!mk_Emerging_Markets

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Investment Workshop Series The Expanding
Credit Universe Avoiding Black Holes and
Supernovas August 2004
!mk_Emerging_Markets
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Presenters
Mark T. Hudoff Mr. Hudoff is an Executive Vice President and portfolio manager. Mr. Hudoff joined the firm in 1996, previously having been associated with Bank Credit Analyst Research Group where he worked as a fixed income strategist. He also has been associated with International City Managers Association, Quantitative Risk Management Group and Martin Marietta Corporation as a financial analyst. He has 16 years of investment experience and holds a bachelors degree in economics from Arizona State University, and an MBA in finance from the University of Chicago School of Business. Curtis A. Mewbourne Mr. Mewbourne is an Executive Vice President, portfolio manager and a senior member of PIMCOs portfolio management and strategy groups. He is an Emerging Market and Investment Grade Credit specialist. He joined the firm in 1999, having spent the previous seven years trading fixed income securities at Salomon Brothers and Lehman Brothers. Mr. Mewbourne has 12 years of investment experience, and holds a degree in Computer Science Engineering from the University of Pennsylvania. Charles Wyman Mr. Wyman is an Executive Vice President and head of global credit research. Mr. Wyman joined the firm in 2001 from Morgan Stanley, where he was a principal and the senior telecom analyst in high yield. He previously covered the energy sector in high yield at Morgan Stanley and was ranked second in Institutional Investor's annual poll for 1999 and 2000. Prior to Morgan Stanley, Mr. Wyman spent ten years at Lehman Brothers in mergers and acquisitions, corporate finance, and equity capital markets, and as an analyst for oil exploration and production companies. He has 18 years of investment experience and holds a bachelors degree from Harvard University and an MBA from Harvard Business School. .
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Agenda

• Credit Research Process
• Global Credit
• Global High Yield

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Credit Research Objectives

• Identify and communicate investment actions that
  generate measurable excess return through
  specific investments made or investments avoided.
• Identify, quantify, and manage credit risk in
  specialist and generalist portfolios.

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Credit Research Functions
Objective
Description
Measurement

• Avoidance of defaults

• Avoid black holes

• Tracked and included in year-end evaluation

• Review of new issues and new idea generation

• New issue calendar dictates pace of review
• Every addition to the portfolio requires note
  from the analyst
• Cooperative effort between PMs analysts

• Quantitative performance of recommendations
• Qualitative review of responsiveness to PM
  requests and clarity of recommendations

• Credit monitoring

• Monitor issuer performance with written responses
  to earnings reports headline events
• Regular company visits and meetings with
  management

• Quantitative measurement of productivity by
  number of notes written
• Qualitative review of note content and clarity

• Model portfolio alpha

• Analyst prepare quarterly model portfolios for
  their sectors with recommendations for sector
  weightings, issuer weights, and security selection

• Alpha generated versus benchmark

Focus on accountability, investment performance,
and productivity.
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Coverage Universe

• Coverage universe represents roughly 3 trillion
  of corporate assets 2/3 U.S., 1/3 Europe 80
  investment grade, 20 high yield.
• Pimco has rated over 40 of issuers in the
  coverage universe, which accounts for 60 of
  market value and 66 of risk dollars.

Source PIMCO, Lehman Merrill Lynch index data
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PIMCOs Internal Rating System
Fundamental Credit Analysis
Rating System
Implications for Analysts

• No bond may be purchased for client portfolios
  prior to research from our credit analysts
• Credit selection a two-stage process
• Fundamental analysis
• Relative value
• Credit opinions include five elements
• Independent credit rating (BBB, BB, etc.)
• View on company outlook (positive, neutral,
  negative)
• Risk rating (red, yellow, green)
• Analysis of relative value
• Buy/sell recommendation
• Color system used to assess credit risk, not
  relative value

Criteria
Green Light

• Ongoing review
• Initial warning if exposures become too large

risk relative to rating is stable to improving or
where any credit deterioration is unlikely to
have any significant impact on price
Yellow Light

• Close monitoring of up/downgrade potential

presence of significant current or prospective
risk
Positive
Red Light

• Investigate communicate the firmwide risk
  position in the credit
• Estimate recovery rates

viability of the issuer as a going concern in
serious question
Goal Select the best credits and avoid defaults
credit_phil_06 red green light
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Issuer and Security Selection

• Start with the definition of credit what is
  credit?
• Credit is the risk associated with an issuers
  ability to repay obligations as they come due.
• Credit is not asset coverage, credit is not
  relative value, but both play an important role
  in the analysis of credit.
• Risk profile of credit differs markedly from
  other fixed income asset classes
• Linkages between credit risk and broad
  macroeconomic trends are indirect and complex
• Granularity of different types of credit risk is
  high and the relationships between those risks
  are complex and unpredictable
• Risk at the level of individual credits is
  virtually unhedgable

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Issuer and Security Selection

• Principals of Credit Analysis
• Articulate assumptions that support our judgments
  on which outcomes are most likely for an
  individual credit.
• Marry granular analysis of individual credit with
  broader secular industry view to develop
  investment action.
• Seek credits with the strongest foundations of
  balance sheet, cash flow, management, and
  industry position.
• Three tests for an investment recommendation
• Does the investment thesis make sense?
• Do we as an investor have an edge and what is
  that edge?
• Can we control our risk through collateral value
  and structure?

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Issuer and Security Selection

• Identify and prioritize by relevance the 4-5
  factors tha determine success of an investment.
• Factors are different for every credit, every
  industry, and every phase of the industry cycle.

Key Factors in Credit Selection

• Business Model
• Strength profitability of competitive position
• Pace of technological innovation
• Access of capital through the cycle
• Return on assets
• Management track record and accessibility
• Transparency of financial reports

• Cash Flow
• Size
• Stability
• Visibility
• Growth

• Balance Sheet
• Leverage
• Liquidity
• Financial flexibility
• Asset coverage

• Structure
• Seniority
• Covenants

Credit_phil_16a
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Issuer and Security Selection balance sheet
PIMCO may or may not own the securities
referenced and, if such securities are owned, no
representation is being made that such securities
will continue to be held.
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Issuer and Security Selection cash flow
Analysis of Tyco Cash Flow
(millions)
Source PIMCO, Company reports
PIMCO may or may not own the securities
referenced and, if such securities are owned, no
representation is being made that such securities
will continue to be held.
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Issuer and Security Selection comparable
security analysis
Source PIMCO, Company reports
PIMCO may or may not own the securities
referenced and, if such securities are owned, no
representation is being made that such securities
will continue to be held.
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Issuer and Security Selection asset valuation
PIMCO may or may not own the securities
referenced and, if such securities are owned, no
representation is being made that such securities
will continue to be held.
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Agenda

• Credit Research Process
• Global Credit
• Global High Yield

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Benefits of PIMCOs Global Credit Process

• Our global resources and expertise portfolio
  managers and research
• Unique credit philosophy, multiple sources of
  added value in portfolio construction
• Consistent outperformance with a focus on
  risk-adjusted returns

Global resources, multiple sources of alpha, and
risk controls lead to consistency of performance
Global_credit_orga_01a
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Global Credit Portfolio ManagementDrawing on
Regional Expertise
Global Credit Portfolio Management
Team Hinman/Kiesel/Mewbourne

• Defines global themes
• Serves as risk regulator
• Portfolio construction and monitoring

U.S.
Australia
Asia
U.K.
Sovereign Supranationals
Continental Europe
EmergingMarket
High Yield
Lead Portfolio Manager
Kiesel
Bentley
Masanao
Mariappa / El-Erian
Mead
Palghat
El-Erian
Kennedy

• Focus on credits within region/sector
• Handle local execution
• Monitor daily credit developments

Global_credit_orga_02
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Global Credit Research Team Organizational
Structure
Charles WymanExecutive Vice PresidentDirector
of Global Credit Research Oversees global credit
research effort
Ivor SchuckingSenior Vice PresidentDirector of
European Credit Research Oversees European
research Reports to Director of Global Credit
Research
Credit Analysts U.S. 14 U.K. 2
Germany (dit) 5 Australia 1
Utilities
Financials
Consumer Non-Cyclical
Auto
Consumer Cyclical
Elissa Johnson Murphy McCann Tim Shaler Sofia
Ramos Bob Sahota
Michael Chang Greg Gore Brian Kim Rolando
Rodrigues Bob Sahota Ivor Schucking
Greg Gore Brian Kim Murphy McCann Monika
Nemeth Rolando Rodrigues Marion Scherzinger
David Andrews Michael Chang
Adam Borneleit1. Dhruv Mallick Greg Gore Brian
Kim Rolando Rodrigues Marion Scherzinger
Energy
Industrials
Communications
Workouts
Basic Industry
Juergen Dahlhoff Donna Riley
David Andrews Michael Chang Juergen
Dahlhoff Elissa Johnson Bob Sahota
Adam Borneleit1 Cyrille Conseil Greg Gore Brian
Kim Richard Mak Dhruv Mallick Christian Wild
David Behenna Charles Wyman
Monika Nemeth Elissa Johnson Juergen
Dahlhoff Donna Riley
Deutscher Investment-Trust Gesellschaft für
Wertpapieranlagen mbH 1 Adam Borneleit covers
emerging market corporates with the support of
the industry specialists in addition to gaming,
lodging, broadcasting as the primary analyst.
Global_HY_Orga_01
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Portfolio Managers and Credit Research Interaction
Daily Weekly Quarterly
Daily credit market e-mails Informal discussion of market conditions and company news Global credit team meetings Determine research priorities Review portfolio construction issues relative to client guidelines and objectives Portfolio strategy meetings Investment committee input Review of model portfolio Establish broad portfolio targets for maximizing return relative to risk Construction and distribution of GIGC model portfolio
The importance of good and timely communication
Global credit phil 05
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PIMCOs Alpha Generation Process
Relative Value
Portfolio Construction

• Active trading
• Other credit markets
• European High Yield
• Bank Loans
• High Grade
• Convertibles
• Emerging Markets

• Investment Committee
• PIMCOs Risk Controls
• Cyclical / Secular Forum

alpha
Credit Selection

• Bottom-up research
• Onsite visits
• Financial modeling and forecasts

global_credit_phil_06
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Global Investment Grade Credit Portfolio
Construction
BB / Crossover-Corporates, EM, Sovereigns

• Higher Yielding Sectors
• Modest exposure in a diversified fashion

Bank Loans, ConvertibleBonds, Asset-Backed and
Credit Derivatives

• Non-traditional instruments/sectors
• Use tactically (relative value) versus comparably
  rated corporates/sovereigns

• Middle tier
• Improving credit fundamentals with compelling a
  structure and good yields

Middle Tier Corporates/Sovereigns

• Core holdings
• Strong credit profiles
• Liquid instruments

Upper Tier Corporates/Sovereigns/Agencies
Our focus is on upper and middle tier most
clients permit us to use, tactically, other areas
of the credit spectrum
Global credit phil 03
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Portfolio Construction Taps Multiple Sources of
Added Value
Top Down Strategies
Duration/Curve
Quality
Sector
Industry

• Diversified industry and issuer exposure
  constitute the core risk position
• Only moderate risk is taken ineach area
• No one or two positions will drive overall
  portfolio returns

Correlation with Quality
US Treasuries of Index
0.93 0.93
19.71 14.75
AAA AA
US Credit
0.88 0.78
36.02 30.12
A BBB
Industry
Issuer
Capital Structure
Legal Covenant
Bottom Up Strategies
Global credit phil 02
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Investment Grade Corporate Fundamentals
Positives Negatives/Risks
Accommodative monetary policy has improved economic fundamentals Risk appetite has been high, reducing risk premium demanded by investors, driving prices higher Foreign demand for US corporate bonds has been high Corporate default rates have fallen to historical lows after the highs of 2002 and corporate earnings have been meeting or exceeding expectations Corporate bond supply has been muted given focus of companies to strengthen balance sheets and reduce debt capital spending has also been subdued Current valuations of corporate bonds have factored in most of the positives with current yields in certain sectors not compensating for risk taken Whilst corporates have done much to strengthen balance sheets, leverage remains high Corporate credit spreads set to underperform in a rising interest rate environment due to corporates maintaining higher leverage
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How Would We Construct A Global Credit Portfolio
Today?

• Duration
• US Under
• Euroland Over
• UK Neutral
• Asia Under
• Sector
• Underweight Mortgages
• Underweight Corporates
• Overweight International
• Overweight Emerging Markets
• Quality
• AA / A

Index Sector Quality DWE
27 Mortgage Securities (GNMA, FNMA, FHLMC) AAA 18
48 Corporates AA / A 32
- Governments/Swaps AAA 40
20 Agencies AAA 1
1 High Yield BB .5
2.5 Emerging Markets BB 4
.5 Munis AAA 1
1 Net Cash A1 3.5
100 AA 100
Average weighted as of May 31, 2004. The
structure of the portfolio is subject to
change. The credit quality of the investment in
the portfolio does not apply to the stability or
safety of the fund.
Stru_1270_01
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Agenda

• Credit Research Process
• Global Credit
• Global High Yield

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PIMCO High Yield Background
As of June 30, 2004

• Founded in 1971
• Formed PIMCO Advisors in 1994
• Majority interest acquired by Allianz in 2000

Assets
Fixed Income 367.0 B
High Yield Mandates 16.4 B
Equity 24.9 B
Total 391.9 B

• Global high yield portfolio management team in
  Newport Beach, London, and Munich (Deutscher
  Investment-Trust Gesellschaft für
  Wertpapieranlagen mbH) with extensive experience
• 22 dedicated credit research analysts

Past performance is no guarantee of future
results. Does not include CDO business assets.
high_yield_asst_09d
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PIMCOs High Yield Product Breadth
As of June 30, 2004
Ray Kennedy Head of High Yield Products
Mark Hudoff Portfolio Manager
Charles Wyman Director of Credit Research
Based on strategic mandates.
High_yield_products_aum
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Benefits of PIMCOs Global High Yield Process

• Focus on risk adjusted returns
• Credit selection process that emphasizes credit
  fundamentals, but which incorporates PIMCOs
  macro views
• Extensive experience in credit analysis and
  portfolio management
• Ray Kennedy has more than 17 years experience in
  credit research and portfolio management
• Mark Hudoff has more than15 years experience in
  credit research and portfolio management,
  including 4 years of experience focused
  exclusively on European high yield
• Global research team in the U.S. Europe and Asia
  with 24 analysts
• Resources and experience to migrate among
  multiple sectors
• High yield track record
• Consistent outperformance relative to the
  benchmark of the broad high yield universe
• Low tracking error / high information ratio
• Focus on risk controls and processes that help to
  limit downside risk and reduce volatility
• Unparalleled global platform

Years of experience include firms other than
PIMCO.
Global_HY_phil_01
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Global High Yield Outpaces U.S. Non-U.S. Equity
In Performance Per Risk

• Over the long run, high yield provides attractive
  risk-reward versus most asset classes
• Globalization of the high yield market should
  reinforce these results

Diversification does not ensure against loss.
Global_HY_Review_11
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Global High Yield Has a Low Long-term Correlation
With Other Asset Classes

• Non-U.S. High Yield issuance is the fastest
  growing segment of the Global High Yield market
• Global High Yield provides compelling correlation
  advantage when combined with other asset classes

SOURCE Merrill Lynch Co., J.P. Morgan,
Morgan Stanley, Lehman Brothers Past
performance is no guarantee of future results.
The chart does not reflect any PIMCO product.
Global_HY_review_09a
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Upper Tier Spreads Are More-Than-Compensating
Investors for Defaults
As of June 30, 2004

• The breakeven spread over treasuries is the
  spread needed to offset a given level of default
  losses
• Actual spreads over treasuries have exceeded
  breakeven levels on average over the entire
  period
• Higher quality segments, within high yield, offer
  the most compelling risk versus reward

SOURCE Moody's Investors Service, Salomon
Smith Barney and PIMCO. Breakeven spread
1
average 10-Yr. Treasury YTM

1 - (average
price recovery rate) (default rate) (average
coupon x 0.5) (default rate) Assumed Recovery
Rate 35 Average month-end absolute spread
over 10-Year Treasury according to Salomon Smith
Barney. Past performance is no guarantee of
future results.
(1 average 10-Yr. Treasury YTM)
-
Global_HY_Review_14 UPDATE ANNUALLY (Hinman
updates)
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Qualitative Improvements in European High Yield
Markets
As of June 30, 2004

• Bankruptcy regimes have matured and been
  preliminarily tested in most countries
• Structural subordination have been reduced
  through industry moves to improve unsecured
  creditor positions
• Transparency has improved as issuers provided
  investors with more information and maintained
  ratings
• Cross-border MA has yet to develop, but weve
  seen a strong surge in solid industrial and other
  first time issuers that adds to diversity and
  depth of market

However, European high yield remains too heavily
concentrated on a stand-alone basis. As such, we
like the global high yield alternative.
Sector Percentage Weight
Capital Goods 17.4
Consumer Cyclicals 15.2
Basic Industries 12.9
Technology Electronics 12.0
Issuer Percentage Weight in Broad Index
FIAT 10.2
AHOLD 5.8
ALCATEL 5.4
ERICSSON 4.2
SOURCE Merrill Lynch INDEX Merrill Lynch
European Currency High Yield Index (HP00)
Global_HY_Review_07
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PIMCOs High Yield Philosophy Buy the Best
High Yield Bonds

• Bottom-up credit research incorporating top-down
  economic framework
• Broad opportunity set resulting from expertise in
  all global credit fixed income sectors

• Core high yield approach with a total return
  orientation
• Upper tier quality focus
• Limit risk through issuer and sector
  diversification

The credit quality of a particular security or
group of securities does not ensure the stability
or safety of the overall portfolio. Strategy
subject to change without notice. Diversification
does not ensure against loss.
high_yield_phil_01
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PIMCO Operates in a Unique Market Niche

• Upper / Middle tier of the high yield market
• Higher quality than typical high yield manager
• Result Better risk / return trade off potential

Rating Tier Annualized Return ()(1) Return per Unit of Volatility(2) Correlation with 10-Yr Treasury Returns Correlation with SP 500
Upper/Middle Tiers (BB and B) 11.0 1.79 0.16 0.50
Lower Tier (B- and below) 3.6 0.30 -0.06 0.38
1 January 1986 June 2004. The chart does not
reflect any PIMCO product. 2 Return per unit of
volatility is calculated by dividing annualized
return by annualized monthly volatility of
return. Upper / middle tier is a market
weighted blend that is rebalanced
annually. Past performance is no guarantee of
future results. SOURCE Credit Suisse
First Boston Corporation, Salomon Smith Barney,
PIMCO.As defined by CSFB, Upper Tier includes
split BBB, BB and split BB Middle Tier includes
B and split B Lower Tier includes B-, CCC,
split CCC and defaulted as rated by Moody's
and/or SP. The SP 500 Index is an unmanaged
index of U.S. companies with market
capitalizations in excess of 4 billion. It is
generally representative of the U.S. stock
market. The credit quality of a particular
security or group of securities does not ensure
the stability or safety of the overall
portfolio. Strategy subject to change without
notice. Diversification does not ensure against
loss.
high_yield_phil_07
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PIMCOs High Yield Portfolio Construction Process
Emerging Markets Bank Loans Convertibles
5-15
Out of Sector Strategies
Attractively priced, improving credits with
0.5-2.5 overweight
25-35
Tactical Overweights
Stable credits with neutral to modest overweight
50-70
Core Holdings
Goal Enhance return with less volatility
The credit quality of a particular security or
group of securities does not ensure the stability
or safety of the overall portfolio.
Global_HY_Phil_03
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Outlook - Yield Will Be The Primary Driver of
Returns For Remainder of 2004
Fundamentals
Continued slowdown in fallen angels and a peak in default rates
Modest economic growth driven by fiscal and monetary stimulus
Emphasis on improving corporate balance sheets and raising liquidity
/ M A activity is resulting in increased event risk
Positive Continuing to improve
Valuation
Neutral Intermediate maturities offer best
value with less treasury risk
/ Spreads are wider than 2004 tights, but yields are still near historical low levels
Middle and lower quality tiers offer less treasury rate sensitivity
Technical
Neutral Market technicals likely to remain
supportive
/ Mutual fund outflows likely to slow Institutional flows have been slightly positive
/ Refinancing cycle has slowed down with treasury sell-off
2cs_HY_outlook_01
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• Appendix

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Current Global Credit Sector Views
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Current Global Credit Sector Views
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Sample Credit Write-up
credit_phil_25
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Sample Risk Reports
global_credit_phil_07
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External Research Supplements Internal Research
Short Sellers Views Behind the Numbers
Independent Credit Shops KDP and CreditSights
Credit Research Process
Qualitative Models KMV/Moodys Risk Metric
Industry Publications Associations Modern
Healthcare, Chemical Week, EEI
Industry Experts J.S. Herold
Web Based Tools Multex
credit_phil_23
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Risk Monitoring Tools and Approach
Spreads/Yields vs. Index
Industry Overexposure Underexposure
Worst Performers
Risk Control Goals -Actively monitor credit
bets -Reduce volatility tracking error -Reduce
account dispersion
IssuerOverexposure Underexposure
Duration Outliers
Quality vs. Index
credit_phil_24