

California Municipal II’s overweighting to the Revenue-Backed, High Yield Tobacco and Industrial Revenue sectors enhanced its results as all three sectors outperformed the Index. An overweight duration relative to the Index detracted from California Municipal II’s performance as municipal yields moved higher during the 12 months ended May 31, 2014. California Municipal II’s underweighting to the Transportation and Education sectors hindered results as they outperformed the Index.

New York Municipal II’s overweighting to the Revenue-Backed, High Yield Tobacco, Industrial Revenue and Health Care sectors enhanced its results as all four sectors outperformed the Index. An overweight duration relative to the Index detracted from New York Municipal II’s performance as municipal yields moved higher during the 12 months ended May 31, 2014. New York Municipal II’s underweighting to the Transportation and Water and Sewer sectors hindered results as they outperformed the Index.

 

 

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May 31, 2014   |  Annual Report     5   


Performance & Statistics

PIMCO Municipal Income Fund II

May 31, 2014 (unaudited)

 

Total Return(1):   Market Price      NAV  

1 Year

    7.76%         5.22%   

5 Year

    12.76%         13.77%   

10 Year

    6.16 %         5.38%   

Commencement of Operations (6/28/02) to 5/31/14

    5.25%         5.46%   

 

Market Price/NAV Performance:

Commencement of Operations (6/28/02) to 5/31/14

 

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Market Price/NAV:      

Market Price

    $12.25   

NAV

    $11.94   

Premium to NAV

    2.60%   

Market Price Yield(2)

    6.37%   

Leverage Ratio(3)

    36.04%   

Moody’s Rating*

(as a % of total investments)

 

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6   Annual Report   |  May 31, 2014


Performance & Statistics

PIMCO California Municipal Income Fund II

May 31, 2014 (unaudited)

 

Total Return(1):   Market Price      NAV  

1 Year

    -1.76%         5.77%   

5 Year

    10.39%         13.01%   

10 Year

    4.32%         3.70%   

Commencement of Operations (6/28/02) to 5/31/14

    3.62%         3.67%   

 

Market Price/NAV Performance:

Commencement of Operations (6/28/02) to 5/31/14

 

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Market Price/NAV:      

Market Price

    $9.52   

NAV

    $8.61   

Premium to NAV

    10.57%   

Market Price Yield(2)

    6.03%   

Leverage Ratio(3)

    42.39%   

Moody’s Rating*

(as a % of total investments)

 

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May 31, 2014   |  Annual Report     7   


Performance & Statistics

PIMCO New York Municipal Income Fund II

May 31, 2014 (unaudited)

 

Total Return(1):   Market Price      NAV  

1 Year

    7.83%         4.88%   

5 Year

    10.91%         10.83%   

10 Year

    6.15%         4.98%   

Commencement of Operations (6/28/02) to 5/31/14

    4.99%         4.74%   

 

Market Price/NAV Performance:

Commencement of Operations (6/28/02) to 5/31/14

 

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Market Price/NAV:      

Market Price

    $12.01   

NAV

    $10.98   

Premium to NAV

    9.38%   

Market Price Yield(2)

    6.62%   

Leverage Ratio(3)

    41.98%   

Moody’s Rating*

(as a % of total investments)

 

LOGO

 

 

8   Annual Report   |  May 31, 2014


Performance & Statistics

PIMCO Municipal Income Funds II

May 31, 2014 (unaudited) (continued)

 

* Bond ratings apply to the underlying holdings of the Funds and not the Funds themselves and are divided into categories ranging from highest to lowest credit quality, determined for purposes of this presentation by using ratings provided by Moody’s Investors Service, Inc. (“Moody’s”). The Funds use ratings provided by Moody’ for this purpose, among other reasons, because of the access to background information and other materials provided by Moody’s, as well as the Funds’ consideration of industry practice. When a bond is not rated by Moody’s, it is designated in the chart above as “NR” for not rated. Credit quality ratings assigned by a rating agency are subjective opinions, not statements of fact, and are subject to change periodically, even as frequently as daily. Ratings assigned by Moody’s or another rating agency are not absolute standards of credit quality and do not evaluate market risk. Rating agencies may fail to make timely changes in credit ratings, and an issuer’s current financial condition may be better or worse than a rating indicates. In formulating investment decisions for the Funds, Pacific Investment Management Company LLC, the sub-adviser to the Funds, develops its own analysis of the credit quality and risks associated with individual debt instruments, rather than relying exclusively on rating agencies or third-party research.

(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. Total return for a period of more than one year represents the average annual total return.

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, 2014.

(3) Represents Floating Rate Notes issued in tender option bond 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).

 

May 31, 2014   |  Annual Report     9   


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014

 

Principal
Amount
(000s)
              Value  
  Municipal Bonds & Notes – 95.8%        
  Alabama – 3.0%      
  $1,000      Birmingham-Baptist Medical Centers Special Care Facs. Financing Auth. Rev., Baptist Health Systems, Inc., 5.00%, 11/15/30, Ser. A       $1,006,630   
  Jefferson Cnty. Sewer Rev.,      
  21,000      zero coupon, 10/1/50, Ser. F (i)       12,122,040   
  16,000      6.50%, 10/1/53, Ser. D       18,196,640   
  2,000      State Docks Department Rev., 6.00%, 10/1/40       2,280,160   
                33,605,470   
  Arizona – 8.1%      
  Health Facs. Auth. Rev., Banner Health,      
  3,500      5.00%, 1/1/35, Ser. A       3,662,890   
  2,860      5.50%, 1/1/38, Ser. D       3,060,486   
  Pima Cnty. Industrial Dev. Auth. Rev.,      
  29,700      5.00%, 9/1/39       30,836,025   
  1,500      Tucson Electric Power Co., 5.25%, 10/1/40, Ser. A       1,580,640   
  Pinal Cnty. Electric Dist. No. 3 Rev.,      
  1,750      5.25%, 7/1/36       1,928,885   
  3,700      5.25%, 7/1/41       4,044,396   
  10,000      Salt River Project Agricultural Improvement & Power Dist. Rev., 5.00%, 1/1/39, Ser. A (h)       10,983,400   
  Salt Verde Financial Corp. Rev.,      
  9,000      5.00%, 12/1/32       10,080,270   
  22,400      5.00%, 12/1/37       24,987,872   
                91,164,864   
  California – 12.8%      
  Bay Area Toll Auth. Rev.,      
  5,000      5.25%, 4/1/48, Ser. S-4       5,523,200   
  6,000      San Francisco Bay Area, 5.00%, 10/1/29       6,660,840   
  1,430      San Francisco Bay Area, 5.00%, 4/1/34, Ser. F-1       1,556,312   
  1,535      Golden State Tobacco Securitization Corp. Rev., 5.75%, 6/1/47, Ser. A-1       1,289,200   
  2,000      Hayward Unified School Dist., GO, 5.00%, 8/1/33       2,151,180   
  Health Facs. Financing Auth. Rev.,      
  1,500      Scripps Health, 5.00%, 11/15/36, Ser. A       1,625,385   
  6,300      Sutter Health, 5.00%, 11/15/42, Ser. A (IBC-NPFGC)       6,552,693   
  3,000      Sutter Health, 6.00%, 8/15/42, Ser. B       3,490,620   
  1,500      Indian Wells Redev. Agcy., Tax Allocation, Whitewater Project, 4.75%, 9/1/34,
Ser. A (AMBAC)
      1,467,435   
  2,000      Los Angeles Community College Dist., GO, 5.00%, 8/1/32, Ser. A (FGIC-NPFGC)       2,220,340   
  4,000      Los Angeles Department of Water & Power Rev., 5.00%, 7/1/39, Ser. A-1 (AMBAC)       4,294,120   
  5,000      Los Angeles Unified School Dist., GO, 5.00%, 7/1/30, Ser. E (AMBAC)       5,228,150   
  1,750      M-S-R Energy Auth. Rev., 6.50%, 11/1/39, Ser. B       2,334,903   
  2,000      Montebello Unified School Dist., GO, 5.00%, 8/1/33 (AGM)       2,190,440   
  2,875      Municipal Finance Auth. Rev., Azusa Pacific Univ. Project, 7.75%, 4/1/31, Ser. B       3,370,650   
  3,000      Newport Beach Rev., Hoag Memorial Hospital Presbyterian, 5.875%, 12/1/30 (Pre-refunded @ $100, 12/1/21) (c)       3,853,200   
  500      Peralta Community College Dist., GO, 5.00%, 8/1/39, Ser. C       524,020   
  2,000      San Diego Cnty. Water Auth., CP, 5.00%, 5/1/38, Ser. 2008-A (AGM)       2,195,200   

 

10   Annual Report   |  May 31, 2014


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

Principal
Amount
(000s)
              Value  
  California (continued)      
  $3,300      San Marcos Unified School Dist., GO, 5.00%, 8/1/38, Ser. A       $3,608,715   
  2,000      Santa Clara Cnty. Financing Auth. Rev., El Camino Hospital, 5.75%, 2/1/41,
Ser. A (AMBAC)
      2,154,440   
  State, GO,      
  2,925      5.00%, 11/1/32       3,214,604   
  1,590      5.00%, 6/1/37       1,705,259   
  5,200      5.125%, 8/1/36       5,709,860   
  2,500      5.25%, 3/1/38       2,723,475   
  5,945      5.25%, 11/1/40       6,667,853   
  5,750      5.50%, 3/1/40       6,538,497   
  9,500      6.00%, 4/1/38       11,200,880   
  Statewide Communities Dev. Auth. Rev.,      
  2,510      California Baptist Univ., 5.75%, 11/1/17, Ser. B (a)(b)(d)(j)      
        (acquisition cost-$2,510,000; purchased 6/22/07)       2,775,734   
  710      California Baptist Univ., 6.50%, 11/1/21       836,756   
  1,000      Cottage Health, 5.00%, 11/1/40       1,081,830   
  4,890      Methodist Hospital Project, 6.625%, 8/1/29 (FHA)       5,821,154   
  17,415      Methodist Hospital Project, 6.75%, 2/1/38 (FHA)       20,687,627   
  5,690      Sutter Health, 6.00%, 8/15/42, Ser. A       6,620,543   
  1,000      Trinity Health, 5.00%, 12/1/41       1,062,850   
  4,725      Torrance Rev., Torrance Memorial Medical Center, 5.00%, 9/1/40, Ser. A       4,935,640   
                143,873,605   
  Colorado – 1.5%      
  5,800      Aurora Rev., Children’s Hospital Assoc., 5.00%, 12/1/40       6,103,108   
  1,000      Denver Health & Hospital Auth. Rev., 5.625%, 12/1/40       1,079,640   
  Health Facs. Auth. Rev., Ser. A,      
  1,000      American Baptist Homes, 5.90%, 8/1/37       1,001,620   
  500      Evangelical Lutheran, 6.125%, 6/1/38 (Pre-refunded @ $100, 6/1/14) (c)       500,000   
  6,045      Sisters of Charity of Leavenworth Health System, 5.00%, 1/1/40       6,443,728   
  1,430      Public Auth. for Colorado Energy Rev., 6.50%, 11/15/38       1,892,519   
                17,020,615   
  Connecticut – 0.2%      
  1,250      Harbor Point Infrastructure Improvement Dist., Tax Allocation, 7.875%, 4/1/39, Ser. A       1,454,913   
  1,000      State Health & Educational Fac. Auth. Rev., Hartford Healthcare, 5.00%, 7/1/41, Ser. A       1,069,960   
                2,524,873   
  Florida – 5.1%      
  1,000      Brevard Cnty. Health Facs. Auth. Rev., Health First, Inc. Project, 7.00%, 4/1/39       1,145,960   
  Broward Cnty. Airport System Rev.,      
  12,100      5.00%, 10/1/42, Ser. Q-1       13,118,336   
  600      5.375%, 10/1/29, Ser. O       688,710   
  8,500      Broward Cnty. Water & Sewer Utility Rev., 5.25%, 10/1/34, Ser. A (h)       9,500,365   
  1,000      Clearwater Water & Sewer Rev., 5.25%, 12/1/39, Ser. A       1,064,630   
  340      Dev. Finance Corp. Rev., Renaissance Charter School, 6.50%, 6/15/21, Ser. A       362,246   
  3,000      Highlands Cnty. Health Facs. Auth. Rev., Adventist Health System,
5.625%, 11/15/37, Ser. B
      3,364,140   
  3,000      Leesburg Hospital Rev., Leesburg Regional Medical Center Project, 5.50%, 7/1/32       3,002,010   
  10,000      Orlando-Orange Cnty. Expressway Auth. Rev., 5.00%, 7/1/40, Ser. A       10,701,200   

 

May 31, 2014   |  Annual Report     11   


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

Principal
Amount
(000s)
              Value  
  Florida (continued)      
  $500      Sarasota Cnty. Health Facs. Auth. Rev., 5.75%, 7/1/37       $483,860   
  7,900      State Board of Education, GO, 5.00%, 6/1/38, Ser. D (h)       8,742,851   
  5,000      Sumter Landing Community Dev. Dist. Rev., 4.75%, 10/1/35, Ser. A (NPFGC)       4,973,150   
                57,147,458   
  Georgia – 0.4%      
  1,500      Atlanta Airport Rev., 5.00%, 1/1/40, Ser. A       1,595,820   
  2,775      Medical Center Hospital Auth. Rev., Spring Harbor Green Island Project, 5.25%, 7/1/37       2,785,823   
                4,381,643   
  Illinois – 5.8%      
  Chicago, Special Assessment, Lake Shore East,      
  2,444      6.625%, 12/1/22       2,472,497   
  5,438      6.75%, 12/1/32       5,495,806   
  1,250      Chicago Motor Fuel Tax Rev., 5.00%, 1/1/38, Ser. A (AGC)       1,278,662   
  Finance Auth. Rev.,      
  2,500      Christian Homes, Inc., 5.75%, 5/15/31, Ser. A       2,569,300   
  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       833,595   
  2,000      Provena Health, 6.00%, 5/1/28, Ser. A       2,188,740   
  5,000      Univ. of Chicago, 5.50%, 7/1/37, Ser. B (h)       5,654,250   
  37,000      Sports Facs. Auth. Rev., 5.50%, 6/15/30 (AMBAC)       38,397,860   
  Village of Hillside, Tax Allocation, Mannheim Redev. Project,      
  3,495      6.55%, 1/1/20       3,725,216   
  2,900      7.00%, 1/1/28       2,978,938   
                65,679,864   
  Indiana – 0.4%      
  1,500      Finance Auth. Rev., Duke Energy Indiana, Inc., 6.00%, 8/1/39, Ser. B       1,656,870   
  Vigo Cnty. Hospital Auth. Rev., Union Hospital, Inc.,      
  990      5.80%, 9/1/47 (a)(b)(d)(j)
(acquisition cost-$960,082; purchased 9/7/07)
      968,487   
  1,900      7.50%, 9/1/22       2,314,352   
                4,939,709   
  Iowa – 2.3%      
  Finance Auth. Rev.,      
  144      Deerfield Retirement Community, Inc., 2.00%, 5/15/56, Ser. B, PIK       1,442   
  4,500      Edgewater LLC Project, 6.75%, 11/15/42       4,681,440   
  6,000      Fertilizer Company Project, 5.25%, 12/1/25       6,264,360   
  5,000      Fertilizer Company Project, 5.50%, 12/1/22       5,236,450   
  10,350      Tobacco Settlement Auth. Rev., 5.60%, 6/1/34, Ser. B       9,554,809   
                25,738,501   
  Kansas – 0.1%      
  500      Dev. Finance Auth. Rev., Adventist Health, 5.75%, 11/15/38       557,180   
  850      Manhattan Rev., Meadowlark Hills Retirement, 5.00%, 5/15/36, Ser. A (b)       821,406   
                1,378,586   
  Kentucky – 0.1%      
  1,000      Economic Dev. Finance Auth. Rev., Owensboro Medical Healthcare Systems, 6.375%, 6/1/40, Ser. A       1,119,600   

 

12   Annual Report   |  May 31, 2014


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

Principal
Amount
(000s)
              Value  
  Louisiana – 0.7%      
  Local Gov’t Environmental Facs. & Community Dev. Auth Rev.,      
  $450      Westlake Chemical Corp., 6.50%, 11/1/35, Ser. A-2       $519,341   
  750      Woman’s Hospital Foundation, 5.875%, 10/1/40, Ser. A       855,262   
  1,000      Woman’s Hospital Foundation, 6.00%, 10/1/44, Ser. A       1,146,800   
  Public Facs. Auth. Rev., Ochsner Clinic Foundation Project,      
  3,300      5.50%, 5/15/47, Ser. B       3,469,059   
  2,000      6.50%, 5/15/37       2,345,600   
                8,336,062   
  Maryland – 0.7%      
  Health & Higher Educational Facs. Auth. Rev.,      
  1,400      Charlestown Community, 6.25%, 1/1/41       1,522,290   
  2,380      Medstar Health, 5.00%, 8/15/41       2,521,324   
  4,050      Washington Cnty. Hospital, 6.00%, 1/1/43       4,167,572   
                8,211,186   
  Massachusetts – 0.9%      
  Dev. Finance Agcy. Rev.,      
  4,610      Adventcare Project, 6.75%, 10/15/37, Ser. A       4,807,354   
  570      Adventcare Project, 7.625%, 10/15/37       631,024   
  1,000      Foxborough Regional Charter School, 7.00%, 7/1/42, Ser. A       1,123,140   
  2,900      State College Building Auth. Rev., 5.50%, 5/1/39, Ser. A       3,269,431   
                9,830,949   
  Michigan – 0.5%      
  1,000      Detroit, GO, 5.25%, 11/1/35       1,069,430   
  800      Public Educational Facs. Auth. Rev., Bradford Academy, 6.50%, 9/1/37 (a)(b)(d)(j) (acquisition cost-$800,000; purchased 9/21/07)       456,000   
  3,000      Royal Oak Hospital Finance Auth. Rev., William Beaumont Hospital, 8.25%, 9/1/39 (Pre-refunded @ $100, 9/1/18) (c)       3,912,660   
                5,438,090   
  Minnesota – 0.3%      
  2,640      North Oaks Rev., Presbyterian Homes North Oaks, 6.00%, 10/1/33       2,759,170   
  400      St. Louis Park Rev., Nicollett Health Services, 5.75%, 7/1/39       434,720   
                3,193,890   
  Mississippi – 0.0%      
  40      Dev. Bank Special Obligation Rev., Capital Projects and Equipment Acquisition, 5.00%, 7/1/24, Ser. A-2 (AMBAC)       40,156   
  Missouri – 1.0%      
  550      Lee’s Summit, Tax Allocation, Summit Fair Project, 5.625%, 10/1/23       575,558   
  10,000      State Health & Educational Facs. Auth. Rev., CoxHealth, 5.00%, 11/15/44, Ser. A       10,674,600   
                11,250,158   
  Nevada – 0.9%      
  10,000      Clark Cnty., GO, 4.75%, 11/1/35 (FGIC-NPFGC) (h)       10,489,200   
  New Hampshire – 0.2%      
  2,000      Business Finance Auth. Rev., Elliot Hospital, 6.125%, 10/1/39, Ser. A       2,134,680   
  New Jersey – 4.0%      
  950      Burlington Cnty. Bridge Commission Rev., The Evergreens Project, 5.625%, 1/1/38       928,729   
  4,000      Economic Dev. Auth., Special Assessment, Kapkowski Road Landfill Project, 5.75%, 10/1/21       4,421,120   

 

May 31, 2014   |  Annual Report     13   


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

Principal
Amount
(000s)
              Value  
  New Jersey (continued)      
  Economic Dev. Auth. Rev.,      
  $525      Arbor Glen, 6.00%, 5/15/28, Ser. A       $368,634   
  2,000      MSU Student Housing Project, 5.875%, 6/1/42       2,188,000   
  Health Care Facs. Financing Auth. Rev.,      
  1,500      AHS Hospital Corp., 6.00%, 7/1/37       1,741,320   
  4,000      Robert Wood Johnson Univ. Hospital, 5.50%, 7/1/43, Ser. A       4,420,680   
  1,500      St. Peters Univ. Hospital, 5.75%, 7/1/37       1,523,835   
  2,000      State Turnpike Auth. Rev., 5.25%, 1/1/40, Ser. E       2,170,500   
  Tobacco Settlement Financing Corp. Rev., Ser. 1-A,      
  3,300      4.75%, 6/1/34       2,587,596   
  31,305      5.00%, 6/1/41       24,605,730   
                44,956,144   
  New Mexico – 0.2%      
  2,000      Farmington Pollution Control Rev., 5.90%, 6/1/40, Ser. D       2,210,760   
  New York – 12.6%      
  33,500      Hudson Yards Infrastructure Corp. Rev., 5.25%, 2/15/47, Ser. A       36,367,265   
  3,880      Metropolitan Transportation Auth. Rev., 5.00%, 11/15/36, Ser. D       4,205,649   
  1,100      Nassau Cnty. Industrial Dev. Agcy. Rev., Amsterdam at Harborside, 6.70%, 1/1/43, Ser. A       571,912   
  New York City Water & Sewer System Rev.,      
  2,830      5.00%, 6/15/37, Ser. D (h)       2,931,795   
  4,000      Second Generation Resolutions, 4.75%, 6/15/35, Ser. DD (h)       4,225,080   
  2,000      Second Generation Resolutions, 5.00%, 6/15/39, Ser. GG-1       2,194,280   
  New York Liberty Dev. Corp. Rev.,      
  10,000      1 World Trade Center Project, 5.00%, 12/15/41       10,725,200   
  54,000      4 World Trade Center Project, 5.75%, 11/15/51       60,327,720   
  1,000      Bank of America Tower at One Bryant Park Project, 5.125%, 1/15/44       1,065,860   
  2,500      Bank of America Tower at One Bryant Park Project, 5.625%, 7/15/47       2,756,475   
  1,250      Bank of America Tower at One Bryant Park Project, 6.375%, 7/15/49       1,380,700   
  1,505      Goldman Sachs Headquarters, 5.25%, 10/1/35       1,761,196   
  10,000      Goldman Sachs Headquarters, 5.25%, 10/1/35 (h)       11,702,300   
  1,750      State Dormitory Auth. Rev., The New School, 5.50%, 7/1/40       1,912,960   
                142,128,392   
  North Carolina – 0.1%      
  550      Medical Care Commission Rev., Salemtowne, 5.10%, 10/1/30       551,513   
  North Dakota – 0.3%      
  3,710      Stark Cnty. Healthcare Rev., Benedictine Living Communities, 6.75%, 1/1/33       3,929,595   
  Ohio – 5.2%      
  Buckeye Tobacco Settlement Financing Auth. Rev., Ser. A-2,      
  10,000      5.875%, 6/1/47       8,199,500   
  33,740      6.50%, 6/1/47       29,785,335   
  3,900      Hamilton Cnty. Sales Tax Rev., 5.00%, 12/1/30, Ser. A       4,285,281   
  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)       1,040,290   
  1,000      Montgomery Cnty. Rev., Miami Valley Hospital, 6.25%, 11/15/39, Ser. A
(Pre-refunded @ $100, 11/15/14) (c)
      1,027,260   
  3,000      State Rev., Cleveland Clinic Health System, 5.50%, 1/1/39, Ser. B       3,350,940   
  10,000      State Turnpike Commission Rev., 5.00%, 2/15/48, Ser. A-1       10,804,200   
                58,492,806   

 

14   Annual Report   |  May 31, 2014


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

Principal
Amount
(000s)
              Value  
  Oregon – 0.2%      
  $1,000      Clackamas Cnty. Hospital Fac. Auth. Rev., Legacy Health System, 5.50%, 7/15/35, Ser. A       $1,084,580   
  1,155      State Department of Administrative Services, CP, 5.25%, 5/1/39, Ser. A       1,242,699   
                2,327,279   
  Pennsylvania – 5.4%      
  7,500      Berks Cnty. Municipal Auth. Rev., Reading Hospital Medical Center, 5.00%, 11/1/44, Ser. A       8,035,425   
  Cumberland Cnty. Municipal Auth. Rev., Messiah Village Project, Ser. A,      
  750      5.625%, 7/1/28       779,085   
  670      6.00%, 7/1/35       698,904   
  3,250      Harrisburg Auth. Rev., Harrisburg Univ. of Science, 6.00%, 9/1/36, Ser. B (e)       1,496,332   
  Higher Educational Facs. Auth. Rev.,      
  850      Edinboro Univ. Foundation, 6.00%, 7/1/43       894,480   
  400      Thomas Jefferson Univ., 5.00%, 3/1/40       423,260   
  500      Luzerne Cnty. Industrial Dev. Auth. Rev., Pennsylvania American Water Co., 5.50%, 12/1/39       553,250   
  8,465      Montgomery Cnty. Industrial Dev. Auth. Rev., New Regional Medical Center, 5.375%, 8/1/38 (FHA)       9,398,436   
  17,000      Philadelphia, GO, 5.25%, 12/15/32, Ser. A (AGM)       18,258,340   
  Philadelphia Hospitals & Higher Education Facs. Auth. Rev., Temple Univ. Health System, Ser. A,      
  1,000      5.625%, 7/1/36       1,021,080   
  7,000      5.625%, 7/1/42       7,060,620   
  500      Philadelphia Water & Wastewater Rev., 5.25%, 1/1/36, Ser. A       537,995   
  10,000      Turnpike Commission Rev., 5.00%, 12/1/43, Ser. C       10,907,100   
  1,000      Westmoreland Cnty. Industrial Dev. Auth. Rev., Excela Health Project, 5.125%, 7/1/30       1,059,560   
                61,123,867   
  Rhode Island – 5.0%      
  56,200      Tobacco Settlement Financing Corp. Rev., 6.25%, 6/1/42, Ser. 2002-A       56,214,050   
  South Carolina – 1.1%      
  1,000      Greenwood Cnty. Rev., Self Regional Healthcare, 5.375%, 10/1/39       1,085,260   
  10,000      State Public Service Auth. Rev., 5.50%, 12/1/53, Ser. E       11,149,900   
                12,235,160   
  Tennessee – 1.2%      
  1,750      Claiborne Cnty. Industrial Dev. Board Rev., Lincoln Memorial Univ. Project, 6.625%, 10/1/39       1,930,302   
  1,000      Johnson City Health & Educational Facs. Board Rev., Mountain States Health Alliance, 6.00%, 7/1/38, Ser. A       1,121,190   
  500      Sullivan Cnty. Health Educational & Housing Facs. Board Rev., Wellmont Health Systems Project, 5.25%, 9/1/36, Ser. C       519,995   
  Tennessee Energy Acquisition Corp. Rev., Ser. C,      
  3,000      5.00%, 2/1/23       3,405,420   
  6,000      5.00%, 2/1/27       6,750,060   
                13,726,967   
  Texas – 13.5%      
  130      Aubrey Independent School Dist., GO, 5.50%, 2/15/33 (GTD-PSF)       130,761   
  6,500      Brazos Cnty. Health Facs. Dev. Corp. Rev., 5.375%, 1/1/32       6,511,310   
  2,500      Dallas Rev., Dallas Civic Center, 5.25%, 8/15/38 (AGC)       2,695,025   
  21,000      Grand Parkway Transportation Corp. Rev., 5.00%, 4/1/53, Ser. B       22,451,310   

 

May 31, 2014   |  Annual Report     15   


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

Principal
Amount
(000s)
              Value  
  Texas (continued)      
  Harris Cnty. Cultural Education Facs. Finance Corp. Rev., Texas Children’s Hospital Project,      
  $3,750      5.25%, 10/1/29       $4,221,188   
  12,700      5.50%, 10/1/39       14,132,306   
  700      HFDC of Central Texas, Inc. Rev., Village at Gleannloch Farms, 5.50%, 2/15/37, Ser. A       671,062   
  North Harris Cnty. Regional Water Auth. Rev.,      
  10,300      5.25%, 12/15/33       11,165,715   
  10,300      5.50%, 12/15/38       11,214,537   
  North Texas Tollway Auth. Rev.,      
  5,750      5.00%, 1/1/38       6,158,307   
  1,300      5.50%, 9/1/41, Ser. A       1,490,931   
  5,000      5.625%, 1/1/33, Ser. B       5,545,550   
  1,200      5.75%, 1/1/33, Ser. F       1,335,600   
  250      San Juan Higher Education Finance Auth. Rev., 6.70%, 8/15/40, Ser. A       294,360   
  State, Mobility Fund, GO (h),      
  10,025      4.75%, 4/1/35, Ser. A       10,290,061   
  17,500      4.75%, 4/1/36       18,558,925   
  1,000      State Public Finance Auth. Charter School Finance Corp. Rev., 5.875%, 12/1/36, Ser. A       1,088,050   
  3,000      Tarrant Cnty. Cultural Education Facs. Finance Corp. Rev., Baylor Health Care Systems Project, 6.25%, 11/15/29       3,487,140   
  19,380      Texas Municipal Gas Acquisition & Supply Corp. I Rev., 6.25%, 12/15/26, Ser. D       23,751,934   
  5,000      Texas Municipal Gas Acquisition & Supply Corp. III Rev., 5.00%, 12/15/26       5,517,900   
  1,000      Wise Cnty. Rev., Parker Cnty. Junior College Dist., 8.00%, 8/15/34       1,176,720   
                151,888,692   
  Virginia – 0.2%      
  1,000      Fairfax Cnty. Industrial Dev. Auth. Rev., Inova Health Systems, 5.50%, 5/15/35, Ser. A       1,138,780   
  James City Cnty. Economic Dev. Auth. Rev., United Methodist Home, Ser. A,      
  412      2.00%, 10/1/48 (e)       10,900   
  1,273      6.00%, 6/1/43       1,154,094   
                2,303,774   
  Washington – 1.5%      
  Health Care Facs. Auth. Rev.,      
  1,300      Multicare Health Systems, 6.00%, 8/15/39, Ser. B (AGC)       1,527,344   
  1,000      Seattle Cancer Care Alliance, 7.375%, 3/1/38       1,208,680   
  13,000      Virginia Mason Medical Center, 6.125%, 8/15/37, Ser. A       13,836,550   
                16,572,574   
  West Virginia – 0.2%      
  2,000      Hospital Finance Auth. Rev., Highland Hospital, 9.125%, 10/1/41       2,016,380   
  Wisconsin – 0.1%      
  1,000      Health & Educational Facs. Auth. Rev., Prohealth Care, Inc., 6.625%, 2/15/39       1,174,430   
  Total Municipal Bonds & Notes (cost-$988,744,527)         1,079,351,542   
  Variable Rate Notes – 1.5%            
  California – 0.5%      
  5,000      Health Facs. Financing Auth. Rev., 8.07%, 11/15/36, Ser. 3193 (a)(b)(d)(f)(g)(j) (acquisition cost -$4,860,300; purchased 6/7/10)       5,912,050   

 

16   Annual Report   |  May 31, 2014


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

Principal
Amount
(000s)
              Value  
  Florida – 0.2%      
  $1,830      Highlands Cnty. Health Facs. Auth. Rev., Adventist Health System, 5.00%, 11/15/31, Ser. C (g)       $1,889,310   
  Iowa – 0.1%      
  769      Finance Auth. Rev., Deerfield Retirement Community, Inc., 2.70%, 11/15/46, Ser. A (g)(i)       495,583   
  Texas – 0.5%      
  5,365      State, GO, 7.663%, 4/1/37, Ser. 3197 (a)(d)(f)(g)       6,020,925   
  West Virginia – 0.2%      
  2,000      Economic Dev. Auth. Rev., Appalachian Power, 5.375%, 12/1/38, Ser. A (g)       2,179,700   
  Total Variable Rate Notes (cost-$14,967,655)         16,497,568   
  Corporate Bonds & Notes – 0.1%            
  Commercial Services – 0.1%      
  900      ADT Corp., 4.125%, 6/15/23 (cost-$805,149)         843,750   
  Short-Term Investments – 2.6%            
  U.S. Government Agency Securities (k) – 2.3%      
  Fannie Mae Discount Notes,      
  1,800      0.051%, 8/26/14       1,799,785   
  9,200      0.056%, 9/8/14       9,198,608   
  Federal Home Loan Bank Discount Notes,      
  1,300      0.061%, 7/9/14       1,299,918   
  8,900      0.079%, 10/8/14       8,897,528   
  1,900      0.101%, 8/1/14       1,899,678   
  3,400      0.132%, 7/25/14       3,399,337   
  Total U.S. Government Agency Securities (cost-$26,494,854)         26,494,854   
  U.S. Treasury Obligations – 0.3%      
  1,300      U.S. Treasury Bills, 0.046%-0.056%, 10/23/14-10/30/14 (k)       1,299,720   
  U.S. Treasury Notes,      
  800      0.25%, 1/31/15       800,938   
  1,000      0.50%, 8/15/14       1,000,957   
  Total U.S. Treasury Obligations (cost-$3,101,052)       3,101,615   
  Total Short-Term Investments (cost-$29,595,906)       29,596,469   
  Total Investments (cost-$1,034,113,237) – 100.0%       $1,126,289,329   

 

May 31, 2014   |  Annual Report     17   


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

Industry classification of portfolio holdings as a percentage of total investments was as follows:

 

Revenue Bonds:

   

Health, Hospital & Nursing Home Revenue

    23.0  

Miscellaneous Revenue

    7.9     

Industrial Revenue

    7.0     

Natural Gas Revenue

    7.0     

Highway Revenue Tolls

    6.9     

Tobacco Settlement Funded

    6.7     

Miscellaneous Taxes

    6.6     

Water Revenue

    3.9     

Electric Power & Light Revenue

    3.2     

Lease (Appropriation)

    2.7     

Sewer Revenue

    2.7     

Port, Airport & Marina Revenue

    2.5     

College & University Revenue

    2.3     

Sales Tax Revenue

    0.4     

Transit Revenue

    0.4     

Resource Recovery Revenue

    0.2     

Fuel Sales Tax Revenue

    0.1     

Lease Revenue

    0.1     
 

 

 

   

Total Revenue Bonds

      83.6

General Obligation

      11.4   

U.S. Government Agency Securities

      2.3   

Special Assessment

      1.1   

Tax Allocation

      0.9   

Certificates of Participation

      0.3   

U.S. Treasury Obligations

      0.3   

Commercial Services

      0.1   
   

 

 

 

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 $16,133,196, representing 1.4% 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, 2014.  

 

(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, 2014.  

 

(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)   Step Bond–Coupon is a fixed rate for an initial period then resets at a specific date and rate.  

 

(j)   Restricted. The aggregate acquisition cost of such securities is $9,130,382. The aggregate value is $10,112,271, representing 0.9% of total investments.  

 

 

18   Annual Report   |  May 31, 2014


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

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

 

(l)   Floating Rate Notes–The weighted average daily balance of Floating Rate Notes outstanding during the year ended May 31, 2014 was $44,385,770 at a weighted average interest rate, including fees, of 0.71%.  

 

(m)   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
5/31/14
 

Investments in Securities – Assets

       

Municipal Bonds & Notes:

       

Illinois

    $–        $65,594,864        $85,000        $65,679,864   

Iowa

           25,737,059        1,442        25,738,501   

Michigan

           4,982,090        456,000        5,438,090   

Virginia

           2,292,874        10,900        2,303,774   

All Other

           980,191,313               980,191,313   

Variable Rate Notes

           16,497,568               16,497,568   

Corporate Bonds & Notes

           843,750               843,750   

Short-Term Investments

           29,596,469               29,596,469   

Totals

    $–        $1,125,735,987        $553,342        $1,126,289,329   

At May 31, 2014, 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, 2014, was as follows:

 

    

Beginning
Balance
5/31/2013

   

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
5/31/2014

 

Investments In Securities – Assets

  

             

Municipal Bonds & Notes:

                 

Illinois

    $–        $–        $–        $–        $–        $–        $85,000        $–        $85,000   

Iowa

           3,007                             (1,565                   1,442   

Michigan

                                              456,000               456,000   

Virginia

                                              10,900               10,900   

Totals

    $–        $3,007        $–        $–        $–        $(1,565     $551,900        $–        $553,342   

The following table presents additional information about valuation techniques and inputs used for investments that are measured at fair value and categorized within Level 3 at May 31, 2014.

 

     Ending Balance
at 5/31/14
    Valuation
Technique Used
  Unobservable
Inputs
  Input Values

Investments in Securities – Assets

  

     

Municipal Bonds & Notes

    $553,342      Third-Party Pricing Vendor   Projected Revenue Stream   $1.00 – $57.00

The net change in unrealized appreciation/depreciation of Level 3 investments held at May 31, 2014, was $(1,565). Net change in unrealized appreciation/depreciation is reflected on the Statement of Operations.

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

The effect of derivatives on the Statement of Operations for the year ended May 31, 2014:

 

Location   Interest
Rate
Contracts
 

Net realized gain on:

 
Swaps     $622,769   
 

 

 

 

Net change in unrealized appreciation/depreciation of:

 
Swaps     $(334,300
 

 

 

 

 

May 31, 2014   |  Annual Report     19   


Schedule of Investments

PIMCO Municipal Income Fund II

May 31, 2014 (continued)

 

The average volume (measured at each fiscal quarter-end) of derivative activity during the year ended May 31, 2014:

 

     Interest Rate
Swap
Agreements(1)
 
    $27,200   
 

 

 

 

 

(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.
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
NPFGC   -   insured by National Public Finance Guarantee Corp.
PIK   -   Payment-in-Kind
PSF   -   Public School Fund

 

20   Annual Report     |  May 31, 2014  |     See accompanying Notes to Financial Statements


Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2014

 

Principal

Amount

(000s)

              Value  
  California Municipal Bonds & Notes – 87.5%            
  $2,000      Alhambra Rev., Atherton Baptist Homes, 7.625%, 1/1/40, Ser. A       $2,165,700   
  20,000      Bay Area Toll Auth. Rev., San Francisco Bay Area, 5.00%, 4/1/39, Ser. F-1 (h)       21,404,600   
  Chabot-Las Positas Community College Dist., GO, Ser. C,      
  17,305      zero coupon, 8/1/36 (AMBAC)       5,711,169   
  5,000      zero coupon, 8/1/37 (AMBAC)       1,561,150   
  15,000      zero coupon, 8/1/43 (AMBAC)       3,328,950   
  1,000      Chula Vista Rev., San Diego Gas & Electric, 5.875%, 2/15/34, Ser. B       1,147,840   
  300      City & Cnty. of San Francisco, Capital Improvement Projects, CP, 5.25%, 4/1/31, Ser. A       335,532   
  8,920      Coronado Community Dev. Agcy., Tax Allocation, 4.875%, 9/1/35 (AMBAC)       9,030,430   
  25,000      Desert Community College Dist., GO, zero coupon, 8/1/46, Ser. C (AGM)       4,393,750   
  8,300      El Dorado Irrigation Dist. & El Dorado Water Agcy., CP, 5.75%, 8/1/39, Ser. A (AGC) (Pre-refunded @ $100, 8/ 1/14) (c)       8,374,202   
  1,440      Fremont Community Facs. Dist. No. 1, Special Tax, Pacific Commons, 5.30%, 9/1/30       1,448,122   
  Golden State Tobacco Securitization Corp. Rev.,      
  13,885      5.00%, 6/1/45 (AMBAC-TCRS)       13,960,951   
  3,500      5.00%, 6/1/45, Ser. A       3,519,145   
  6,000      5.00%, 6/1/45, Ser. A (FGIC-TCRS)       6,032,820   
  8,500      5.125%, 6/1/47, Ser. A-1       6,573,390   
  31,415      5.75%, 6/1/47, Ser. A-1       26,384,516   
  Health Facs. Financing Auth. Rev.,      
  250      Adventist Health System, 5.75%, 9/1/39, Ser. A       281,682   
  3,000      Catholic Healthcare West, 6.00%, 7/1/39, Ser. A       3,362,160   
  1,000      Children’s Hospital of Los Angeles, 5.00%, 11/15/34, Ser. A       1,041,930   
  500      Children’s Hospital of Orange Cnty., 6.50%, 11/1/38, Ser. A       593,060   
  4,000      Scripps Health, 5.00%, 11/15/40, Ser. A       4,335,720   
  3,700      Stanford Hospital, 5.25%, 11/15/40, Ser. A-2       4,110,959   
  8,755      Stanford Hospital Clinics, 5.00%, 8/15/51, Ser. A       9,475,712   
  1,000      Sutter Health, 5.00%, 8/15/35, Ser. D       1,104,030   
  4,220      Sutter Health, 5.00%, 11/15/42, Ser. A (IBC-NPFGC)       4,389,264   
  12,195      Sutter Health, 5.25%, 11/15/46, Ser. A (h)       12,755,238   
  4,500      Imperial Irrigation Dist. Rev., 5.00%, 11/1/41, Ser. B       4,723,470   
  Infrastructure & Economic Dev. Bank Rev.,      
  175      5.25%, 2/1/38       186,226   
  10,000      Independent System Operator Corp., 5.00%, 2/1/39       10,763,100   
  515      Irvine Unified School Dist., Special Tax, 6.70%, 9/1/35       562,261   
  Lancaster Redev. Agcy., Tax Allocation,      
  425      6.875%, 8/1/39       492,350   
  575      6.875%, 8/1/39 (Pre-refunded @ $100, 8/ 1/19) (c)       737,403   
  500      Long Beach Airport Rev., 5.00%, 6/1/40, Ser. A       521,530   
  7,500      Long Beach Bond Finance Auth. Rev., Long Beach Natural Gas, 5.50%, 11/15/37, Ser. A       9,110,400   
  10,000      Long Beach Unified School Dist., GO, 5.25%, 8/1/33, Ser. A (h)       11,199,400   
  Los Angeles Department of Water & Power Rev.,      
  15,000      4.75%, 7/1/30, Ser. A-2 (AGM) (h)       15,524,250   
  3,000      5.00%, 7/1/36, Ser. B       3,356,610   
  3,000      5.00%, 7/1/43, Ser. B (e)       3,358,170   
  11,000      Los Angeles Unified School Dist., GO, 5.00%, 1/1/34, Ser. I       12,181,180   
  7,175      M-S-R Energy Auth. Rev., 6.50%, 11/1/39, Ser. B       9,573,100   

 

May 31, 2014   |  Annual Report     21   


Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2014 (continued)

 

Principal

Amount

(000s)

              Value  
  $10,000      Manteca Redev. Agcy., Tax Allocation, 5.00%, 10/1/36 (AMBAC)       $10,037,400   
  5,000      Metropolitan Water Dist. of Southern California Rev., 5.00%, 7/1/37, Ser. A (h)       5,481,200   
  1,130      Municipal Finance Auth. Rev., Azusa Pacific Univ. Project, 7.75%, 4/1/31, Ser. B       1,324,812   
  5,000      Oakland Unified School Dist., Alameda Cnty., GO, 6.125%, 8/1/29, Ser. A       5,692,650   
  4,750      Palomar Pomerado Health, CP, 6.75%, 11/1/39       4,999,280   
  10,000      Placentia-Yorba Linda Unified School Dist., CP, 5.00%, 10/1/32 (NPFGC)       10,423,600   
  1,500      Pollution Control Financing Auth. Rev., American Water Capital Corp. Project, 5.25%, 8/1/40 (a)(b)(d)(i) (acquisition cost-$1,500,000; purchased 8/11/10)       1,591,290   
  Poway Unified School Dist., GO,      
  11,000      zero coupon, 8/1/40       3,197,040   
  16,000      zero coupon, 8/1/46       3,437,280   
  2,000      Roseville Redev. Agcy., Tax Allocation, 5.00%, 9/1/32, Ser. B (NPFGC)       2,001,000   
  1,375      Ross Valley School Dist., GO, 5.00%, 8/1/42, Ser. B       1,501,844   
  1,000      San Diego Public Facs. Financing Auth. Sewer Rev., 5.25%, 5/15/39, Ser. A       1,111,950   
  4,000      San Diego Public Facs. Financing Auth. Water Rev., 5.25%, 8/1/38, Ser. A       4,483,840   
  2,800      San Diego Regional Building Auth. Rev., Cnty. Operations Center & Annex, 5.375%, 2/1/36, Ser. A       3,089,548   
  2,800      San Diego Unified School Dist., GO, 4.75%, 7/1/27, Ser. D-2 (AGM)       2,961,224   
  1,000      San Jose Hotel Tax Rev., Convention Center Expansion, 6.50%, 5/1/36       1,161,340   
  1,300      San Marcos Unified School Dist., GO, 5.00%, 8/1/38, Ser. A       1,421,615   
  1,260      Santa Cruz Cnty., CP, 5.25%, 8/1/32       1,263,692   
  1,500      Santa Cruz Cnty. Redev. Agcy., Tax Allocation, Live Oak/Soquel Community, 7.00%, 9/1/36, Ser. A       1,722,990   
  State, GO,      
  2,500      5.00%, 9/1/31       2,722,750   
  7,000      5.00%, 11/1/43       7,723,100   
  10,000      6.00%, 4/1/38       11,790,400   
  State Public Works Board Rev.,      
  3,000      5.75%, 10/1/30, Ser. G-1       3,476,670   
  2,000      California State Univ., 6.00%, 11/1/34, Ser. J       2,352,000   
  2,000      Judicial Council Projects, 5.00%, 12/1/29, Ser. D       2,249,460   
  2,500      Judicial Council Projects, 5.00%, 3/1/38, Ser. A (b)       2,721,225   
  7,915      Regents Univ., 5.00%, 3/1/33, Ser. A (Pre-refunded @ $100, 3/1/18) (c)       9,166,520   
  Statewide Communities Dev. Auth. Rev.,      
  3,760      Bentley School, 7.00%, 7/1/40, Ser. A       4,156,680   
  1,520      Catholic Healthcare West, 5.50%, 7/1/31, Ser. D       1,672,137   
  1,520      Catholic Healthcare West, 5.50%, 7/1/31, Ser. E       1,672,137   
  250      Huntington Park Charter School Project, 5.15%, 7/1/30, Ser. A (b)       246,762   
  1,250      Huntington Park Charter School Project, 5.25%, 7/1/42, Ser. A (b)       1,169,975   
  500      International School of the Peninsula Project, 5.00%, 11/1/29       502,115   
  9,705      Kaiser Permanente, 5.00%, 4/1/42, Ser. A       10,493,240   
  1,000      Lancer Student Housing Project, 7.50%, 6/1/42       1,112,030   
  2,135      Methodist Hospital Project, 6.625%, 8/1/29 (FHA)       2,541,547   
  7,860      Methodist Hospital Project, 6.75%, 2/1/38 (FHA)       9,337,051   
  3,700      St. Joseph Health System, 5.75%, 7/1/47, Ser. A-3 (FGIC)       4,100,932   
  5,490      Sutter Health, 5.25%, 11/15/48, Ser. B       5,824,561   
  5,600      Sutter Health, 6.00%, 8/15/42, Ser. A       6,515,824   
  4,500      Univ. of California Irvine E. Campus, 5.375%, 5/15/38       4,838,085   

 

22   Annual Report   |  May 31, 2014


Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2014 (continued)

 

Principal

Amount

(000s)

              Value  
  $1,800      Tobacco Securitization Agcy. Rev., Stanislaus Cnty., 5.875%, 6/1/43, Ser. A       $1,800,054   
  3,100      Torrance Rev., Torrance Memorial Medical Center, 5.00%, 9/1/40, Ser. A       3,238,198   
  3,000      Township Health Care Dist, GO, 5.00%, 8/1/43, Ser. B       3,232,680   
  1,700      Turlock Irrigation Dist. Rev., 5.50%, 1/1/41       1,859,460   
  1,000      Tustin Unified School Dist., Special Tax, 6.00%, 9/1/40, Ser. 2006-1       1,058,450   
  Total California Municipal Bonds & Notes (cost-$365,223,580)         413,589,110   
  California Variable Rate Notes (a)(d)(f)(g) – 5.9%            
  6,035      Desert Community College Dist., GO, 8.05%, 8/1/32, Ser. 3016-1 (AGC) (b)(i) (acquisition cost-$5,860,407; purchased 4/17/09)       7,164,088   
  7,500      JPMorgan Chase Putters/Drivers Trust Rev., 8.085%, 5/15/34, Ser. 3838       8,965,575   
  4,000      Los Angeles Community College Dist., GO, 11.866%, 8/1/33, Ser. 3096       5,422,200   
  5,000      San Diego Community College Dist., GO, 8.523%, 2/1/17       6,307,100   
  Total California Variable Rate Notes (cost-$22,302,284)         27,858,963   
  Other Municipal Bonds & Notes – 3.7%            
  New Jersey – 0.7%      
  Tobacco Settlement Financing Corp. Rev., Ser. 1-A,      
  1,300      4.75%, 6/1/34       1,019,356   
  3,000      5.00%, 6/1/41       2,358,000   
                3,377,356   
  New York – 0.7%      
  1,250      New York Liberty Dev. Corp. Rev., Goldman Sachs Headquarters, 5.25%, 10/1/35       1,462,787   
  1,900      TSASC, Inc. Rev., 5.00%, 6/1/34, Ser. 1       1,609,908   
                3,072,695   
  Rhode Island – 2.3%      
  11,000      Tobacco Settlement Financing Corp. Rev., 6.25%, 6/1/42, Ser. 2002-A       11,002,750   
  Total Other Municipal Bonds & Notes (cost-$14,871,058)         17,452,801   
  Short-Term Investments – 2.9%            
  U.S. Government Agency Securities (j) – 1.9%      
  Federal Home Loan Bank Discount Notes,      
  800      0.091%, 7/18/14       799,906   
  8,100      0.101%, 7/30/14       8,098,673   
  Total U.S. Government Agency Securities (cost-$8,898,579)       8,898,579   
  U.S. Treasury Obligations – 0.7%      
  U.S. Treasury Notes,      
  3,400      0.50%, 8/15/14       3,403,254   
  100      0.50%, 10/15/14       100,162   
  Total U.S. Treasury Obligations (cost-$3,502,725)       3,503,416   
  Repurchase Agreements – 0.3%      
  1,300      Citigroup Global Markets, Inc.,
dated 5/30/14, 0.10%, due 6/2/14,
proceeds $1,300,011; collateralized by
U.S. Treasury Notes, 0.50%, due 10/15/14,
valued at $1,327,999 including accrued interest (cost-$1,300,000)
      1,300,000   
  Total Short-Term Investments (cost-$13,701,304)       13,701,995   
  Total Investments (cost-$416,098,226) – 100.0%       $472,602,869   

 

May 31, 2014   |  Annual Report     23   


Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2014 (continued)

 

Industry classification of portfolio holdings as a percentage of total investments was as follows:

 

Revenue Bonds:

   

Health, Hospital & Nursing Home Revenue

    18.8  

Tobacco Settlement Funded

    13.4     

Electric Power & Light Revenue

    7.7     

Highway Revenue Tolls

    4.5     

Natural Gas Revenue

    4.2     

Water Revenue

    3.2     

Lease (Abatement)

    2.9     

Miscellaneous Revenue

    2.6     

College & University Revenue

    2.5     

Port, Airport & Marina Revenue

    2.0     

Local or Guaranteed Housing

    1.0     

Private Schools

    1.0     

Lease Revenue

    0.3     

Hotel Occupancy Tax

    0.2     

Sewer Revenue

    0.2     
 

 

 

   

Total Revenue Bonds

      64.5

General Obligation

      21.4   

Certificates of Participation

      5.4   

Tax Allocation

      5.1   

U.S. Government Agency Securities

      1.9   

U.S. Treasury Obligations

      0.7   

Special Tax

      0.7   

Repurchase Agreements

      0.3   
   

 

 

 

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 $29,450,253, 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)   When-issued or delayed-delivery. To be settled/delivered after May 31, 2014.  

 

(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, 2014.  

 

(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, 2014.  

 

(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)   Restricted. The aggregate acquisition cost of such securities is $7,360,407. The aggregate value is $8,755,378, representing 1.9% of total investments.  

 

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

 

(k)   Floating Rate Notes–The weighted average daily balance of Floating Rate Notes outstanding during the year ended May 31, 2014 was $38,098,801 at a weighted average interest rate, including fees, of 0.70%.  

 

24   Annual Report   |  May 31, 2014


Schedule of Investments

PIMCO California Municipal Income Fund II

May 31, 2014 (continued)

 

 

(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
5/31/14
 

Investments in Securities – Assets

       

California Municipal Bonds & Notes

    $–        $413,589,110        $–        $413,589,110   

California Variable Rate Notes

           27,858,963               27,858,963   

Other Municipal Bonds & Notes

           17,452,801               17,452,801   

Short-Term Investments

           13,701,995               13,701,995   

Totals

    $–        $472,602,869        $–        $472,602,869   

At May 31, 2014, there were no transfers between Levels 1 and 2.

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

The effect of derivatives on the Statement of Operations for the year ended May 31, 2014:

 

Location   Interest
Rate
Contracts
 
Net realized gain on:  
Swaps     $205,965   
 

 

 

 
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, 2014:

 

     Interest Rate
Swap
Agreements(1)
 
    $10,600   
 

 

 

 

 

(1)   Notional Amount (in thousands)  

 

(n)   The following tables present by counterparty, the Fund’s derivative assets and liabilities net of related collateral held by the Fund at May 31, 2014 which has not been offset in the Statement of Assets and Liabilities, but would be available for offset to the extent of a default by the counterparty to the transaction.  

Financial Assets and Derivative Assets, and Collateral Received at May 31, 2014:

 

Gross Amounts Not Offset in the Statement of Assets and Liabilities

 
Counterparty  

Gross Financial Assets

Presented in Statement of

Assets and Liabilities

   

Financial

Instrument/

Derivative

Offset

    Net Amount  
Repurchase Agreement      

Citigroup

    $1,300,000        $(1,300,000 )†      $—   

Totals

    $1,300,000        $(1,300,000     $—   

 

  The actual collateral received is greater than the amount shown here due to over collateralization.  

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
IBC   -   Insurance Bond Certificate
NPFGC   -   insured by National Public Finance Guarantee Corp.
TCRS   -   Temporary Custodian Receipts

 

May 31, 2014   |  Annual Report     25   


Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2014

 

Principal
Amount
(000s)
              Value  
  New York Municipal Bonds & Notes – 88.6%            
  $1,000      Chautauqua Cnty. Industrial Dev. Agcy. Rev., Dunkirk Power Project, 5.875%, 4/1/42       $1,085,610   
  150      Erie Cnty. Industrial Dev. Agcy. Rev., Orchard Park, Inc. Project, 6.00%, 11/15/36, Ser. A       152,135   
  9,000      Hudson Yards Infrastructure Corp. Rev., 5.75%, 2/15/47, Ser. A       10,291,500   
  500      Long Island Power Auth. Rev., 5.00%, 9/1/34, Ser. A (AMBAC)       502,780   
  Metropolitan Transportation Auth. Rev.,      
  2,000      5.00%, 11/15/30, Ser. D       2,242,560   
  2,000      5.00%, 11/15/34, Ser. B       2,215,500   
  3,000      5.00%, 11/15/43, Ser. B       3,233,070   
  5,000      5.50%, 11/15/39, Ser. A       5,605,200   
  Monroe Cnty. Industrial Dev. Corp. Rev.,      
  3,500      Unity Hospital Rochester Project, 5.50%, 8/15/40 (FHA)       3,968,090   
  1,750      University of Rochester, 5.00%, 7/1/43, Ser. A       1,916,897   
  2,400      Nassau Cnty. Industrial Dev. Agcy. Rev., Amsterdam at Harborside, 6.70%, 1/1/43, Ser. A       1,247,808   
  2,000      New York City, GO, 5.00%, 8/1/31, Ser. D-1       2,273,540   
  1,500      New York City Health & Hospital Corp. Rev., 5.00%, 2/15/30, Ser. A       1,641,990   
  New York City Industrial Dev. Agcy. Rev.,      
  1,415      Liberty Interactive Corp., 5.00%, 9/1/35       1,426,419   
  1,500      Pilot Queens Baseball Stadium, 6.50%, 1/1/46 (AGC)       1,748,640   
  1,500      United Jewish Appeal Federation Project, 5.00%, 7/1/27, Ser. A       1,504,365   
  750      Yankee Stadium, 5.00%, 3/1/31 (FGIC)       767,663   
  1,900      Yankee Stadium, 5.00%, 3/1/36 (NPFGC)       1,938,190   
  4,900      Yankee Stadium, 7.00%, 3/1/49 (AGC)       5,938,555   
  New York City Transitional Finance Auth. Rev.,      
  5      5.00%, 11/1/27, Ser. B       5,016   
  4,850      5.00%, 5/1/39, Ser. F-1       5,366,282   
  5,000      5.25%, 1/15/39, Ser. S-3       5,512,950   
  New York City Water & Sewer System Rev.,      
  1,000      5.00%, 6/15/47, Ser. CC       1,095,800   
  1,000      5.25%, 6/15/40, Ser. EE       1,107,770   
  500      Second Generation Resolutions, 5.00%, 6/15/39, Ser. GG-1       548,570   
  New York Liberty Dev. Corp. Rev.,      
  3,000      1 World Trade Center Project, 5.00%, 12/15/41       3,217,560   
  10,000      4 World Trade Center Project, 5.75%, 11/15/51       11,171,800   
  1,500      Bank of America Tower at One Bryant Park Project, 5.125%, 1/15/44       1,598,790   
  1,400      Bank of America Tower at One Bryant Park Project, 5.625%, 7/15/47       1,543,626   
  1,300      Bank of America Tower at One Bryant Park Project, 6.375%, 7/15/49       1,435,928   
  2,230      Goldman Sachs Headquarters, 5.25%, 10/1/35       2,609,613   
  4,120      Goldman Sachs Headquarters, 5.25%, 10/1/35 (g)       4,821,348   
  3,500      Goldman Sachs Headquarters, 5.50%, 10/1/37       4,237,100   
  1,000      Onondaga Cnty. Rev., Syracuse Univ. Project, 5.00%, 12/1/36       1,091,210   
  1,400      Port Auth. of New York & New Jersey Rev., JFK International Air Terminal, 6.00%, 12/1/36       1,568,882   
  State Dormitory Auth. Rev.,      
  3,000      5.00%, 3/15/38, Ser. A       3,289,050   
  2,500      5.00%, 7/1/42, Ser. A       2,734,125   
  7,490      5.50%, 5/15/31, Ser. A (AMBAC)       9,447,811   
  2,600      Catholic Health of Long Island, 5.10%, 7/1/34       2,609,594   
  1,500      Fordham Univ., 5.50%, 7/1/36, Ser. A       1,676,565   

 

26   Annual Report   |  May 31, 2014


Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2014 (continued)

 

Principal
Amount
(000s)
              Value  
  $2,750      Memorial Sloan-Kettering Cancer Center, 5.00%, 7/1/35, Ser. 1       $2,911,067   
  2,000      Memorial Sloan-Kettering Cancer Center, 5.00%, 7/1/36, Ser. A-1       2,156,300   
  2,000      Mount Sinai Hospital, 5.00%, 7/1/31, Ser. A       2,185,220   
  2,100      New York Univ., 5.00%, 7/1/38, Ser. A       2,285,997   
  1,000      New York Univ. Hospital Center, 5.625%, 7/1/37, Ser. B       1,072,270   
  600      North Shore-Long Island Jewish Health System, 5.50%, 5/1/37, Ser. A       649,728   
  5,000      Rochester General Hospital, 5.00%, 12/1/35 (Radian) (Pre-refunded @ $100, 12/1/15) (c)       5,343,250   
  3,000      Teachers College, 5.50%, 3/1/39       3,246,240   
  1,000      The New School, 5.50%, 7/1/40       1,093,120   
  5,000      State Environmental Facs. Corp. Rev., 5.125%, 6/15/38, Ser. A       5,644,500   
  State Thruway Auth. Rev.,      
  1,000      4.75%, 1/1/29, Ser. G (AGM)       1,038,230   
  3,800      5.00%, 1/1/42, Ser. I       4,084,658   
  6,000      State Urban Dev. Corp. Rev., 5.00%, 3/15/36, Ser. B-1 (g)       6,626,100   
  5,000      Triborough Bridge & Tunnel Auth. Rev., 5.25%, 11/15/34, Ser. A-2 (g)       5,599,850   
  3,435      Troy Capital Res. Corp. Rev., Rensselaer Polytechnic Institute Project, 5.125%, 9/1/40, Ser. A       3,671,809   
  TSASC, Inc. Rev., Ser. 1,      
  5,000      5.00%, 6/1/26       4,937,900   
  5,000      5.00%, 6/1/34       4,236,600   
  1,000      5.125%, 6/1/42       831,560   
  1,815      Ulster Cnty. Industrial Dev. Agcy. Rev., 6.00%, 9/15/37, Ser. A (b)       1,495,687   
  2,000      Warren & Washington Cntys. Industrial Dev. Agcy. Rev., Glens Falls Hospital Project, 5.00%, 12/1/35, Ser. A (AGM)       2,001,980   
  1,490      Westchester Cnty. Healthcare Corp. Rev., 6.125%, 11/1/37, Ser. C-2       1,678,127   
  1,000      Westchester Cnty. Local Dev. Corp. Rev., 5.50%, 5/1/42, Ser. A       1,074,220   
  1,000      Yonkers Economic Dev. Corp. Rev., Charter School of Educational Excellence Project, 6.00%, 10/15/30, Ser. A       1,047,210   
  600      Yonkers Industrial Dev. Agcy. Rev., Sarah Lawrence College Project, 6.00%, 6/1/41, Ser. A       661,794   
  Total New York Municipal Bonds & Notes (cost-$168,826,458)         181,963,319   
  Other Municipal Bonds & Notes – 4.8%            
  Florida – 0.5%      
  1,000      Clearwater Water & Sewer Rev., 5.25%, 12/1/39, Ser. A       1,064,630   
  Louisiana – 0.6%      
  1,000      East Baton Rouge Sewerage Commission Rev., 5.25%, 2/1/39, Ser. A       1,109,960   
  Ohio – 3.2%      
  7,450      Buckeye Tobacco Settlement Financing Auth. Rev., 6.50%, 6/1/47, Ser. A-2       6,576,786   
  U. S. Virgin Islands – 0.5%      
  1,000      Public Finance Auth. Rev., 6.00%, 10/1/39, Ser. A       1,043,790   
  Total Other Municipal Bonds & Notes (cost-$9,866,259)         9,795,166   
  New York Variable Rate Notes – 2.9%            
  5,000      JPMorgan Chase Putters/Drivers Trust Rev., 8.031%, 7/1/33, Ser. 3382 (a)(d)(e)(f) (cost-$4,885,484)       5,990,050   

 

May 31, 2014   |  Annual Report     27   


Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2014 (continued)

 

Principal
Amount
(000s)
              Value  
  Short-Term Investments – 3.7%            
  U.S. Government Agency Securities (h) – 2.3%      
  $1,300      Fannie Mae Discount Notes, 0.066%, 9/3/14       $1,299,779   
  1,800      Federal Home Loan Bank Discount Notes, 0.101%, 8/1/14       1,799,695   
  1,600      Freddie Mac Discount Notes, 0.056%, 9/2/14       1,599,773   
  Total U.S. Government Agency Securities (cost-$4,699,247)       4,699,247   
  U.S. Treasury Obligations – 1.0%      
  U.S. Treasury Notes,      
  262      0.25%, 8/31/14       262,138   
  1,800      0.50%, 10/15/14       1,802,918   
  Total U.S. Treasury Obligations (cost-$2,064,552)       2,065,056   
  Repurchase Agreements – 0.4%      
  900      Citigroup Global Markets, Inc.,
dated 5/30/14, 0.10%, due 6/2/14,
proceeds $900,008; collateralized by
U.S. Treasury Notes, 0.50%, due 10/15/14,
valued at $919,075 including accrued interest (cost-$900,000)
      900,000   
  Total Short-Term Investments (cost-$7,663,799)       7,664,303   
  Total Investments (cost-$191,242,000) – 100.0%       $205,412,838   

Industry classification of portfolio holdings as a percentage of total investments was as follows:

 

Revenue Bonds:

   

Health, Hospital & Nursing Home Revenue

    14.2  

College & University Revenue

    12.4     

Industrial Revenue

    11.0     

Miscellaneous Revenue

    8.2     

Tobacco Settlement Funded

    8.1     

Income Tax Revenue

    7.4     

Transit Revenue

    6.5     

Highway Revenue Tolls

    5.2     

Miscellaneous Taxes

    5.0     

Water Revenue

    4.6     

Lease (Abatement)

    4.6     

Recreational Revenue

    4.2     

Port, Airport & Marina Revenue

    2.3     

Economic Development Revenue

    0.7     

Sewer Revenue

    0.5     

Electric Power & Light Revenue

    0.3     
 

 

 

   

Total Revenue Bonds

      95.2

U.S. Government Agency Securities

      2.3   

General Obligation

      1.1   

U.S. Treasury Obligations

      1.0   

Repurchase Agreements

      0.4   
   

 

 

 

Total Investments

      100.0
   

 

 

 

 

28   Annual Report   |  May 31, 2014


Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2014 (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 $5,990,050, representing 2.9% 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, 2014.  

 

(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, 2014.  

 

(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–The weighted average daily balance of Floating Rate Notes outstanding during the year ended May 31, 2014 was $8,250,305 at a weighted average interest rate, including fees, of 0.80%.  

 

(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
5/31/14
 

Investments in Securities – Assets

       

New York Municipal Bonds & Notes

  $      $ 181,963,319      $      $ 181,963,319   

Other Municipal Bonds & Notes

           9,795,166               9,795,166   

New York Variable Rate Notes

           5,990,050               5,990,050   

Short-Term Investments

           7,664,303               7,664,303   

Totals

  $      $ 205,412,838      $      $ 205,412,838   

At May 31, 2014, there were no transfers between Levels 1 and 2.

 

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

The effect of derivatives on the Statement of Operations for the year ended May 31, 2014:

 

Location   Interest
Rate
Contracts
 
Net realized gain on:  
Swaps     $144,467   
 

 

 

 
Net change in unrealized appreciation/depreciation of:  
Swaps     $(89,478
 

 

 

 

The average volume (measured at each fiscal quarter-end) of derivative activity during the year ended May 31, 2014:

 

     Interest
Rate Swap
Agreements(1)
 
    $7,200   
 

 

 

 

 

(1)   Notional Amount (in thousands)  

 

May 31, 2014   |  Annual Report     29   


Schedule of Investments

PIMCO New York Municipal Income Fund II

May 31, 2014 (continued)

 

 

(l)   The following tables present by counterparty, the Fund’s derivative assets and liabilities net of related collateral held by the Fund at May 31, 2014 which has not been offset in the Statement of Assets and Liabilities, but would be available for offset to the extent of a default by the counterparty to the transaction.  

Financial Assets and Derivative Assets, and Collateral Received at May 31, 2014:

 

Gross Amounts Not Offset in the Statement of Assets and Liabilities

 
Counterparty  

Gross Financial Assets

Presented in Statement of

Assets and Liabilities

   

Financial

Instrument/

Derivative

Offset

    Net Amount  
Repurchase Agreement      

Citigroup

    $900,000        $(900,000 )†      $—   

Totals

    $900,000        $(900,000     $—   

 

  The actual collateral received is greater than the amount shown here due to overcollateralization.  

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
GO   -   General Obligation Bond
NPFGC   -   insured by National Public Finance Guarantee Corp.
Radian   -   insured by Radian Guaranty, Inc.

 

30   Annual Report     |  May 31, 2014  |     See accompanying Notes to Financial Statements


Statements of Assets and Liabilities

PIMCO Municipal Income Funds II

May 31, 2014

 

        Municipal II         California
Municipal II
        New York
Municipal II
 
Assets:                  
Investments, at value (cost-$1,034,113,237, $416,098,226 and $191,242,000, respectively)       $1,126,289,329          $472,602,869          $205,412,838   
Cash       533,716          538,495          529,027   
Interest receivable       18,423,154          6,746,777          2,958,510   
Receivable for investments sold       1,152,350                     
Prepaid expenses and other assets       52,587          46,422          23,231   

Total Assets

      1,146,451,136          479,934,563          208,923,606   
     
Liabilities:                  
Payable for floating rate notes issued       44,317,277          38,098,801          8,186,394   
Payable for investments purchased                3,347,340            
Dividends payable to common and preferred shareholders       3,978,349          1,706,992          728,393   
Investment management fees payable       602,006          239,301          109,485   
Interest payable       69,041          34,258          7,253   
Accrued expenses and other liabilities       396,717          218,577          372,024   

Total Liabilities

      49,363,390          43,645,269          9,403,549   
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       $730,087,746          $273,289,294          $120,520,057   
     
Composition of Net Assets Applicable to Common Shareholders:                  
Common Shares:                  

Par value ($0.00001 per share)

      $611          $317          $110   

Paid-in-capital in excess of par

      808,756,893          410,321,297          148,435,008   
Undistributed (dividends in excess of) net investment income       24,160,410          (1,706,992)          1,140,077   
Accumulated net realized loss       (195,000,505)          (191,851,739)          (43,213,661)   
Net unrealized appreciation       92,170,337          56,526,411          14,158,523   
Net Assets Applicable to Common Shareholders       $730,087,746          $273,289,294          $120,520,057   
Common Shares Issued and Outstanding       61,139,523          31,723,041          10,980,906   
Net Asset Value Per Common Share       $11.94          $8.61          $10.98   

 

See accompanying Notes to Financial Statements     |  May 31, 2014  |     Annual Report     31   


Statements of Operations

PIMCO Municipal Income Funds II

Year ended May 31, 2014

 

        Municipal II         California
Municipal II
        New York
Municipal II
 
Investment Income:                  
Interest       $57,325,385          $24,929,386          $9,829,802   
Miscellaneous       90,000                     

Total Investment Income

      57,415,385          24,929,386          9,829,802   
     
Expenses:                  
Investment management       6,812,730          2,693,680          1,239,209   
Auction agent and commissions       582,265          275,917          131,810   
Interest       315,818          265,961          66,001   
Custodian and accounting agent       152,596          92,647          65,854   
Audit and tax services       139,511          68,685          64,668   
Trustees       55,138          20,409          9,175   
Shareholder communications       53,165          34,758          19,275   
New York Stock Exchange listing       47,557          24,641          20,804   
Insurance       25,282          13,069          8,530   
Transfer agent       23,606          26,026          32,671   
Legal       13,445          17,131          11,860   
Miscellaneous       14,994          12,460          11,216   

Total Expenses

      8,236,107          3,545,384          1,681,073   
     
Net Investment Income       49,179,278          21,384,002          8,148,729   
     
Realized and Change In Unrealized Gain (Loss):                  

Net realized gain (loss) on:

                 

Investments

      (3,791,952)          (3,313,696)          (453,677)   

Swaps

      622,769          205,965          144,467   

Net change in unrealized appreciation/depreciation of:

                 

Investments

      (11,659,833)          (4,674,339)          (2,675,606)   

Swaps

      (334,300)          (119,661)          (89,478)   
Net realized and change in unrealized loss       (15,163,316)          (7,901,731)          (3,074,294)   
Net Increase in Net Assets Resulting from Investment Operations       34,015,962          13,482,271          5,074,435   
Dividends on Preferred Shares from Net investment income       (425,517)          (190,698)          (91,824)   
Net Increase in Net Assets Applicable to Common Shareholders Resulting from Investment Operations       $33,590,445          $13,291,573          $4,982,611   

 

32   Annual Report     |  May 31, 2014  |     See accompanying Notes to Financial Statements


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May 31, 2014   |  Annual Report     33   


Statements of Changes in Net Assets Applicable to Common Shareholders

PIMCO Municipal Income Funds II

 

        Municipal II  
        Year ended
May 31, 2014
        Year ended
May 31, 2013
 
Investment Operations:            
Net investment income       $49,179,278          $50,453,284   
Net realized gain (loss)       (3,169,183)          4,106,105   
Net change in unrealized appreciation/depreciation       (11,994,133)          9,719,063   
Net increase in net assets resulting from investment operations       34,015,962          64,278,452   
   
Dividends on Preferred Shares from Net Investment Income       (425,517)          (901,014)   
Net increase in net assets applicable to common shareholders
resulting from investment operations
      33,590,445          63,377,438   
   
Dividends to Common Shareholders from:            
Net investment income       (47,596,445)          (47,407,514)   
Return of capital                  
Total dividends and distributions to common shareholders       (47,596,445)          (47,407,514)   
   
Common Share Transactions:            
Reinvestment of dividends       2,726,193          3,236,891   
Total increase (decrease) in net assets applicable to
common shareholders
      (11,279,807)          19,206,815   
   
Net Assets Applicable to Common Shareholders:            
Beginning of year       741,367,553          722,160,738   
End of year*       $730,087,746          $741,367,553   
*Including undistributed (dividends in excess of) net investment income of:       $24,160,410          $22,643,835   
   
Common Shares Issued in Reinvestment of Dividends       242,896          257,784   

 

34   Annual Report     |  May 31, 2014  |     See accompanying Notes to Financial Statements


Statements of Changes in Net Assets Applicable to Common Shareholders

PIMCO Municipal Income Funds II

 

California Municipal II         New York Municipal II  
Year ended
May 31, 2014
      Year ended
May 31, 2013
        Year ended
May 31, 2014
        Year ended
May 31, 2013
 
                   
$21,384,002       $21,709,832          $8,148,729          $8,604,979   
(3,107,731)       3,108,299          (309,210)          292,763   
(4,794,000)       7,700,006          (2,765,084)          (612,931)   
13,482,271       32,518,137          5,074,435          8,284,811   

(190,698)

      (402,646)          (91,824)          (194,449)   
       
13,291,573       32,115,491          4,982,611          8,090,362   
       
                   
(20,949,262)       (21,313,126)          (8,711,074)          (8,669,854)   
(2,252,817)       (2,354,016)                     
(23,202,079)       (23,667,142)          (8,711,074)          (8,669,854)   
       
                   
1,018,865       1,162,949          563,362          597,357   
       
(8,891,641)       9,611,298          (3,165,101)          17,865   
       
                   
282,180,935       272,569,637          123,685,158          123,667,293   
$273,289,294       $282,180,935          $120,520,057          $123,685,158   
$(1,706,992)       $(2,098,678)          $1,140,077          $1,873,593   
       
112,714       113,525          53,584          47,813   

 

See accompanying Notes to Financial Statements     |  May 31, 2014  |     Annual Report     35   


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

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 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 as amended, and the rules and regulations thereunder. Allianz Global Investors Fund Management LLC (“AGIFM” or 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.

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.

 

36   Annual Report   |  May 31, 2014


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

1. Organization and Significant Accounting Policies (continued)

 

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. Securities purchased on a when-issued or delayed-delivery basis are marked to market daily until settlement at the forward settlement date.

The Board of Trustees (the “Board”) has adopted procedures for valuing portfolio securities and other financial 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 premium or discount based on 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
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 valuation techniques used by the Funds to measure fair value during the year ended May 31, 2014 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,

 

May 31, 2014   |  Annual Report     37   


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

1. Organization and Significant Accounting Policies (continued)

 

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.

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.

Government Sponsored Enterprise and Mortgage-Backed Securities – Government sponsored enterprise and mortgage-backed securities are valued by independent pricing

services using pricing models based on inputs that include issuer type, coupon, cash flows, mortgage prepayment projection tables and Adjustable Rate Mortgage evaluations that incorporate index data, periodic life caps and the next coupon reset date. To the extent that these inputs are observable, the values of government sponsored enterprise and mortgage-backed securities 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.

Corporate Bonds & Notes – Corporate bonds & notes are generally comprised of two main categories: investment grade bonds and high yield bonds. Investment grade bonds are valued by independent pricing services using various inputs and techniques, which include broker-dealer quotations, live trading levels, recently executed transactions in securities of the issuer or comparable issuers, and option adjusted spread models that include base curve and spread curve inputs. Adjustments to individual bonds can be applied to recognize trading differences compared to other bonds issued by the same issuer. High yield bonds are valued by independent pricing services based primarily on broker-dealer quotations from relevant market

 

38   Annual Report   |  May 31, 2014


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

1. Organization and Significant Accounting Policies (continued)

 

makers and recently executed transactions in securities of the issuer or comparable issuers. The broker-dealer quotations received are supported by credit analysis of the issuer that takes into consideration credit quality assessments, daily trading activity, and the activity of the underlying equities, listed bonds and sector-specific trends. To the extent that these inputs are observable, the values of corporate bonds & notes are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.

(c) Investment Transactions and Investment Income

Investment transactions are accounted for on the trade date. Securities purchased and sold on a when-issued or delayed-delivery basis maybe settled a month or more after 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. Consent fees relating to corporate actions are recorded as miscellaneous income upon receipt.

(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. In accordance with provisions set forth under U.S. GAAP, the Investment Manager has reviewed the Funds’ tax positions for all open tax years. As of May 31, 2014, the Funds have recorded no liability for net unrecognized tax benefits relating to uncertain income tax positions they have taken. The Funds’ 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

 

May 31, 2014   |  Annual Report     39   


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

1. Organization and Significant Accounting Policies (continued)

 

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” 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 investments in Fixed Rate Bonds.

The Funds’ restrictions on borrowings do not apply to the secured borrowings deemed to have occurred for accounting purposes. Inverse Floaters held by the Funds are exempt from registration under Rule 144A of the Securities Act of 1933.

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) Repurchase Agreements

The Funds are parties to Master Repurchase Agreements (“Master Repo Agreements”) with select counterparties. The Master Repo Agreements maintain provisions for initiation,

 

40   Annual Report   |  May 31, 2014


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

1. Organization and Significant Accounting Policies (continued)

 

income payments, events of default, and maintenance of collateral.

The Funds enter into transactions, under the terms of the Master Repo Agreements, 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 under the Master Repo Agreements 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.

(h) When-Issued/Delayed-Delivery Transactions

When-issued or delayed-delivery transactions involve a commitment to purchase or sell securities for a 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 NAV. 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 a delayed-delivery basis, the Funds do not participate in future gains and losses with respect to the security.

(i) 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.

 

May 31, 2014   |  Annual Report     41   


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

1. Organization and Significant Accounting Policies (continued)

 

(j) Restricted Securities

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

(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 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. Interest rate changes can be sudden and unpredictable, and the Funds may lose money as a result of movements in interest rates. The Funds may not be able to hedge against changes in interest rates or may choose not to do so for cost or other reasons. In addition, any hedges may not work as intended.

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

 

42   Annual Report   |  May 31, 2014


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

2. Principal Risks (continued)

 

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, adverse changes to credit markets 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. Credit ratings downgrades may also negatively affect securities held by the Funds. Even when markets perform well, there is no assurance that the investments held by the Funds will increase in value along with the broader market. In addition, market risk includes the risk that geopolitical events will disrupt the economy on a national or global level.

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

The Funds may hold defaulted securities that may involve special considerations including bankruptcy proceedings, other regulatory and legal restrictions affecting the Funds’ ability to trade, and the availability of prices from independent pricing services or dealer quotations. Defaulted securities are often illiquid and may not be actively traded. Sale of securities in bankrupt companies at an acceptable price may be difficult and differences compared to the value of the securities used by the Funds could be material.

A Fund may incur additional expenses to the extent it is required to seek recovery upon a portfolio security’s default in the payment of principal or interest. In any bankruptcy proceeding relating to a defaulted investment, a Fund may lose its entire investment or may be required to accept cash or securities with a value substantially less than its original investment.

The Funds are party to International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreements”) with select

 

May 31, 2014   |  Annual Report     43   


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

2. Principal Risks (continued)

 

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.

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) 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 or cash 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, if any, 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

 

44   Annual Report   |  May 31, 2014


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

3. Financial Derivative Instruments

(continued)

 

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 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.

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.

Please see Note 8 for a discussion of recently approved changes to the Funds’ investment management and sub-advisory arrangements.

 

May 31, 2014   |  Annual Report     45   


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

5. Investments in Securities

 

For the year ended May 31, 2014, purchases and sales of investments, other than short-term securities were:

 

     Municipal II     California
Municipal II
    New York
Municipal II
 

Purchases

  $ 167,608,382      $ 62,001,350      $ 10,063,228   

Sales

    169,754,499        65,445,717        15,953,239   

6. Income Tax Information

The tax character of dividends paid was:

 

    Year Ended May 31, 2014     Year Ended May 31, 2013  
     Ordinary
Income
    Tax Exempt
Income
    Return of
Capital
    Ordinary
Income
    Tax Exempt
Income
    Return of
Capital
 

Municipal II

  $ 854,779      $ 47,167,183      $      $ 458,232      $ 47,850,296      $   

California Municipal II

    748,147        20,391,813        2,252,817        583,738        21,132,034        2,354,016   

New York Municipal II

    155,141        8,647,757               76,412        8,787,891          

At May 31, 2014, the components of distributable earnings were:

 

               

Post-October

Capital Loss(2)

 
     Tax Exempt
Income
    Capital Loss
Carryforwards(1)
    Short-Term     Long-Term  

Municipal II

  $ 24,160,410      $ 194,203,049      $ 1,608,493      $   

California Municipal II

           190,703,638        840,314        272,213   

New York Municipal II

    1,303,231        42,879,886        18,080        346,305   

 

(1)   Capital loss carryforwards available as a reduction, to the extent provided in the regulations, of any future net realized gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be distributed.  

 

(2)   Capital losses realized during the period November 1, 2013 through May 31, 2014 which the Funds elected to defer to the following taxable year pursuant to income tax regulations.  

Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses for an unlimited period. Capital losses that are carried forward will retain their character as either short-term or long-term capital losses.

At May 31, 2014, capital loss carryforward amounts were:

 

                            No Expiration(3)  
     2015     2016     2017     2018     Short-Term     Long-Term  

Municipal II

  $ 7,912,932      $      $ 7,955,461      $ 164,801,603      $ 13,533,053      $   

California Municipal II

    5,531,398        4,849,597        18,401,113        157,995,404        2,619,281        1,306,845   

New York Municipal II

    51,848        1,171,157        2,961,908        34,379,048        4,315,925          

 

(3)   Carryforward amounts are subject to the provisions of the Regulated Investment Company Modernization Act of 2010.  

For the year ended May 31, 2014, Municipal II had capital loss carryforwards which expired in the amount of $4,473,237.

 

46   Annual Report   |  May 31, 2014


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

6. Income Tax Information (continued)

 

For the year ended May 31, 2014, permanent “book-tax” adjustments were:

 

     Undistributed
Net Investment
Income
    Accumulated
Net Realized
Gain(Loss)
    Paid-in
Capital
 

Municipal II (a)(b)(c)

  $ 359,259      $ 4,113,978      $ (4,473,237

California Municipal II (b)

    147,644        (147,644       

New York Municipal II (a)(b)

    83,807        (83,807       

These permanent “book-tax” differences were primarily attributable to:

 

(a)   Different treatment of Inverse Floaters  

 

(b)   Different Treatment of swap payments  

 

(c)   Expiring Capital Loss Carryforwards  

Net investment income, net realized gains or losses and net assets were not affected by these adjustments.

At May 31, 2014, the aggregate cost basis and the net unrealized appreciation of investments for federal income tax purposes were:

 

     Federal Tax
Cost Basis
    Unrealized
Appreciation
    Unrealized
Depreciation
    Net
Unrealized
Appreciation
 

Municipal II

  $ 988,460,225      $ 99,746,802      $ 6,476,335      $ 93,270,467   

California Municipal II

    378,053,142        56,550,681        192,314        56,358,367   

New York Municipal II

    182,925,150        16,248,849        2,227,997        14,020,852   

Differences between book and tax cost basis were attributable to Inverse Floater transactions and wash sale deferrals.

7. Auction-Rate Preferred Shares

Municipal II has 2,936 shares of Preferred Shares Series A, 2,936 shares of Preferred Shares Series B, 2,936 shares of Preferred Shares Series C, 2,936 shares of Preferred Shares Series D, and 2,936 shares of Preferred Shares Series E outstanding, each with a liquidation preference of $25,000 per share plus any accumulated, unpaid dividends.

California Municipal II has 1,304 shares of Preferred Shares Series A, 1,304 shares of Preferred Shares Series B, 1,304 shares of Preferred Shares Series C, 1,304 shares of Preferred Shares Series D, and 1,304 shares of

Preferred Shares Series E outstanding, each with a liquidation preference of $25,000 per share plus any accumulated, unpaid dividends.

New York Municipal II has 1,580 shares of Preferred Shares Series A and 1,580 shares of Preferred Shares Series B outstanding, each with a liquidation preference of $25,000 per share plus any accumulated, unpaid dividends.

Dividends are accumulated daily at an annual rate that is typically re-set every seven days. Distributions of net realized capital gains, if any, are paid annually.

 

 

May 31, 2014   |  Annual Report     47   


Notes to Financial Statements

PIMCO Municipal Income Funds II

May 31, 2014

 

7. Auction-Rate Preferred Shares (continued)

 

For the year ended May 31, 2014, the annualized dividend rates ranged from:

 

                              
      High        Low        At May 31, 2014  

Municipal II:

            

Series A

     0.246%           0.066%           0.131%   

Series B

     0.246%           0.066%           0.131%   

Series C

     0.246%           0.066%           0.131%   

Series D

     0.246%           0.066%           0.131%   

Series E

     0.246%           0.066%           0.131%   

California Municipal II:

            

Series A

     0.246%           0.066%           0.131%   

Series B

     0.246%           0.066%           0.131%   

Series C

     0.246%           0.066%           0.131%   

Series D

     0.246%           0.066%           0.131%   

Series E

     0.246%           0.066%           0.131%   

New York Municipal II:

            

Series A

     0.246%           0.066%           0.131%   

Series B

     0.246%           0.066%           0.131%   

 

The Funds are subject to certain limitations and restrictions while Preferred Shares are outstanding. Failure to comply with these limitations and restrictions could preclude the Funds from declaring or paying any dividends or distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of Preferred Shares at their liquidation preference plus any accumulated, unpaid dividends.

Preferred shareholders, who are entitled to one vote per share, generally vote together with the common shareholders but vote separately as a class to elect two Trustees and on certain matters adversely affecting the rights of the Preferred Shares.

Since mid-February 2008, holders of auction-rate preferred shares (“ARPS”) issued by the Funds have been directly impacted by lack of liquidity, which has similarly affected ARPS holders in many of the nation’s closed-end

funds. Since then, regularly scheduled auctions for ARPS issued by the Funds have consistently “failed” because of insufficient demand (bids to buy shares) to meet the supply (shares offered for sale) at each auction. In a failed auction, ARPS holders cannot sell all, and may not be able to sell any, of their shares tendered for sale. While repeated auction failures have affected the liquidity for ARPS, they do not constitute a default or automatically alter the credit quality of the ARPS, and the ARPS holders have continued to receive dividends at the defined

“maximum rate” equal to the higher of the 30-day “AA” Composite Commercial Paper Rate multiplied by a minimum of 110% or the Taxable Equivalent of the Short-Term Municipal Obligations Rate-defined as 90% of the quotient of (A) the per annum rate expressed on an interest equivalent basis equal to the S&P Municipal Bond 7-day High Grade Rate Index divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal) multiplied by a

 

 

48   Annual Report   |  May 31, 2014


7. Auction-Rate Preferred Shares (continued)

 

minimum of 110% (which is a function of short-term interest rates). As of May 31, 2014 the current multiplier for calculating the maximum rate is 110%. If the Funds’ ARPS auctions continue to fail and the “maximum rate”

payable on the ARPS rises as a result of changes in short-term interest rates, returns for the Funds’ common shareholders could be adversely affected.

 

 

8. Subsequent Events

In preparing these financial statements, the Funds’ management has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

On June 2, 2014, the following dividends were declared to common shareholders payable July 1, 2014 to shareholders of record on June 12, 2014.

 

Municipal II      $0.065 per common share
California Municipal II      $0.05375 per common share
New York Municipal II      $0.06625 per common share

On July 1, 2014, the following dividends were declared to common shareholders payable August 1, 2014 to shareholders of record on July 11, 2014.

 

Municipal II      $0.065 per common share
California Municipal II      $0.05375 per common share
New York Municipal II      $0.06625 per common share

 

At a special meeting of shareholders held on July 10, 2014 (following an earlier adjournment), each Fund’s shareholders approved a new investment management agreement (the “Agreement”) between the Fund and PIMCO, pursuant to which PIMCO will replace AGIFM as the investment manager to the Funds. Under the Agreement, PIMCO will continue to provide the day-to-day portfolio management services it currently provides to the Funds as their sub-adviser and will also assume responsibility for the supervisory and administrative services currently provided by AGIFM to the Funds as their investment manager. The same investment professionals that are currently responsible for managing the Funds’ portfolios will continue to do so following the proposed transition, and PIMCO personnel will replace AGIFM personnel as Fund officers and in other roles to provide and oversee the administrative, accounting/financial reporting, compliance, legal, marketing, transfer

agency, shareholder servicing and other services required for the daily operations of the Funds. The Agreement will become effective at a date and time mutually agreeable to the Funds, PIMCO and AGIFM (the “Transition Date”) in order to effect an efficient transition for the Funds and their shareholders. The Transition Date will be announced at a later date.

Although the management fee rate to be paid to PIMCO by each Fund under the Agreement is higher than the management fee rate imposed under the corresponding current agreement, the unified fee arrangement under the Agreement covers the Funds’ portfolio management and administrative services covered under the current agreement and also requires PIMCO, at its expense, to procure most other supervisory and administrative services required by the Funds that are currently paid for or incurred by the Funds directly outside of the current agreements.

 

 

May 31, 2014   |  Annual Report     49   


Financial Highlights

PIMCO Municipal Income Fund II

For a common share outstanding throughout each year:

 

<
        Year ended May 31,  
        2014         2013         2012         2011         2010  
Net asset value, beginning of year       $12.17          $11.91          $10.12          $10.77          $8.97   
Investment Operations:                              
Net investment income       0.81          0.82          0.88          0.91          0.88   
Net realized and change in unrealized gain (loss)       (0.25       0.23          1.70          (0.75       1.73   
Total from investment operations       0.56          1.05          2.58          0.16          2.61   
Dividends on Preferred Shares from Net Investment Income       (0.01       (0.01       (0.01       (0.03       (0.03
Net increase in net assets applicable to common shareholders resulting from investment operations       0.55          1.04          2.57          0.13          2.58   
Dividends to Common Shareholders from Net Investment Income       (0.78       (0.78       (0.78       (0.78       (0.78
Net asset value, end of year       $11.94          $12.17          $11.91          $10.12          $10.77   
Market price, end of year       $12.25          $12.19          $12.54          $10.45          $11.12   
Total Investment Return (1)       7.76       3.41       28.70       1.30       25.49
RATIOS/SUPPLEMENTAL DATA:                              
Net assets, applicable to common shareholders, end of year (000s)       $730,088          $741,368          $722,161          $610,800          $645,589   
Ratio of expenses to average net assets, including interest expense (2)(3)       1.21       1.16 %(4)(5)        1.19 %(4)(5)        1.37 %(4)        1.38 %(4)(5) 
Ratio of expenses to average net assets, excluding interest expense (2)       1.16       1.11 %(4)(5)        1.11 %(4)(5)        1.24 %(4)        1.24 %(4)(5) 
Ratio of net investment income to average net assets (2)       7.22       6.74 %(5)        8.04 %(5)        8.80       8.77 %(5) 
Preferred shares asset coverage per share       $74,733          $75,501          $74,192          $66,606