SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. )
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¨ Preliminary Proxy Statement
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¨ Definitive Joint Proxy Statement
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¨ Soliciting Material Under Rule 14a-12
PIMCO Income Strategy Fund
PIMCO Income Strategy Fund II
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(Name of Registrant as Specified in its Charter)
Brigade Leveraged Capital Structures Fund Ltd.
Brigade Capital Management, LLC
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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On July 10, 2012, Brigade Capital Management, LLC gave a presentation to Institutional Shareholder Services (ISS). Slides for the presentation to ISS are attached hereto.
PIMCO Income Strategy Fund
PIMCO Income Strategy Fund II
Proxy Contest for Preferred Shares
Trustee
PIMCO Income Strategy Fund II
Proxy Contest for Preferred Shares
Trustee
July 10, 2012
Presentation to ISS
Brigade Capital Management, LLC.
PIMCO Funds
q PIMCO Income Strategy Fund (PFL) and PIMCO Income Strategy Fund II
(PFN) - (“Funds”)
(PFN) - (“Funds”)
– Description: Seek high current income, consistent with capital preservation.
– Fund Highlights: Ordinarily invests in a diversified portfolio of floating and/or fixed-
rate debt instruments.
rate debt instruments.
– Flexibility: Has the flexibility to allocate assets in varying proportions among
floating- and fixed-rate debt instruments, as well as among investment-grade and
non-investment-grade securities; may choose to focus more heavily or exclusively
on either asset class or rating quality at any time, based on assessments of
relative values, market conditions and other factors.
floating- and fixed-rate debt instruments, as well as among investment-grade and
non-investment-grade securities; may choose to focus more heavily or exclusively
on either asset class or rating quality at any time, based on assessments of
relative values, market conditions and other factors.
q Total Fund Assets (as of 3/31/2012)
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PFL
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PFN
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Common
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$268.6 million
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$571.8 million
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Preferred
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78.9
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161.0
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Total
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$347.5 million
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$732.8 million
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Source: www.Allianzinvestors.com
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Brigade Capital Management, LLC
(“Brigade”)
(“Brigade”)
q Brigade is an asset management firm specializing in high yield and
distressed debt investing with over $9 billion of assets under management.
distressed debt investing with over $9 billion of assets under management.
q Brigade specializes in credit investing. It seeks long term growth of capital
throughout market environments with a strong focus on capital preservation.
throughout market environments with a strong focus on capital preservation.
q As of June 21, 2012, Brigade (together with its affiliates) beneficially owned
1,037 PFL Preferred Shares (32.8%) and 1,669 PFN Preferred Shares
(25.1%), making it the second largest holder of Preferred Shares of each of
the Funds.
1,037 PFL Preferred Shares (32.8%) and 1,669 PFN Preferred Shares
(25.1%), making it the second largest holder of Preferred Shares of each of
the Funds.
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Background
q Brigade is seeking one seat, i.e. minority representation at PFL and PFN -
both with seven-member boards.
both with seven-member boards.
q The nomination is for the Preferred Shares trustee only. The Preferred
Shares class of holders are entitled to two seats on each of the boards of
PFL and PFN.
Shares class of holders are entitled to two seats on each of the boards of
PFL and PFN.
q The Timeline - Delay of the Annual Meeting
– Nov. 12, 2010 - Funds disclose in their 2010 proxy statement that the next annual
meeting is anticipated to be held in Dec. 2011.
meeting is anticipated to be held in Dec. 2011.
– July 14, 2011 - Brigade requests meeting with the Funds’ CEO to discuss concerns
regarding Preferred Shares and to explore financing strategies.
regarding Preferred Shares and to explore financing strategies.
– Sept. 7, 2011 - Brigade meets with the CEO and members of the management team to
discuss its views on alternative financing for ARPs and the Funds’ performance.
discuss its views on alternative financing for ARPs and the Funds’ performance.
– Sept. 21, 2011 - Brigade provides notice to the Funds of its intention to nominate Neal
P. Goldman at the 2011 meeting.
P. Goldman at the 2011 meeting.
– Oct. 11, 2011 - Funds issue a press release stating that the 2011 annual meeting is
being rescheduled to July 31, 2012, without any explanation for the 7-month delay.
being rescheduled to July 31, 2012, without any explanation for the 7-month delay.
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Background (contd.)
q Timeline (contd.):
– Nov. 11 & 17, 2011 - Brigade sends letters to the Funds stating that the 19-month gap
between annual meetings of shareholders violates the Funds' Bylaws and requests that
the 7-month delay be reconsidered.
between annual meetings of shareholders violates the Funds' Bylaws and requests that
the 7-month delay be reconsidered.
– Nov. 22, 2011 - Funds respond that the July 31, 2012 meeting date was consistent with
their Bylaws and provide no explanation for the 7-month delay.
their Bylaws and provide no explanation for the 7-month delay.
– February 29, 2012 - The Massachusetts Superior Court for the Commonwealth of
Massachusetts finds in favor of Brigade; Funds obtain a stay pending appeal; appeal
process is continuing.
Massachusetts finds in favor of Brigade; Funds obtain a stay pending appeal; appeal
process is continuing.
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Reason for Solicitation
q Neither Fund has held a shareholder meeting since Dec. 2010. The Funds’
unexplained and unilateral delay tactics violate shareholder rights. Trial court
found violation of Bylaws (case on appeal).
unexplained and unilateral delay tactics violate shareholder rights. Trial court
found violation of Bylaws (case on appeal).
q Despite attractive alternative sources of financing, neither PFL nor PFN have
taken ANY steps to redeem the Preferred Shares.
taken ANY steps to redeem the Preferred Shares.
q Funds’ failure to redeem Preferred Shares is in stark contrast to ARP
redemptions effected by other taxable closed end funds. (See Slides 8-12)
redemptions effected by other taxable closed end funds. (See Slides 8-12)
q PFL’s 1-year and 5-year track records place them significantly below their
peers. (Source: Bloomberg; See Slide 11)
peers. (Source: Bloomberg; See Slide 11)
q PFN’s 1-year and 5-year track records place them toward the bottom quartile
on performance relative to peers. (Source: Bloomberg; See Slide 12)
on performance relative to peers. (Source: Bloomberg; See Slide 12)
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Reason for Solicitation (contd.)
q Poor corporate governance - classified board and plurality voting with no
director resignation policy.
director resignation policy.
q The Funds stated in their definitive proxy statement that even if Brigade
were to succeed, they may consider expanding the size of the board and
adding the losing trustee back on the board.
were to succeed, they may consider expanding the size of the board and
adding the losing trustee back on the board.
q If elected, Brigade’s nominee will seek redemption of ARPs because we
believe it is in the best interest of all shareholders.
believe it is in the best interest of all shareholders.
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Overall ARPs Redemptions
Source: The Investor’s Guide to Closed-End Funds (June, 2012), Thomas J. Herzfeld Advisors, Inc.
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Closed-End Fund ARPs Redemptions
Source: The Investor’s Guide to Closed-End Funds (June, 2012), Thomas J. Herzfeld Advisors, Inc.
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ARPs redemptions - Investment Advisor
Source: The Investor’s Guide to Closed-End Funds (June, 2012), Thomas J. Herzfeld Advisors, Inc.
q As of May 28, 2012, more
than 85% of ARPs issued by
taxable closed-end funds have
been redeemed or are
pending.
than 85% of ARPs issued by
taxable closed-end funds have
been redeemed or are
pending.
q In comparison, only 43% of
ARPs in funds managed by
Allianz Global Investors have
been redeemed, with NO
redemptions of PFL and PFN.
ARPs in funds managed by
Allianz Global Investors have
been redeemed, with NO
redemptions of PFL and PFN.
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Funds Performance - PFL
Source: Bloomberg. Data as of 6/18/2012
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Funds Performance - PFN
q PFN’s 1-year and 5-year track records place them toward the bottom
quartile on performance relative to peers.
quartile on performance relative to peers.
Source: Bloomberg. Data as of 6/18/2012
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Funds Nominees
q James A. Jacobson: Mr. Jacobson served for more than 15 years as a senior
executive at a New York Stock Exchange (the “NYSE”) specialist firm. He has
also served on the NYSE Board of Directors, including terms as Vice Chair. As
such, he provides significant expertise on matters relating to portfolio brokerage
and trade execution.
executive at a New York Stock Exchange (the “NYSE”) specialist firm. He has
also served on the NYSE Board of Directors, including terms as Vice Chair. As
such, he provides significant expertise on matters relating to portfolio brokerage
and trade execution.
q Alan Rappaport: Mr. Rappoport has senior executive experience in the banking
industry. He formerly served as Chairman and President of the private banking
division of Bank of America and as Vice Chairman of U.S. Trust. He is currently
the Vice Chairman of an investment banking firm.
industry. He formerly served as Chairman and President of the private banking
division of Bank of America and as Vice Chairman of U.S. Trust. He is currently
the Vice Chairman of an investment banking firm.
q Neither Mr. Jacobson nor Mr. Rapport have any portfolio management or
fixed income investment experience. There is no evidence to suggest that
they have advocated steps to provide liquidity to ARP investors. Moreover,
both nominees lack public board experience, except that at the Funds.
Neither owns any Preferred Shares.
fixed income investment experience. There is no evidence to suggest that
they have advocated steps to provide liquidity to ARP investors. Moreover,
both nominees lack public board experience, except that at the Funds.
Neither owns any Preferred Shares.
q Each of the directors serve on 56 boards affiliated with the Funds, making it
unlikely, in our view, that they can devote the requisite time and care required to
act as a capable trustee and fiduciary of the Funds.
unlikely, in our view, that they can devote the requisite time and care required to
act as a capable trustee and fiduciary of the Funds.
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Brigade Nominee
– Neal P. Goldman is one of the founding partners of Brigade Capital
Management, LLC. - a $9 billion asset management firm.
Management, LLC. - a $9 billion asset management firm.
– Previously, Mr. Goldman was a Managing Director at MacKay Shields, LLC
working in the high yield division from 2001-2006. Prior to joining MacKay
Shields, Mr. Goldman was a Principal in the Special Situations Group at
Banc of America Securities, where he specialized in distressed debt
investing. Before Banc of America, Mr. Goldman worked at Salomon
Brothers in the Merger and Acquisitions Group and as a Vice President in
the High Yield Bond Department.
working in the high yield division from 2001-2006. Prior to joining MacKay
Shields, Mr. Goldman was a Principal in the Special Situations Group at
Banc of America Securities, where he specialized in distressed debt
investing. Before Banc of America, Mr. Goldman worked at Salomon
Brothers in the Merger and Acquisitions Group and as a Vice President in
the High Yield Bond Department.
– Mr. Goldman has public board experience having served on several boards
including NII Holdings, Inc., where he helped create several hundred million
dollars of shareholder value. He has an MBA from the University of Illinois
and a BA from the University of Michigan.
including NII Holdings, Inc., where he helped create several hundred million
dollars of shareholder value. He has an MBA from the University of Illinois
and a BA from the University of Michigan.
– Mr. Goldman's relevant experience in turnaround management, his valuable
financial expertise, familiarity with mergers and acquisitions, capital markets
transactions, private equity and his substantial board experience and
corporate governance knowledge well qualifies him to serve as a Preferred
Shares trustee of each of the Funds.
financial expertise, familiarity with mergers and acquisitions, capital markets
transactions, private equity and his substantial board experience and
corporate governance knowledge well qualifies him to serve as a Preferred
Shares trustee of each of the Funds.
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Conclusion
q The incumbent Preferred Shares nominees have failed to take steps to address
ARP liquidity concerns. Other closed-end funds have taken advantage of
alternative financing sources to redeem ARPs, especially in this current
historically low interest rate environment. However, there is no evidence that
suggests the incumbent Preferred Nominees have taken a lead in ensuring that
the Funds redeem their ARPs.
ARP liquidity concerns. Other closed-end funds have taken advantage of
alternative financing sources to redeem ARPs, especially in this current
historically low interest rate environment. However, there is no evidence that
suggests the incumbent Preferred Nominees have taken a lead in ensuring that
the Funds redeem their ARPs.
q The Boards delayed the annual shareholder meeting by 7 months without
providing any rationale for the delay. The Massachusetts Superior Court
concurred with Brigade’s contention that the meeting delay was against the
Funds’ Bylaws and that shareholder meeting must be held within twelve months
of the last meeting.
providing any rationale for the delay. The Massachusetts Superior Court
concurred with Brigade’s contention that the meeting delay was against the
Funds’ Bylaws and that shareholder meeting must be held within twelve months
of the last meeting.
q As the second largest holder of the Funds’ ARPs, Brigade’s interest is aligned
with all other ARP holders. If elected, its nominee would seek redemption of the
ARPs as soon as possible.
with all other ARP holders. If elected, its nominee would seek redemption of the
ARPs as soon as possible.
q Brigade’s nominee - Mr. Goldman - has the requisite board and industry
experience to work with other board members to provide the much needed board
oversight that has been missing under the current governance structure.
experience to work with other board members to provide the much needed board
oversight that has been missing under the current governance structure.
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