|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Investments in unaffiliated securities, at value (Cost — $227,535,515)
|
|
$
|
230,492,691
|
|
|
Investments in affiliated securities, at value (Cost — $9,190,205)
|
|
|
9,190,205
|
|
|
Cash
|
|
|
5,142,614
|
|
|
Interest receivable
|
|
|
656,153
|
|
|
Deposits with brokers for centrally cleared swap contracts
|
|
|
435,000
|
|
|
Receivable for securities sold
|
|
|
254,076
|
|
|
Deposits with brokers for open futures contracts
|
|
|
176,999
|
|
|
Deposits with brokers for OTC derivatives
|
|
|
50,000
|
|
|
Receivable from broker — net variation margin on centrally cleared swap contracts
|
|
|
27,460
|
|
|
Receivable from broker — net variation margin on open futures contracts
|
|
|
20,062
|
|
|
OTC swaps, at value (premiums paid — $40,882)
|
|
|
18,133
|
|
|
Prepaid expenses
|
|
|
35,396
|
|
|
Total Assets
|
|
|
246,498,789
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Payable for open reverse repurchase agreements (Note 3)
|
|
|
65,427,000
|
|
|
Payable for securities purchased
|
|
|
11,566,501
|
|
|
Distributions payable
|
|
|
1,245,687
|
|
|
Deposits from brokers for open reverse repurchase agreements
|
|
|
350,000
|
|
|
Investment management fee payable
|
|
|
152,222
|
|
|
Interest expense payable
|
|
|
120,446
|
|
|
OTC swaps, at value (premiums received — $21,782)
|
|
|
69,205
|
|
|
Directors’ fees payable
|
|
|
6,547
|
|
|
Accrued expenses
|
|
|
177,735
|
|
|
Total Liabilities
|
|
|
79,115,343
|
|
|
Total Net Assets
|
|
$
|
167,383,446
|
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
Par value ($0.001 par value; 11,099,493 shares issued and outstanding; 100,000,000 shares authorized)
|
|
$
|
11,099
|
|
|
Paid-in capital in excess of par value
|
|
|
195,515,960
|
|
|
Total distributable earnings (loss)
|
|
|
(28,143,613)
|
|
|
Total Net Assets
|
|
$
|
167,383,446
|
|
|
|
|
|
Shares Outstanding
|
|
|
11,099,493
|
|
|
|
|
|
Net Asset Value
|
|
$
|
15.08
|
|
See Notes to Financial
Statements.
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
17
|
Statement of operations (unaudited)
For the
Six Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
|
Interest from unaffiliated investments
|
|
$
|
6,605,977
|
|
|
Interest from affiliated investments
|
|
|
158
|
|
|
Total Investment Income
|
|
|
6,606,135
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Investment management fee (Note 2)
|
|
|
1,094,388
|
|
|
Interest expense (Notes 3 and 5)
|
|
|
532,282
|
|
|
Audit and tax fees
|
|
|
62,020
|
|
|
Legal fees
|
|
|
53,019
|
|
|
Transfer agent fees
|
|
|
42,548
|
|
|
Directors’ fees
|
|
|
29,213
|
|
|
Fund accounting fees
|
|
|
12,315
|
|
|
Commitment fees (Note 5)
|
|
|
12,166
|
|
|
Shareholder reports
|
|
|
9,843
|
|
|
Stock exchange listing fees
|
|
|
7,864
|
|
|
Custody fees
|
|
|
2,098
|
|
|
Insurance
|
|
|
1,453
|
|
|
Miscellaneous expenses
|
|
|
2,842
|
|
|
Total Expenses
|
|
|
1,862,051
|
|
|
Less: Fee waivers and/or expense reimbursements (Note 2)
|
|
|
(219,078)
|
|
|
Net Expenses
|
|
|
1,642,973
|
|
|
Net Investment Income
|
|
|
4,963,162
|
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options and Swap Contracts (Notes 1, 3 and
4):
|
|
|
|
|
|
Net Realized Gain (Loss) From:
|
|
|
|
|
|
Investment transactions in unaffiliated securities
|
|
|
631,985
|
|
|
Futures contracts
|
|
|
(463,023)
|
|
|
Written options
|
|
|
17,625
|
|
|
Swap contracts
|
|
|
23,246
|
|
|
Net Realized Gain
|
|
|
209,833
|
|
|
Change in Net Unrealized Appreciation (Depreciation) From:
|
|
|
|
|
|
Investments in unaffiliated securities
|
|
|
3,369,148
|
|
|
Futures contracts
|
|
|
142,133
|
|
|
Swap contracts
|
|
|
27,619
|
|
|
Change in Net Unrealized Appreciation (Depreciation)
|
|
|
3,538,900
|
|
|
Net Gain on Investments, Futures Contracts, Written Options and Swap Contracts
|
|
|
3,748,733
|
|
|
Increase in Net Assets From Operations
|
|
$
|
8,711,895
|
|
See Notes to Financial
Statements.
|
|
|
|
|
18
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2021 (unaudited)
and the Year Ended December 31, 2020
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
4,963,162
|
|
|
$
|
13,280,812
|
|
|
Net realized gain (loss)
|
|
|
209,833
|
|
|
|
(19,594,143)
|
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
3,538,900
|
|
|
|
(23,513,781)
|
|
|
Increase (Decrease) in Net Assets From Operations
|
|
|
8,711,895
|
|
|
|
(29,827,112)
|
|
|
|
|
|
|
Distributions to Shareholders From (Note 1):
|
|
|
|
|
|
|
|
|
|
Total distributable earnings
|
|
|
(7,448,837)
|
|
|
|
(12,229,661)
|
|
|
Return of capital
|
|
|
—
|
|
|
|
(4,519,753)
|
|
|
Decrease in Net Assets From Distributions to
Shareholders
|
|
|
(7,448,837)
|
|
|
|
(16,749,414)
|
|
|
|
|
|
|
Fund Share Transactions:
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of shares (65,232 and 479,339 shares issued, respectively) (Note 7)
|
|
|
997,242
|
†,‡
|
|
|
6,292,173
|
†,‡
|
|
Reinvestment of distributions (7,147 and 39,852 shares issued, respectively)
|
|
|
107,239
|
|
|
|
590,370
|
|
|
Increase in Net Assets From Fund Share Transactions
|
|
|
1,104,481
|
|
|
|
6,882,543
|
|
|
Increase (Decrease) in Net Assets
|
|
|
2,367,539
|
|
|
|
(39,693,983)
|
|
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
165,015,907
|
|
|
|
204,709,890
|
|
|
End of period
|
|
$
|
167,383,446
|
|
|
$
|
165,015,907
|
|
|
†
|
Net of sales charges of $10,147 and $64,918, respectively.
|
|
‡
|
Net of shelf registration offering costs of $6,835 and $359,440, respectively (Note 8).
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
19
|
Statement of cash flows (unaudited)
For the
Six Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash:
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
8,711,895
|
|
|
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating
activities:
|
|
|
|
|
|
Purchases of portfolio securities
|
|
|
(30,713,346)
|
|
|
Sales of portfolio securities
|
|
|
7,448,666
|
|
|
Net purchases, sales and maturities of short-term investments
|
|
|
3,436,572
|
|
|
Net amortization of premium (accretion of discount)
|
|
|
1,186,106
|
|
|
Increase in receivable for securities sold
|
|
|
(254,076)
|
|
|
Decrease in interest receivable
|
|
|
49,895
|
|
|
Increase in receivable from broker — net variation margin on centrally cleared swap contracts
|
|
|
(27,460)
|
|
|
Increase in prepaid expenses
|
|
|
(33,447)
|
|
|
Decrease in receivable for open OTC swap contracts
|
|
|
167
|
|
|
Increase in receivable from broker — net variation margin on open futures contracts
|
|
|
(5,062)
|
|
|
Decrease in net premiums paid for OTC swap contracts
|
|
|
207
|
|
|
Increase in deposits from brokers for open reverse repurchase agreements
|
|
|
350,000
|
|
|
Increase in payable for securities purchased
|
|
|
11,566,501
|
|
|
Increase in investment management fee payable
|
|
|
6,421
|
|
|
Decrease in Directors’ fees payable
|
|
|
(1,553)
|
|
|
Increase in interest expense payable
|
|
|
25,822
|
|
|
Increase in accrued expenses
|
|
|
63,970
|
|
|
Decrease in payable for open OTC swap contracts
|
|
|
(166)
|
|
|
Net realized gain on investments
|
|
|
(631,985)
|
|
|
Change in net unrealized appreciation (depreciation) of investments and OTC swap contracts
|
|
|
(3,358,079)
|
|
|
Net Cash Used in Operating Activities*
|
|
|
(2,178,952)
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Distributions paid on common stock (net of distributions payable)
|
|
|
(6,095,911)
|
|
|
Decrease in loan facility borrowings
|
|
|
(45,000,000)
|
|
|
Increase in payable for open reverse repurchase agreements
|
|
|
57,790,000
|
|
|
Net proceeds from sale of shares
|
|
|
997,242
|
|
|
Net Cash Provided by Financing Activities
|
|
|
7,691,331
|
|
|
Net Increase in Cash and Restricted Cash
|
|
|
5,512,379
|
|
|
Cash and restricted cash at beginning of period
|
|
|
292,234
|
|
|
Cash and restricted cash at end of period
|
|
$
|
5,804,613
|
|
|
*
|
Included in operating expenses is cash of $521,210 paid for interest and commitment fees on borrowings.
|
See Notes to Financial Statements.
|
|
|
|
|
20
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
The following table provides a reconciliation of cash and restricted cash reported within the Statement of Assets and Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows.
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
Cash
|
|
$
|
5,142,614
|
|
|
Restricted cash
|
|
|
661,999
|
|
|
Total cash and restricted cash shown in the Statement of Cash Flows
|
|
$
|
5,804,613
|
|
Restricted cash consists of cash that has been segregated to cover the Fund’s collateral or margin obligations under derivative
contracts. It is separately reported on the Statement of Assets and Liabilities as Deposits with brokers.
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activities:
|
|
|
|
|
|
Proceeds from reinvestment of distributions
|
|
$
|
107,239
|
|
See Notes to Financial
Statements.
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
21
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout each year ended December 31,
unless
otherwise noted:
|
|
|
|
|
|
|
|
20211,2
|
|
|
20201
|
|
|
20191
|
|
|
20181
|
|
|
20171
|
|
|
20161
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
|
$14.96
|
|
|
|
$19.48
|
|
|
|
$19.28
|
|
|
|
$21.27
|
|
|
|
$20.70
|
|
|
|
$22.76
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.45
|
|
|
|
1.23
|
|
|
|
1.51
|
|
|
|
1.65
|
|
|
|
1.57
|
|
|
|
1.47
|
|
|
Net realized and unrealized gain (loss)
|
|
|
0.35
|
|
|
|
(4.20)
|
|
|
|
0.65
|
|
|
|
0.22
|
|
|
|
2.28
|
|
|
|
(0.53)
|
|
|
Total income (loss) from operations
|
|
|
0.80
|
|
|
|
(2.97)
|
|
|
|
2.16
|
|
|
|
1.87
|
|
|
|
3.85
|
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.68)
|
3
|
|
|
(1.13)
|
|
|
|
(1.45)
|
|
|
|
(3.03)
|
|
|
|
(2.69)
|
|
|
|
(2.95)
|
|
|
Net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.83)
|
|
|
|
(0.59)
|
|
|
|
(0.05)
|
|
|
Return of capital
|
|
|
—
|
|
|
|
(0.42)
|
|
|
|
(0.51)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total distributions
|
|
|
(0.68)
|
|
|
|
(1.55)
|
|
|
|
(1.96)
|
|
|
|
(3.86)
|
|
|
|
(3.28)
|
|
|
|
(3.00)
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
|
$15.08
|
|
|
|
$14.96
|
|
|
|
$19.48
|
|
|
|
$19.28
|
|
|
|
$21.27
|
|
|
|
$20.70
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
|
$15.59
|
|
|
|
$14.18
|
|
|
|
$20.30
|
|
|
|
$20.39
|
|
|
|
$24.67
|
|
|
|
$22.79
|
|
|
Total return, based on NAV4,5
|
|
|
5.44
|
%
|
|
|
(14.67)
|
%
|
|
|
11.65
|
%
|
|
|
9.26
|
%
|
|
|
19.70
|
%
|
|
|
4.47
|
%
|
|
Total return, based on Market Price6
|
|
|
15.06
|
%
|
|
|
(22.13)
|
%
|
|
|
9.71
|
%
|
|
|
(1.16)
|
%
|
|
|
24.20
|
%
|
|
|
10.80
|
%
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (millions)
|
|
|
$167
|
|
|
|
$165
|
|
|
|
$205
|
|
|
|
$202
|
|
|
|
$222
|
|
|
|
$216
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
2.27
|
%7
|
|
|
2.82
|
%
|
|
|
3.56
|
%
|
|
|
3.15
|
%
|
|
|
2.68
|
%
|
|
|
2.97
|
%
|
|
Net expenses
|
|
|
2.00
|
7,8,9
|
|
|
2.53
|
9
|
|
|
3.56
|
|
|
|
3.15
|
|
|
|
2.68
|
|
|
|
2.97
|
|
|
Net investment income
|
|
|
6.05
|
7
|
|
|
8.18
|
|
|
|
7.73
|
|
|
|
7.78
|
|
|
|
7.29
|
|
|
|
6.78
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
4
|
%
|
|
|
11
|
%
|
|
|
17
|
%
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
23
|
%10
|
|
|
|
|
|
|
|
|
|
Supplemental data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Outstanding, End of Period (000s)
|
|
|
—
|
|
|
|
$45,000
|
|
|
|
$98,000
|
|
|
|
$99,250
|
|
|
|
$101,750
|
|
|
|
$101,750
|
|
|
Asset Coverage Ratio for Loan Outstanding11
|
|
|
—
|
|
|
|
467
|
%
|
|
|
309
|
%
|
|
|
303
|
%
|
|
|
319
|
%
|
|
|
312
|
%
|
|
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding11
|
|
|
—
|
|
|
|
$4,667
|
|
|
|
$3,089
|
|
|
|
$3,035
|
|
|
|
$3,185
|
|
|
|
$3,124
|
|
|
Weighted Average Loan (000s)
|
|
|
$45,000
|
|
|
|
$62,369
|
|
|
|
$98,072
|
|
|
|
$101,743
|
|
|
|
$101,750
|
|
|
|
$90,984
|
|
|
Weighted Average Interest Rate on Loan
|
|
|
1.84
|
%
|
|
|
2.14
|
%
|
|
|
3.46
|
%
|
|
|
3.06
|
%
|
|
|
2.06
|
%
|
|
|
1.50
|
%
|
See Notes to Financial
Statements.
|
|
|
|
|
22
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended June 30, 2021 (unaudited).
|
|
3
|
The actual source of the Fund’s current fiscal year distributions may be from net investment income, return of capital or a combination of both.
Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year.
|
|
4
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
5
|
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of
less than one year are not annualized.
|
|
6
|
The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no
guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
8
|
The manager has agreed to waive the Fund’s management fee to an extent sufficient to offset the net management fee payable in connection with any investment
in an affiliated money market fund.
|
|
9
|
Reflects fee waivers and/or expense reimbursements.
|
|
10
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 24%.
|
|
11
|
Represents value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the end of the period.
|
See Notes to Financial
Statements.
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
23
|
Notes to financial statements (unaudited)
1. Organization and significant accounting policies
Western Asset Mortgage Opportunity Fund Inc. (the “Fund”) was incorporated in Maryland on December 11, 2009 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s primary investment objective is to provide current income. As a secondary
investment objective, the Fund will seek capital appreciation. The Fund seeks to achieve its investment objectives by investing primarily in a diverse portfolio of mortgage-backed securities (“MBS”) and mortgage whole loans. Investments in
MBS consist primarily of non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”).
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles
(“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government,
municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or
broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit
risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. Futures contracts
are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the
primary market or exchange on which they trade. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third
party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers
or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been
significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures
approved by the Fund’s Board of Directors.
|
|
|
|
|
24
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily
valuation process to the Global Fund Valuation Committee (formerly known as Legg Mason North Atlantic Fund Valuation Committee prior to March 1, 2021) (the “Valuation Committee”). The Valuation Committee, pursuant to the policies
adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party
pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of
possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity;
and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security;
the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions;
information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable
companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the
policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are
reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach
and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income
approach uses valuation techniques to discount estimated future cash flows to present value.
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
25
|
Notes to financial statements
(unaudited) (cont’d)
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs
are summarized in the three broad levels listed below:
|
•
|
|
Level 1 — quoted prices in active markets for identical investments
|
|
•
|
|
Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
|
|
•
|
|
Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
|
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those
securities.
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Long-Term Investments†:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage-Backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
—
|
|
|
$
|
164,432,919
|
|
|
|
—
|
|
|
$
|
164,432,919
|
|
|
Commercial Mortgage-Backed Securities
|
|
|
—
|
|
|
|
52,742,733
|
|
|
|
—
|
|
|
|
52,742,733
|
|
|
Asset-Backed Securities
|
|
|
—
|
|
|
|
10,805,304
|
|
|
|
—
|
|
|
|
10,805,304
|
|
|
Corporate Bonds & Notes
|
|
|
—
|
|
|
|
2,511,735
|
|
|
|
—
|
|
|
|
2,511,735
|
|
|
Total Long-Term Investments
|
|
|
—
|
|
|
|
230,492,691
|
|
|
|
—
|
|
|
|
230,492,691
|
|
|
Short-Term Investments†
|
|
$
|
9,190,205
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,190,205
|
|
|
Total Investments
|
|
$
|
9,190,205
|
|
|
$
|
230,492,691
|
|
|
|
—
|
|
|
$
|
239,682,896
|
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures Contracts††
|
|
$
|
184,721
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
184,721
|
|
|
Centrally Cleared Interest Rate Swaps††
|
|
|
—
|
|
|
$
|
38,688
|
|
|
|
—
|
|
|
|
38,688
|
|
|
OTC Credit Default Swaps on Credit Indices — Buy Protection‡
|
|
|
—
|
|
|
|
18,133
|
|
|
|
—
|
|
|
|
18,133
|
|
|
Total Other Financial Instruments
|
|
$
|
184,721
|
|
|
$
|
56,821
|
|
|
|
—
|
|
|
$
|
241,542
|
|
|
Total
|
|
$
|
9,374,926
|
|
|
$
|
230,549,512
|
|
|
|
—
|
|
|
$
|
239,924,438
|
|
|
|
|
|
|
26
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC Credit Default Swaps on Credit Indices — Sell Protection‡
|
|
|
—
|
|
|
$
|
69,205
|
|
|
|
—
|
|
|
$
|
69,205
|
|
|
†
|
See Schedule of Investments for additional detailed categorizations.
|
|
††
|
Reflects the unrealized appreciation (depreciation) of the instruments.
|
|
‡
|
Value includes any premium paid or received with respect to swap contracts.
|
(b) Purchased options. When the Fund purchases an option, an amount equal to the premium paid by the Fund is recorded as an investment on the
Statement of Assets and Liabilities, the value of which is marked-to-market to reflect the current market value of the option purchased. If the purchased option expires,
the Fund realizes a loss equal to the amount of premium paid. When an instrument is purchased or sold through the exercise of an option, the related premium paid is added to the basis of the instrument acquired or deducted from the proceeds of the
instrument sold. The risk associated with purchasing put and call options is limited to the premium paid.
(c) Written
options. When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded as a realized gain. When a written call option is exercised, the
difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered
written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund from the
exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a closing
transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.
The risk
in writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the
market price of the underlying security decreases and the option is exercised. The risk in writing an uncovered call option is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there
is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
27
|
Notes to financial statements
(unaudited) (cont’d)
(d) Futures contracts. The Fund uses futures contracts generally to gain exposure to, or
hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or securities with a broker in an amount equal to a certain percentage of
the contract amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation margin’’) are made or received by the Fund each day, depending on the daily fluctuation in the value of the
contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The daily changes in contract value are recorded as unrealized appreciation
or depreciation in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve,
to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(e) Swap agreements. The Fund invests in swaps for the purpose of managing its exposure to
interest rate, credit or market risk, or for other purposes, including to increase the Fund’s return. The use of swaps involves risks that are different from those associated with other portfolio transactions. Swap agreements are privately
negotiated in the over-the-counter market and may be entered into as a bilateral contract (“OTC Swaps”) or centrally cleared (“Centrally Cleared
Swaps”). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.
In a Centrally Cleared Swap, immediately
following execution of the swap, the swap agreement is submitted to a clearinghouse or central counterparty (the “CCP”) and the CCP becomes the ultimate counterparty of the swap agreement. The Fund is required to interface with the CCP
through a broker, acting in an agency capacity. All payments are settled with the CCP through the broker. Upon entering into a Centrally Cleared Swap, the Fund is required to deposit initial margin with the broker in the form of cash or securities.
Swap contracts are marked-to-market daily and changes in value are
recorded as unrealized appreciation (depreciation). The daily change in valuation of Centrally Cleared Swaps, if any, is recorded as a net receivable or payable for variation margin on the Statement of Assets and Liabilities. Gains or losses are
realized upon termination of the swap agreement. Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Fund’s custodian in compliance with the terms of the swap contracts.
Securities posted as collateral for swap contracts are identified in the Schedule of Investments and restricted cash, if any, is identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in the Statement of Assets and
Liabilities. These risks include changes in the returns of the underlying instruments, failure of the counterparties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.
|
|
|
|
|
28
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
OTC Swap payments received or made at the beginning of the measurement period are reflected as a premium or deposit,
respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as realized gain or loss in the Statement of Operations. Net periodic payments received or paid by the Fund
are recognized as a realized gain or loss in the Statement of Operations.
The Fund’s maximum exposure in the event of a defined credit event on a
credit default swap to sell protection is the notional amount. As of June 30, 2020, the total notional value of all credit default swaps to sell protection was $500,000. This amount would be offset by the value of the swap’s reference
entity, upfront premiums received on the swap and any amounts received from the settlement of a credit default swap where the Fund bought protection for the same referenced security/entity.
For average notional amounts of swaps held during the six months ended June 30, 2021, see Note 4.
(f) Swaptions. The Fund may purchase or write swaption contracts to manage exposure to
fluctuations in interest rates or to enhance yield. The Fund may also purchase and write swaption contracts to manage exposure to an underlying instrument. Swaption contracts written by the Fund represent an option that gives the purchaser the
right, but not the obligation, to enter into a previously agreed upon swap contract at a future date. Swaption contracts purchased by the Fund represent an option that gives the Fund the right, but not the obligation, to enter into a previously
agreed upon swap contract at a future date.
When the Fund writes a swaption, an amount equal to the premium received by the Fund is recorded as a
liability, the value of which is marked-to-market daily to reflect the current market value of the swaption written. If the swaption expires, the Fund realizes a gain
equal to the amount of the premium received.
When the Fund purchases a swaption, an amount equal to the premium paid by the Fund is recorded as an
investment on the Statement of Assets and Liabilities, the value of which is marked-to-market daily to reflect the current market value of the swaption purchased. If the
swaption expires, the Fund realizes a loss equal to the amount of the premium paid.
Swaptions are marked-to-market daily based upon quotations from market makers. Changes in the value of the swaption are reported as unrealized gains or losses in the Statement of Operations.
(g) Stripped securities. The Fund may invest in ‘‘Stripped Securities,’’
a term used collectively for components, or strips, of fixed income securities. Stripped Securities can be principal only securities (“PO”), which are debt obligations that have been stripped of unmatured interest coupons, or interest only
securities (“IO”), which are unmatured interest
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
29
|
Notes to financial statements
(unaudited) (cont’d)
coupons that have been stripped from debt obligations. The market value of Stripped Securities will fluctuate in response to changes in economic conditions, rates
of prepayment, interest rates and the market’s perception of the securities. However, fluctuations in response to interest rates may be greater in Stripped Securities than for debt obligations of comparable maturities that pay interest
currently. The amount of fluctuation may increase with a longer period of maturity.
The yield to maturity on IO’s is sensitive to the rate of
principal repayments (including prepayments) on the related underlying debt obligation and principal payments may have a material effect on yield to maturity. If the underlying debt obligation experiences greater than anticipated prepayments of
principal, the Fund may not fully recoup its initial investment in IO’s.
(h) Reverse repurchase agreements. The Fund may enter into reverse repurchase agreements. Under the terms of a typical reverse repurchase agreement, a fund sells a security subject to an obligation to repurchase the security from the buyer at an
agreed upon time and price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the agreement may be restricted pending a determination by the
counterparty, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities. In entering into reverse repurchase agreements, the Fund will pledge cash, U.S. government securities or other liquid debt
obligations at least equal in value to its obligations with respect to reverse repurchase agreements or will take other actions permitted by law to cover its obligations. If the market value of the collateral declines during the period, the Fund may
be required to post additional collateral to cover its obligation. Cash collateral that has been pledged to cover obligations of the Fund under reverse repurchase agreements, if any, will be reported separately in the Statement of Assets and
Liabilities. Securities pledged as collateral are noted in the Schedule of Investments. Interest payments made on reverse repurchase agreements are recognized as a component of “Interest expense” on the Statement of Operations. In periods
of increased demand for the security, the Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund.
(i) Securities traded on a when-issued and delayed delivery basis. The Fund may trade securities on a when-issued or delayed delivery basis. In
when-issued and delayed delivery transactions, the securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time
of entering into the transaction.
Purchasing such securities involves risk of loss if the value of the securities declines prior to settlement. These
securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.
|
|
|
|
|
30
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
(j) Mortgage-backed securities. Mortgage-Backed
Securities (“MBS”) include CMBS and RMBS. These securities depend on payments (except for rights or other assets designed to assure the servicing or timely distribution of proceeds to holders of such securities) primarily from the cash
flow from secured commercial or residential mortgage loans made to borrowers. Such loans are secured (on a first priority basis or second priority basis, subject to permitted liens, easements and other encumbrances) by commercial or residential real
estate, the proceeds of which are used to purchase and or to construct commercial or residential real estate. The value of some mortgage-backed securities may be particularly sensitive to changes in prevailing interest rates. The value of these
securities may fluctuate in response to the market’s perception of the creditworthiness of the issuers. Additionally, although certain mortgage-related securities are supported by some form of government or private guarantee and/or insurance,
there is no assurance that private guarantors or insurers will meet their obligations.
(k) Leverage. The Fund may seek to enhance the level of its current distributions to holders of common stock through the use of leverage. The Fund may use leverage directly at the Fund level through borrowings, including loans
from certain financial institutions or through a qualified government sponsored program, the use of reverse repurchase agreements and/or the issuance of debt securities (collectively, “Borrowings”), and possibly through the issuance of
preferred stock (“Preferred Stock”), in an aggregate amount of up to approximately 33 1/3% of the Fund’s Total Assets immediately after such Borrowings and/or issuances of Preferred Stock. “Total Assets” means net assets of
the Fund plus the amount of any Borrowings and assets attributable to Preferred Stock that may be outstanding. Currently, the Fund has no intention to issue notes or debt securities, or Preferred Stock. In addition, the Fund may enter into
additional reverse repurchase agreements and/or use similar investment management techniques that may provide leverage, but which are not subject to the foregoing 33 1/3% limitation so long as the Fund has covered its commitment with respect to such
techniques by segregating liquid assets, entering into offsetting transactions or owning positions covering related obligations.
(l)
Cash flow information. The Fund invests in securities and distributes dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of
shareholders. These activities are reported in the Statements of Changes in Net Assets and additional information on cash receipts and cash payments is presented in the Statement of Cash Flows.
(m) Credit and market risk. Investments in securities that are collateralized by real estate
mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the
outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and
may result in a lack of correlation between their credit ratings and values.
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
31
|
Notes to financial statements
(unaudited) (cont’d)
(n) Foreign investment risks. The Fund’s investments in foreign securities may involve
risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or may pay interest or dividends in foreign currencies, changes in the relationship of these foreign
currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political,
social or economic developments, all of which affect the market and/or credit risk of the investments.
(o) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions where the Fund is
exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the
event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s subadviser attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness
of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events
and changes in overall economic conditions may impact the assessment of such counterparty risk by the subadviser. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.
With exchange traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or clearinghouse, as counterparty to such
instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law,
the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default of the clearing broker or clearinghouse.
The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement, with certain of its
derivative counterparties that govern over-the-counter (“OTC”) derivatives and provide for general obligations, representations, agreements, collateral posting
terms, netting provisions in the event of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to, a percentage decrease in the Fund’s net assets or net asset value
per share over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional collateral.
|
|
|
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|
32
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Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain
derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement, the terms of the ISDA
Master Agreements do not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the
right to offset may vary by jurisdiction.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker
or exchange clearinghouse for exchange traded derivatives while collateral terms are contract specific for OTC traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any, will be
reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
As of June 30, 2021, the Fund held OTC credit default swaps with credit related contingent features which had a liability position of $69,205. If a contingent feature in the master agreements would have been
triggered, the Fund would have been required to pay this amount to its derivatives counterparties.
As of June 30, 2021, the Fund held cash
collateral from Morgan Stanley & Co. Inc. in the amount of $50,000. This amount could be used to reduce the Fund’s exposure to the counterparty in the event of default.
(p) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income (including
interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. The Fund accretes
market discounts and amortizes market premiums on debt securities using the effective yield method. Accretion of market discounts and amortization of market premiums requires the application of several assumptions including, but not limited to,
prepayment assumptions and default rate assumptions, which are reevaluated not less than semi-annually and require the use of a significant amount of judgment. Principal write-offs are generally treated as realized losses. The Fund’s accretion
of discounts and amortization of premiums for U.S. federal and other tax purposes is likely to differ from the financial accounting treatment under GAAP of these items as described above. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs
that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
|
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Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
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33
|
Notes to financial statements
(unaudited) (cont’d)
(q) Partnership accounting policy. The Fund records its pro rata share of the income (loss)
and capital gains (losses), to the extent of distributions it has received, allocated from the underlying partnerships and accordingly adjusts the cost basis of the underlying partnerships for return of capital. These amounts are included in the
Fund’s Statement of Operations.
(r) Distributions to shareholders.
Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. The actual source of the Fund’s current fiscal year distributions may be from
net investment income, return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year. Distributions of net realized gains, if any, are declared at least
annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(s) Compensating balance arrangements. The Fund has an arrangement with its custodian bank
whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
(t) Federal and other taxes. It is the Fund’s policy to comply with the federal income
and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to
shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of December 31, 2020, no provision for income tax is required in the
Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and
state departments of revenue.
(u) Reclassification. GAAP requires that certain
components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. Western Asset Management Company, LLC (“Western Asset”) and Western Asset Management Company Limited
(“Western Asset Limited”) are the Fund’s subadvisers.
|
|
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Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
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LMPFA, Western Asset and Western Asset Limited are indirect, wholly-owned subsidiaries of Franklin Resources, Inc.
(“Franklin Resources”).
Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid
monthly, at an annual rate of 1.00% of the Fund’s average daily managed assets. Managed assets are net assets plus the proceeds of any outstanding borrowings used for leverage and assets attributable to preferred stock that may be outstanding.
The manager has agreed to waive the Fund’s management fee to an extent sufficient to offset the net management fee payable in connection with any
investment in an affiliated money market fund (the “affiliated money market fund waiver”).
LMPFA provides administrative and certain oversight
services to the Fund. LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. Western Asset Limited provides certain subadvisory services to
the Fund relating to currency transactions and investments in non-U.S. dollar denominated debt securities. For its services, LMPFA pays Western Asset a fee monthly, at an annual rate equal to 70% of the net
management fee it receives from the Fund. In turn, Western Asset pays Western Asset Limited a monthly subadvisory fee in an amount equal to 100% of the management fee paid to Western Asset on the assets that Western Asset allocates to Western Asset
Limited to manage.
During periods in which the Fund utilizes financial leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize
leverage because the fees are calculated as a percentage of the Fund’s assets, including those investments purchased with leverage.
LMPFA
implemented an investment management fee waiver of 0.20% that will continue until January 2, 2022.
During the six months ended June 30, 2021,
fees waived and/or expenses reimbursed amounted to $219,078, which included an affiliated money market fund waiver of $200.
All officers and one
Director of the Fund are employees of Franklin Resources or its affiliates and do not receive compensation from the Fund.
3.
Investments
During the six months ended June 30, 2021, the aggregate cost of purchases and proceeds from sales of investments (excluding
short-term investments) and U.S. Government & Agency Obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
U.S. Government &
Agency Obligations
|
|
|
Purchases
|
|
$
|
25,670,995
|
|
|
$
|
5,042,351
|
|
|
Sales
|
|
|
7,316,928
|
|
|
|
131,738
|
|
|
|
|
|
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Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
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|
35
|
Notes to financial statements
(unaudited) (cont’d)
At June 30, 2021, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments for federal income tax
purposes were substantially as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost/Premiums
Paid (Received)
|
|
|
Gross
Unrealized
Appreciation
|
|
|
Gross
Unrealized
Depreciation
|
|
|
Net
Unrealized
Appreciation
(Depreciation)
|
|
|
Securities
|
|
$
|
236,725,720
|
|
|
$
|
26,224,716
|
|
|
$
|
(23,267,540)
|
|
|
$
|
2,957,176
|
|
|
Futures contracts
|
|
|
—
|
|
|
|
184,721
|
|
|
|
—
|
|
|
|
184,721
|
|
|
Swap contracts
|
|
|
19,100
|
|
|
|
38,688
|
|
|
|
(70,172)
|
|
|
|
(31,484)
|
|
Transactions in reverse repurchase agreements for the Fund during the six months ended June 30, 2021 were as follows:
|
|
|
|
|
|
|
Average Daily
Balance*
|
|
Weighted Average
Interest Rate*
|
|
Maximum Amount
Outstanding
|
|
$19,268,691
|
|
2.031%
|
|
$65,427,000
|
|
*
|
Averages based on the number of days that the Fund had reverse repurchase agreements outstanding.
|
Interest rates on reverse repurchase agreements ranged from 1.891% to 3.250% during the six months ended June 30, 2021. Interest expense incurred on reverse
repurchase agreements totaled $196,796.
4. Derivative instruments and hedging activities
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and
Liabilities at June 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET DERIVATIVES1
|
|
|
|
|
Interest Rate
Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
|
Futures contracts2
|
|
$
|
184,721
|
|
|
|
—
|
|
|
$
|
184,721
|
|
|
OTC swap contracts3
|
|
|
—
|
|
|
$
|
18,133
|
|
|
|
18,133
|
|
|
Centrally cleared swap contracts4
|
|
|
38,688
|
|
|
|
—
|
|
|
|
38,688
|
|
|
Total
|
|
$
|
223,409
|
|
|
$
|
18,133
|
|
|
$
|
241,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITY
DERIVATIVES1
|
|
|
|
|
|
|
|
|
|
|
Credit
Risk
|
|
|
OTC swap contracts3
|
|
|
|
|
|
|
|
|
|
$
|
69,205
|
|
|
|
|
|
|
36
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
1
|
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability derivatives is payables/net unrealized
depreciation.
|
|
2
|
Includes cumulative unrealized appreciation (depreciation) of futures contracts as reported in the Schedule of Investments. Only net variation margin is reported
within the receivables and/or payables on the Statement of Assets and Liabilities.
|
|
3
|
Values include premiums paid (received) on swap contracts which are shown separately in the Statement of Assets and Liabilities.
|
|
4
|
Includes cumulative unrealized appreciation (depreciation) of centrally cleared swap contracts as reported in the Schedule of Investments. Only net variation
margin is reported within the receivables and/or payables on the Statement of Assets and Liabilities.
|
The following tables provide
information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the six months ended June 30, 2021. The first table provides additional detail about the amounts and sources of gains (losses)
realized on derivatives during the period. The second table provides additional information about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Interest Rate
Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
|
Purchased options1
|
|
$
|
(17,555)
|
|
|
|
—
|
|
|
$
|
(17,555)
|
|
|
Futures contracts
|
|
|
(463,023)
|
|
|
|
—
|
|
|
|
(463,023)
|
|
|
Written options
|
|
|
17,625
|
|
|
|
—
|
|
|
|
17,625
|
|
|
Swap contracts
|
|
|
23,429
|
|
|
$
|
(183)
|
|
|
|
23,246
|
|
|
Total
|
|
$
|
(439,524)
|
|
|
$
|
(183)
|
|
|
$
|
(439,707)
|
|
|
1
|
Net realized gain (loss) from purchased options is reported in Net Realized Gain (Loss) From Investment transactions in unaffiliated securities in the Statement
of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Interest Rate
Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
|
Futures contracts
|
|
$
|
142,133
|
|
|
|
—
|
|
|
$
|
142,133
|
|
|
Swap contracts
|
|
|
38,688
|
|
|
$
|
(11,069)
|
|
|
|
27,619
|
|
|
Total
|
|
$
|
180,821
|
|
|
$
|
(11,069)
|
|
|
$
|
169,752
|
|
During the six months ended June 30, 2021, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
|
|
Average Market
Value
|
|
|
Purchased options†
|
|
$
|
970
|
|
|
Written options†
|
|
|
1,411
|
|
|
Futures contracts (to buy)
|
|
|
3,864,018
|
|
|
Futures contracts (to sell)
|
|
|
2,385,358
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
37
|
Notes to financial statements
(unaudited) (cont’d)
|
|
|
|
|
|
|
|
|
Average Notional
Balance
|
|
|
Interest rate swap contracts
|
|
$
|
7,500,000
|
|
|
Credit default swap contracts (buy protection)
|
|
|
500,000
|
|
|
Credit default swap contracts (sell protection)
|
|
|
500,000
|
|
|
†
|
At June 30, 2021, there were no open positions held in this derivative.
|
The following table presents the Fund’s OTC derivative assets and liabilities by counterparty net of amounts available for offset under an ISDA Master Agreement and net of the related collateral pledged
(received) by the Fund as of June 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Gross
Assets
Subject
to
Master
Agreements1
|
|
|
Gross
Liabilities
Subject to
Master
Agreements1
|
|
|
Net Assets
(Liabilities)
Subject to
Master
Agreements
|
|
Collateral
Pledged
(Received)2,3
|
|
|
Net
Amount4
|
|
|
Morgan Stanley & Co. Inc.
|
|
$
|
18,133
|
|
|
$
|
(69,205)
|
|
|
$(51,072)
|
|
$
|
50,000
|
|
|
$
|
(1,072)
|
|
|
1
|
Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
|
|
2
|
Gross amounts are not offset in the Statement of Assets and Liabilities.
|
|
3
|
In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization.
|
|
4
|
Represents the net amount receivable (payable) from (to) the counterparty in the event of default.
|
5. Loan
Prior to May 27, 2021, the Fund
had a revolving credit agreement with Societe Generale (“Credit Agreement”) that allowed the Fund to borrow up to an aggregate amount of $55,000,000. Effective May 27, 2021, the Credit Agreement was terminated. The Fund paid a
commitment fee on the unutilized portion of the loan commitment amount at an annual rate of 0.90%, except that the commitment fee was 0.30% in the event that the aggregate outstanding principal balance of the loan was greater than 80% of the loan
commitment amount. The interest on the loan was calculated at a variable rate based on the LIBOR, plus any applicable margin. Securities held by the Fund were subject to a lien, granted to Societe Generale, to the extent of the borrowing outstanding
and any additional expenses. The Fund’s Credit Agreement contained customary covenants that, among other things, limited the Fund’s ability to pay distributions in certain circumstances, incur additional debt, change its fundamental
investment policies and engage in certain transactions, including mergers and consolidations, and required asset coverage ratios in addition to those required by the 1940 Act. In addition, the Credit Agreement was subject to early termination under
certain conditions and contained other provisions that limited the Fund’s ability to utilize borrowing under the agreement. Interest expense related to the loan for the six months ended June 30, 2021 was $335,487. For the six months ended
June 30, 2021, the Fund incurred commitment fees in the amount of $12,166. At June 30, 2021, the Fund had no borrowings outstanding per this Credit Agreement. For the six months ended June 30, 2021, based on the number of days during
the reporting period that the Fund has a loan balance outstanding, the average daily loan balance was $45,000,000 and the weighted average interest rate was 1.84%.
|
|
|
|
|
38
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
6. Distributions subsequent to June 30, 2021
The following distributions have been declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report:
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payable Date
|
|
|
Amount
|
|
|
6/23/2021
|
|
|
7/1/2021
|
|
|
$
|
0.1125
|
|
|
7/23/2021
|
|
|
8/2/2021
|
|
|
$
|
0.1125
|
|
|
8/24/2021
|
|
|
9/1/2021
|
|
|
$
|
0.1125
|
|
|
9/23/2021
|
|
|
10/1/2021
|
|
|
$
|
0.1125
|
|
|
10/22/2021
|
|
|
11/1/2021
|
|
|
$
|
0.1125
|
|
|
11/22/2021
|
|
|
12/1/2021
|
|
|
$
|
0.1125
|
|
7. Stock repurchase program
On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s
outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes
may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts. During the six months ended June 30, 2021, the Fund did not repurchase any shares.
8. Capital shares
During the six months
ended June 30, 2021, the Fund filed a registration statement with the Securities and Exchange Commission authorizing the Fund to offer and sell shares of common stock having an aggregate offering price of up to $43,283,467. Under the equity
shelf offering program, the Fund, subject to market conditions, may raise additional equity capital from time to time in varying amounts and offering methods at a net price at or above the Fund’s then-current net asset value per common share.
Costs incurred by the Fund in connection with the shelf offering are recorded as a prepaid expense. These costs are amortized on a pro-rata basis as shares are sold and are presented as a reduction to the Net
proceeds from sale of shares on the Statement of Changes in Net Assets. Any deferred charges remaining at the end of the life of the shelf offering period will be expensed. For the six months ended June 30, 2021, the Fund sold 65,232 shares of
common stock and the proceeds from such sales were $997,242, net of offering costs and sales charges of $6,835 and $10,147, respectively. For the year ended December 31, 2020, the Fund sold 479,339 shares of common stock and the proceeds from
such sales were $6,292,173, net of offering costs and sales charges of $359,440 and $64,918, respectively.
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
|
39
|
Notes to financial statements
(unaudited) (cont’d)
9. Transactions with affiliated companies
As
defined by the 1940 Act, an affiliated company is one in which the Fund owns 5% or more of the outstanding voting securities, or a company which is under common ownership or control with the Fund. The following company was considered an affiliated
company for all or some portion of the six months ended June 30, 2021. The following transactions were effected in such company for the six months ended June 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
Value at
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
Sold
|
|
|
|
Cost
|
|
|
Shares
|
|
|
Cost
|
|
|
Shares
|
|
|
Western Asset Premier Institutional Government Reserves, Premium Shares
|
|
|
—
|
|
|
$
|
27,429,312
|
|
|
|
27,429,312
|
|
|
$
|
18,239,107
|
|
|
|
18,239,107
|
|
|
|
|
|
|
|
|
|
(cont’d)
|
|
Realized
Gain (Loss)
|
|
|
Interest
Income
|
|
|
|
|
|
Net Increase
(Decrease) in
Unrealized
Appreciation
(Depreciation)
|
|
|
Affiliate
Value at
June 30,
2021
|
|
|
Western Asset Premier Institutional Government Reserves, Premium Shares
|
|
|
—
|
|
|
$
|
158
|
|
|
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—
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$
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9,190,205
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10. Deferred capital losses
As of December 31, 2020, the Fund had deferred capital losses of $23,945,708, which have no expiration date, that will be available to offset future taxable capital gains.
11. Recent accounting pronouncement
In March
2020, the Financial Accounting Standards Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial
Reporting (the “ASU”). The amendments in the ASU provide optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the London Interbank Offered Rate
and other interbank-offered based reference rates as of the end of 2021. The ASU is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has
reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.
12.
Other matters
The outbreak of the respiratory illness COVID-19 (commonly referred to as
“coronavirus”) has continued to rapidly spread around the world, causing considerable uncertainty for the
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40
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Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
|
global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on
economies, markets, industries and individual issuers, are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the Fund’s investments and negatively impact the Fund’s
performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
* * *
The
Fund’s investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or “LIBOR,” which is the offered rate for short-term Eurodollar deposits between major
international banks. On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of (i) the overnight and one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023 and (ii) all other LIBOR settings, including the
one-week and two-month USD LIBOR settings, immediately following the LIBOR publication on Friday, December 31, 2021. There remains uncertainty regarding the nature
of any replacement rate and the impact of the transition from LIBOR on the Fund’s transactions and the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Fund’s investments cannot
yet be determined.
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Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report
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41
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Additional shareholder information (unaudited)
Results of special meeting of shareholders
On July 6, 2020, a special meeting of shareholders was held for the following purposes: 1) to approve a new management agreement between the Fund and its
investment manager; and 2) to approve a new subadvisory agreement with respect to each of the Fund’s subadvisers. The following table provides the number of votes cast for or against, as well as the number of abstentions and broker non-votes as to each matter voted on at the special meeting of shareholders. Each item voted on was approved.
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Item Voted On
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Voted For
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Voted Against
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Abstentions
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Broker Non-Votes
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To Approve a New Management Agreement with Legg Mason Partners Fund Advisor, LLC
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4,580,000
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|
|
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278,591
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525,353
|
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|
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0
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|
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To Approve a New Subadvisory Agreement with Western Asset Management Company, LLC
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4,583,754
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|
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278,191
|
|
|
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521,999
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0
|
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To Approve a New Subadvisory Agreement with Western Asset Management Company Limited
|
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4,572,193
|
|
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288,751
|
|
|
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523,000
|
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|
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0
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42
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Western Asset Mortgage Opportunity Fund Inc.
|
Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and
return of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the “Plan Agent”), in additional shares of Common Stock under the Fund’s
Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare
Trust Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined
as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date
is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal
to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close
of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading
day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders;
except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the
Common Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases,
the Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the
day prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by
the Plan Agent in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e.,
opt-out) by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date; otherwise such
withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Stock.
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Western Asset Mortgage Opportunity Fund Inc.
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43
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Dividend reinvestment plan
(unaudited) (cont’d)
Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage
charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage
commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost
averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite
advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean
that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in
writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any
fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your
account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at
1-888-888-0151.
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44
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Western Asset Mortgage Opportunity Fund Inc.
|
Western Asset
Mortgage Opportunity Fund Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial
Officer
Fred Jensen
Chief Compliance Officer
Jenna Bailey
Identity Theft Prevention Officer
George P. Hoyt
Secretary and Chief Legal Officer
Thomas C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
Western Asset Mortgage
Opportunity Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund
Advisor, LLC
Subadvisers
Western
Asset Management Company,
LLC
Western Asset Management
Company
Limited
Custodian
The Bank of New York Mellon
Transfer agent
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
Independent registered
public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher & Bartlett LLP
900 G Street NW
Washington, DC 20001
New York Stock
Exchange Symbol
DMO
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to
nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Franklin Distributors, LLC, as well as Legg Mason-sponsored closed-end funds. The
provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not
limited to:
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Personal information included on applications or other forms;
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Account balances, transactions, and mutual fund holdings and positions;
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Bank account information, legal documents, and identity verification documentation;
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•
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Online account access user IDs, passwords, security challenge question responses; and
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•
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Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt,
payment history, etc.).
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How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial
institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have
authorized or as permitted or required by law.
The Funds may disclose information about you to:
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Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business, or to comply with obligations to
government regulators;
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Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or
processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds;
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•
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Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and
service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;
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The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations
to government regulators;
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•
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Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
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NOT PART OF THE
SEMI-ANNUAL REPORT
|
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’
behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them
to perform. The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory
request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’
practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify
you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The
Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized
employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal
information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds
will attempt to notify you as necessary, so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the
most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information
accurate is very important. If you believe that your account information is incomplete, not accurate or not current, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, write the Funds
using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at
1-888-777-0102.
Revised April
2018
Legg Mason California Consumer Privacy Act Policy
Although much of the personal information we collect is “nonpublic personal information” subject to federal law, residents of California may, in certain circumstances, have additional rights under the
California Consumer Privacy Act (“CCPA”). For example, if you are a broker,
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NOT PART OF THE
SEMI-ANNUAL REPORT
|
Legg Mason Funds Privacy and Security Notice (cont’d)
dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the
account of any other person(s) or household, or a financial advisor, or if you have otherwise provided personal information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your
personal information (as defined by the CCPA).
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In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the categories and specific pieces of personal
information we have collected about you.
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You also have the right to request the deletion of the personal information collected or maintained by the Funds.
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If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set forth below. The
rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process described below. We
do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.
We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a
request on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or
other applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an
agent if suitable and appropriate proof is not provided.
For the 12-month period prior to the date of this
Privacy Policy, the Legg Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.
Contact
Information
Address: Data Privacy Officer, 100 International Dr., Baltimore, MD 21202
Email: DataProtectionOfficer@franklintempleton.com
Phone: 1-800-396-4748
Revised October 2020
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NOT PART OF THE
SEMI-ANNUAL REPORT
|
Western Asset Mortgage Opportunity Fund Inc.
Western Asset Mortgage Opportunity Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at
market prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission
(“SEC”) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the
SEC’s website at www.sec.gov. To obtain information on Form N-PORT, shareholders can call the Fund at
1-888-777-0102.
Information on
how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to
vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102,
(2) at www.lmcef.com and (3) on the SEC’s website at www.sec.gov.
This report is transmitted to the shareholders of Western Asset Mortgage
Opportunity Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
WASX012835 8/21 SR21-4230