|
|
|
|
|
|
|
Assets:
|
|
|
|
|
Investments, at value (Cost $226,922,269)
|
|
|
$214,836,572
|
|
Interest receivable
|
|
|
733,197
|
|
Receivable for Fund shares sold
|
|
|
530,386
|
|
Deposits with brokers for open futures contracts
|
|
|
342,078
|
|
OTC swaps, at value (premiums paid $72,906)
|
|
|
176,426
|
|
Receivable for open OTC swap contracts
|
|
|
250
|
|
Prepaid expenses
|
|
|
9,032
|
|
Total Assets
|
|
|
216,627,941
|
|
|
|
Liabilities:
|
|
|
|
|
Loan payable (Note 5)
|
|
|
60,000,000
|
|
Distributions payable
|
|
|
1,391,096
|
|
Investment management fee payable
|
|
|
142,291
|
|
OTC swaps, at value (premiums received $22,382)
|
|
|
113,853
|
|
Interest expense payable
|
|
|
64,375
|
|
Payable to broker net variation margin on open futures contracts
|
|
|
16,765
|
|
Due to custodian
|
|
|
10,827
|
|
Directors fees payable
|
|
|
5,728
|
|
Payable for open OTC swap contracts
|
|
|
435
|
|
Written options, at value (premiums received $58,391)
|
|
|
0
|
*
|
Accrued expenses
|
|
|
178,118
|
|
Total Liabilities
|
|
|
61,923,488
|
|
Total Net Assets
|
|
|
$154,704,453
|
|
|
|
Net Assets:
|
|
|
|
|
Par value ($0.001 par value; 10,984,078 shares issued and outstanding; 100,000,000 shares authorized)
|
|
|
$10,984
|
|
Paid-in capital in excess of par value
|
|
|
203,427,467
|
|
Total distributable earnings (loss)
|
|
|
(48,733,998)
|
|
Total Net Assets
|
|
|
$154,704,453
|
|
|
|
Shares Outstanding
|
|
|
10,984,078
|
|
|
|
Net Asset Value
|
|
|
$14.08
|
|
*
|
Amount represents less than $1.
|
See Notes to Financial Statements.
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
|
17
|
Statement of operations (unaudited)
For the
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
Interest
|
|
$
|
9,309,207
|
|
|
|
Expenses:
|
|
|
|
|
Investment management fee (Note 2)
|
|
|
1,250,327
|
|
Interest expense (Notes 3 and 5)
|
|
|
1,072,067
|
|
Commitment fees (Note 5)
|
|
|
77,304
|
|
Audit and tax fees
|
|
|
68,337
|
|
Legal fees
|
|
|
63,972
|
|
Transfer agent fees
|
|
|
40,080
|
|
Directors fees
|
|
|
35,113
|
|
Fund accounting fees
|
|
|
15,989
|
|
Custody fees
|
|
|
11,061
|
|
Shareholder reports
|
|
|
10,489
|
|
Stock exchange listing fees
|
|
|
6,257
|
|
Insurance
|
|
|
1,888
|
|
Miscellaneous expenses
|
|
|
7,136
|
|
Total Expenses
|
|
|
2,660,020
|
|
Less: Fee waivers and/or expense reimbursements (Note 2)
|
|
|
(254,528)
|
|
Net Expenses
|
|
|
2,405,492
|
|
Net Investment Income
|
|
|
6,903,715
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options, Swap Contracts, Forward Foreign Currency
Contracts and Foreign Currency Transactions (Notes 1, 3 and 4):
|
|
|
|
|
Net Realized Loss From:
|
|
|
|
|
Investment transactions
|
|
|
(15,757,801)
|
|
Futures contracts
|
|
|
(3,007,021)
|
|
Swap contracts
|
|
|
(741,337)
|
|
Forward foreign currency contracts
|
|
|
(1,776)
|
|
Foreign currency transactions
|
|
|
(589)
|
|
Net Realized Loss
|
|
|
(19,508,524)
|
|
Change in Net Unrealized Appreciation (Depreciation) From:
|
|
|
|
|
Investments
|
|
|
(34,863,160)
|
|
Futures contracts
|
|
|
(66,326)
|
|
Written options
|
|
|
58,391
|
|
Swap contracts
|
|
|
(54,693)
|
|
Forward foreign currency contracts
|
|
|
(839)
|
|
Foreign currencies
|
|
|
(380)
|
|
Change in Net Unrealized Appreciation (Depreciation)
|
|
|
(34,927,007)
|
|
Net Loss on Investments, Futures Contracts, Written Options, Swap Contracts, Forward Foreign Currency Contracts and Foreign Currency
Transactions
|
|
|
(54,435,531)
|
|
Decrease in Net Assets From Operations
|
|
$
|
(47,531,816)
|
|
See Notes to Financial
Statements.
|
|
|
18
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2020 (unaudited)
and the Year Ended December 31, 2019
|
|
2020
|
|
|
2019
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
6,903,715
|
|
|
$
|
15,892,494
|
|
Net realized loss
|
|
|
(19,508,524)
|
|
|
|
(1,553,304)
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
(34,927,007)
|
|
|
|
8,217,931
|
|
Increase (Decrease) in Net Assets From Operations
|
|
|
(47,531,816)
|
|
|
|
22,557,121
|
|
|
|
|
Distributions to Shareholders From (Note 1):
|
|
|
|
|
|
|
|
|
Total distributable earnings
|
|
|
(8,976,147)
|
|
|
|
(20,068,443)
|
|
Return of capital
|
|
|
|
|
|
|
(441,518)
|
|
Decrease in Net Assets From Distributions to
Shareholders
|
|
|
(8,976,147)
|
|
|
|
(20,509,961)
|
|
|
|
|
Fund Share Transactions:
|
|
|
|
|
|
|
|
|
Net proceeds from sale of shares (449,932 and 0 shares issued, respectively) (Note 8)
|
|
|
6,103,919
|
|
|
|
|
|
Reinvestment of distributions (26,223 and 35,526 shares issued, respectively)
|
|
|
398,607
|
|
|
|
713,330
|
|
Increase in Net Assets From Fund Share Transactions
|
|
|
6,502,526
|
|
|
|
713,330
|
|
Increase (Decrease) in Net Assets
|
|
|
(50,005,437)
|
|
|
|
2,760,490
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
204,709,890
|
|
|
|
201,949,400
|
|
End of period
|
|
$
|
154,704,453
|
|
|
$
|
204,709,890
|
|
|
Net of shelf registration offering costs of $113,936 and sales charges of $60,527.
|
See Notes to Financial Statements.
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
|
19
|
Statement of cash flows (unaudited)
For the
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
Increase (Decrease) in Cash:
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(47,531,816)
|
|
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided (used) by operating
activities:
|
|
|
|
|
Purchases of portfolio securities
|
|
|
(22,908,749)
|
|
Sales of portfolio securities
|
|
|
54,645,520
|
|
Net purchases, sales and maturities of short-term investments
|
|
|
3,457,658
|
|
Net amortization of premium (accretion of discount)
|
|
|
1,260,422
|
|
Decrease in interest receivable
|
|
|
356,857
|
|
Increase in prepaid expenses
|
|
|
(4,469)
|
|
Decrease in other receivables
|
|
|
53,500
|
|
Decrease in receivable for open OTC swap contracts
|
|
|
3,400
|
|
Decrease in net premiums received for OTC swap contracts
|
|
|
(292,895)
|
|
Decrease in receivable from broker net variation margin on open futures contracts
|
|
|
20,718
|
|
Decrease in investment management fee payable
|
|
|
(115,484)
|
|
Decrease in Directors fees payable
|
|
|
(1,592)
|
|
Decrease in interest expense payable
|
|
|
(168,375)
|
|
Decrease in accrued expenses
|
|
|
(79,398)
|
|
Increase in premiums received from written options
|
|
|
58,391
|
|
Increase in payable to broker net variation margin on open futures contracts
|
|
|
16,765
|
|
Decrease in payable for open OTC swap contracts
|
|
|
(2,065)
|
|
Net realized loss on investments
|
|
|
15,757,801
|
|
Change in net unrealized appreciation (depreciation) of investments, written options, OTC swap contracts and forward
foreign currency contracts
|
|
|
34,860,301
|
|
Net Cash Provided in Operating Activities*
|
|
|
39,386,490
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
Distributions paid on common stock (net of distributions payable)
|
|
|
(7,186,444)
|
|
Decrease in loan facility borrowings
|
|
|
(38,000,000)
|
|
Increase in due to custodian
|
|
|
10,827
|
|
Proceeds from sale of shares (net of receivable for Fund shares sold)
|
|
|
5,573,533
|
|
Net Cash Used by Financing Activities
|
|
|
(39,602,084)
|
|
Net Decrease in Cash and Restricted Cash
|
|
|
(215,594)
|
|
Cash and restricted cash at beginning of period
|
|
|
557,672
|
|
Cash and restricted cash at end of period
|
|
$
|
342,078
|
|
*
|
Included in operating expenses is cash of $1,297,618 paid for interest and commitment fees on borrowings.
|
See Notes to Financial Statements.
|
|
|
20
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 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, 2020
|
|
Cash
|
|
|
|
|
Restricted cash
|
|
|
342,078
|
|
Total cash and restricted cash shown in the Statement of Cash Flows
|
|
$
|
342,078
|
|
|
Restricted cash consists of cash that has been segregated to cover the Funds 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
|
|
$
|
398,607
|
|
See Notes to Financial
Statements.
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
|
21
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout each year ended December 31,
unless
otherwise noted:
|
|
|
|
|
|
|
20201,2
|
|
|
20191
|
|
|
20181
|
|
|
20171
|
|
|
20161
|
|
|
20151
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
|
$19.48
|
|
|
|
$19.28
|
|
|
|
$21.27
|
|
|
|
$20.70
|
|
|
|
$22.76
|
|
|
|
$24.75
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.65
|
|
|
|
1.51
|
|
|
|
1.65
|
|
|
|
1.57
|
|
|
|
1.47
|
|
|
|
2.13
|
|
Net realized and unrealized gain (loss)
|
|
|
(5.20)
|
|
|
|
0.65
|
|
|
|
0.22
|
|
|
|
2.28
|
|
|
|
(0.53)
|
|
|
|
(0.80)
|
|
Total income (loss) from operations
|
|
|
(4.55)
|
|
|
|
2.16
|
|
|
|
1.87
|
|
|
|
3.85
|
|
|
|
0.94
|
|
|
|
1.33
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.85)
|
3
|
|
|
(1.92)
|
|
|
|
(3.03)
|
|
|
|
(2.69)
|
|
|
|
(2.95)
|
|
|
|
(2.33)
|
|
Net realized gains
|
|
|
|
|
|
|
|
|
|
|
(0.83)
|
|
|
|
(0.59)
|
|
|
|
(0.05)
|
|
|
|
(0.99)
|
|
Return of capital
|
|
|
|
|
|
|
(0.04)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.85)
|
|
|
|
(1.96)
|
|
|
|
(3.86)
|
|
|
|
(3.28)
|
|
|
|
(3.00)
|
|
|
|
(3.32)
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
|
$14.08
|
|
|
|
$19.48
|
|
|
|
$19.28
|
|
|
|
$21.27
|
|
|
|
$20.70
|
|
|
|
$22.76
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
|
$14.67
|
|
|
|
$20.30
|
|
|
|
$20.39
|
|
|
|
$24.67
|
|
|
|
$22.79
|
|
|
|
$23.55
|
|
Total return, based on NAV4,5
|
|
|
(23.56)
|
%
|
|
|
11.65
|
%
|
|
|
9.26
|
%
|
|
|
19.70
|
%
|
|
|
4.47
|
%
|
|
|
5.44
|
%
|
Total return, based on Market Price6
|
|
|
(23.47)
|
%
|
|
|
9.71
|
%
|
|
|
(1.16)
|
%
|
|
|
24.20
|
%
|
|
|
10.80
|
%
|
|
|
13.56
|
%
|
|
|
|
|
|
|
|
Net assets, end of period (millions)
|
|
|
$155
|
|
|
|
$205
|
|
|
|
$202
|
|
|
|
$222
|
|
|
|
$216
|
|
|
|
$237
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
3.20
|
%7
|
|
|
3.56
|
%
|
|
|
3.15
|
%
|
|
|
2.68
|
%
|
|
|
2.97
|
%
|
|
|
2.39
|
%
|
Net expenses
|
|
|
2.89
|
7,8
|
|
|
3.56
|
|
|
|
3.15
|
|
|
|
2.68
|
|
|
|
2.97
|
|
|
|
2.39
|
|
Net investment income
|
|
|
8.30
|
7
|
|
|
7.73
|
|
|
|
7.78
|
|
|
|
7.29
|
|
|
|
6.78
|
|
|
|
8.65
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
9
|
%
|
|
|
17
|
%
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
23
|
%9
|
|
|
24
|
%
|
|
|
|
|
|
|
|
Supplemental data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Outstanding, End of Period (000s)
|
|
|
$60,000
|
|
|
|
$98,000
|
|
|
|
$99,250
|
|
|
|
$101,750
|
|
|
|
$101,750
|
|
|
|
$80,500
|
|
Asset Coverage Ratio for Loan Outstanding10
|
|
|
358
|
%
|
|
|
309
|
%
|
|
|
303
|
%
|
|
|
319
|
%
|
|
|
312
|
%
|
|
|
395
|
%
|
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding10
|
|
|
$3,578
|
|
|
|
$3,089
|
|
|
|
$3,035
|
|
|
|
$3,185
|
|
|
|
$3,124
|
|
|
|
$3,946
|
|
Weighted Average Loan (000s)
|
|
|
$77,210
|
|
|
|
$98,072
|
|
|
|
$101,743
|
|
|
|
$101,750
|
|
|
|
$90,984
|
|
|
|
$99,544
|
|
Weighted Average Interest Rate on Loan
|
|
|
2.39
|
%
|
|
|
3.46
|
%
|
|
|
3.06
|
%
|
|
|
2.06
|
%
|
|
|
1.50
|
%
|
|
|
1.06
|
%
|
1
|
Per share amounts have been calculated using the average shares method.
|
See Notes to Financial Statements.
|
|
|
22
|
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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2
|
For the six months ended June 30, 2020 (unaudited).
|
3
|
The actual source of the Funds 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 Funds dividend reinvestment plan. Past performance is no
guarantee of future results. Total returns for periods of less than one year are not annualized.
|
8
|
Reflects fee waivers and/or expense reimbursements.
|
9
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 24%.
|
10
|
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.
|
|
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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|
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 Funds 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). At the Funds Special Meeting of Stockholders
held on December 13, 2019, stockholders approved the proposal to convert the Fund to a perpetual fund by eliminating the Funds term, which was scheduled to end at the close of business on March 1, 2022. The conversion became
effective on January 2, 2020. On April 1, 2020, the Board of Directors of the Fund approved amendments to the Funds bylaws. The amended and restated bylaws were subsequently filed on Form 8-K
and are available on the Securities and Exchange Commissions website at www.sec.gov.
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 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
|
|
|
24
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
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 Funds Board of Directors.
The Board of Directors is responsible for the valuation process and has delegated the supervision of the
daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (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 Funds 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 issuers 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.
|
|
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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|
25
|
Notes to financial statements
(unaudited) (contd)
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 Funds 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 Funds 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
|
|
|
|
|
|
$
|
158,899,538
|
|
|
|
|
|
|
$
|
158,899,538
|
|
Commercial Mortgage-Backed Securities
|
|
|
|
|
|
|
40,906,958
|
|
|
|
|
|
|
|
40,906,958
|
|
Asset-Backed Securities
|
|
|
|
|
|
|
9,989,613
|
|
|
|
|
|
|
|
9,989,613
|
|
Corporate Bonds & Notes
|
|
|
|
|
|
|
488,119
|
|
|
|
|
|
|
|
488,119
|
|
Purchased Options
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
77
|
|
Total Long-Term Investments
|
|
|
|
|
|
|
210,284,305
|
|
|
|
|
|
|
|
210,284,305
|
|
Short-Term Investments
|
|
$
|
4,552,267
|
|
|
|
|
|
|
|
|
|
|
|
4,552,267
|
|
Total Investments
|
|
$
|
4,552,267
|
|
|
$
|
210,284,305
|
|
|
|
|
|
|
$
|
214,836,572
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures Contracts
|
|
$
|
540,045
|
|
|
|
|
|
|
|
|
|
|
$
|
540,045
|
|
OTC Credit Default Swaps on Credit Indices Buy Protection
|
|
|
|
|
|
$
|
176,426
|
|
|
|
|
|
|
|
176,426
|
|
Total Other Financial Instruments
|
|
$
|
540,045
|
|
|
$
|
176,426
|
|
|
|
|
|
|
$
|
716,471
|
|
Total
|
|
$
|
5,092,312
|
|
|
$
|
210,460,731
|
|
|
|
|
|
|
$
|
215,553,043
|
|
|
|
|
26
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written Options
|
|
|
|
|
|
$
|
0
|
*
|
|
|
|
|
|
$
|
0
|
*
|
Futures Contracts
|
|
$
|
366,501
|
|
|
|
|
|
|
|
|
|
|
|
366,501
|
|
OTC Credit Default Swaps on Credit Indices Sell Protection
|
|
|
|
|
|
|
113,853
|
|
|
|
|
|
|
|
113,853
|
|
Total
|
|
$
|
366,501
|
|
|
$
|
113,853
|
|
|
|
|
|
|
$
|
480,354
|
|
|
See Schedule of Investments for additional detailed categorizations.
|
|
Value includes any premium paid or received with respect to swap contracts.
|
*
|
Amount represents less than $1.
|
(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 Funds 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 Funds 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
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
|
27
|
Notes to financial statements
(unaudited) (contd)
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.
(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 gains or losses 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) Forward foreign currency
contracts. The Fund enters into a forward foreign currency contract to hedge against, or manage exposure to, foreign issuers or markets. The Fund may also enter into a forward foreign currency
contract to hedge against foreign currency exchange rate risk on its non-U.S. dollar denominated securities or to facilitate settlement of a foreign currency denominated portfolio transaction. A forward
foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is
marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either
delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time
it is closed.
Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected on the Statement of Assets and
Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties
to meet the terms of their contracts.
(f) 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 Funds return. The use of swaps involves risks that are different from those associated
|
|
|
28
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
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 Funds 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.
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 Funds 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 swaps 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, 2020, see Note 4.
(g) 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
|
|
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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|
29
|
Notes to financial statements
(unaudited) (contd)
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.
(h) Loan participations. The Fund may invest in loans arranged
through private negotiation between one or more financial institutions. The Funds investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Fund
generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and the Fund may not benefit directly
from any collateral supporting the loan in which it has purchased the participation.
The Fund assumes the credit risk of the borrower, the lender that
is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not
benefit from any off-set between the lender and the borrower.
(i) 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 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 markets 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.
|
|
|
30
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
The yield to maturity on IOs 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 IOs.
(j) Repurchase agreements. The Fund may enter into
repurchase agreements with institutions that its subadviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Fund acquires a debt security subject to an obligation
of the seller to repurchase, and of the Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the Funds holding period. When entering into repurchase agreements, it is the Funds policy that
its custodian or a third party custodian, acting on the Funds behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured
against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market
value of the collateral declines during the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or
limited.
(k) 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 Funds 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
Funds obligation to repurchase the securities. In entering into reverse repurchase agreements, the Fund will maintain 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.
|
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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|
31
|
Notes to financial statements
(unaudited) (contd)
(l) 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
markets 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.
(m) 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 Funds 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.
(n) 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 Statement of Changes in Net Assets and additional information on cash receipts and cash payments are presented in the Statement of Cash Flows.
(o) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into
U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon
prevailing exchange rates on the respective dates of such transactions.
|
|
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32
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange
rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency
gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Funds books and the U.S. dollar equivalent
of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange
rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar
denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(p) 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.
(q) Foreign investment risks. The Funds 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
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.
(r) 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.
|
|
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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|
33
|
Notes to financial statements
(unaudited) (contd)
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 Funds 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 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 Funds net assets or NAV 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.
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 over-the-counter 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.
|
|
|
34
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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As of June 30, 2020, the Fund held OTC credit default swaps with credit related contingent features which had a
liability position of $113,853. 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.
At June 30, 2020, the Fund held non-cash collateral from Morgan Stanley & Co. Inc. in the amount of $60,619.
This amount could be used to reduce the Funds exposure to the counterparty in the event of default.
(s) 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 Funds 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.
(t) 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 Funds Statement of Operations.
(u) 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 Funds 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.
|
|
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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|
35
|
Notes to financial statements
(unaudited) (contd)
(v) Compensating balance arrangements. The Fund has an arrangement with its custodian bank
whereby a portion of the custodians fees is paid indirectly by credits earned on the Funds cash on deposit with the bank.
(w) Federal and other taxes. It is the Funds 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 Funds financial statements.
Management has analyzed the Funds tax positions taken on income tax returns for all open tax years and has concluded that as of December 31, 2019, no provision for income tax is required in the
Funds financial statements. The Funds 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.
(x) 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 Funds investment manager. Western Asset Management Company, LLC (Western Asset) and Western Asset Management Company Limited
(Western Asset Limited) are the Funds subadvisers. LMPFA, Western Asset and Western Asset Limited are wholly-owned subsidiaries of Legg Mason, Inc. (Legg Mason). As of July 31, 2020, 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 Funds 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.
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.
|
|
|
36
|
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
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 Funds assets, including those investments purchased with leverage.
Effective January 2, 2020, LMPFA implemented an investment management fee waiver of 0.20% that will terminate on January 2, 2022.
During the six months ended June 30, 2020, fees waived and/or expenses reimbursed amounted to $254,528.
All officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
3. Investments
During the six months ended
June 30, 2020, 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
|
|
$
|
21,408,749
|
|
|
$
|
1,500,000
|
|
Sales
|
|
|
50,545,869
|
|
|
|
4,099,651
|
|
At June 30, 2020, 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
|
|
$
|
226,922,269
|
|
|
$
|
17,367,386
|
|
|
$
|
(29,453,083)
|
|
|
$
|
(12,085,697)
|
|
Swap contracts
|
|
|
50,524
|
|
|
|
103,520
|
|
|
|
(91,471)
|
|
|
|
12,049
|
|
Written options
|
|
|
(58,391)
|
|
|
|
58,391
|
|
|
|
|
|
|
|
58,391
|
|
Futures contracts
|
|
|
|
|
|
|
540,045
|
|
|
|
(366,501)
|
|
|
|
173,544
|
|
Transactions in reverse repurchase agreements for the Fund during the six months ended June 30, 2020 were as follows:
|
|
|
|
|
Average Daily
Balance*
|
|
Weighted Average
Interest Rate*
|
|
Maximum Amount
Outstanding
|
$11,791,640
|
|
4.80%
|
|
$21,706,000
|
*
|
Averages based on the number of days that the Fund had reverse repurchase agreements outstanding.
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
|
37
|
Notes to financial statements
(unaudited) (contd)
Interest rates on reverse repurchase agreements ranged from 3.46% to 5.00% during the six months ended June 30, 2020. Interest expense incurred on reverse
repurchase agreements totaled $154,664.
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, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET DERIVATIVES1
|
|
|
|
Interest
Rate Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
Purchased options2
|
|
$
|
77
|
|
|
|
|
|
|
$
|
77
|
|
Futures contracts3
|
|
|
540,045
|
|
|
|
|
|
|
|
540,045
|
|
OTC swap contracts4
|
|
|
|
|
|
$
|
176,426
|
|
|
|
176,426
|
|
Total
|
|
$
|
540,122
|
|
|
$
|
176,426
|
|
|
$
|
716,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITY DERIVATIVES1
|
|
|
|
Interest
Rate Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
Written options
|
|
$
|
0
|
*
|
|
|
|
|
|
$
|
0
|
*
|
Futures contracts3
|
|
|
366,501
|
|
|
|
|
|
|
|
366,501
|
|
OTC swap contracts4
|
|
|
|
|
|
$
|
113,853
|
|
|
|
113,853
|
|
Total
|
|
$
|
366,501
|
|
|
$
|
113,853
|
|
|
$
|
480,354
|
|
*
|
Amount represents less than $1.
|
1
|
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability derivatives is payables/net unrealized
depreciation.
|
2
|
Market value of purchased options is reported in Investments at value in the Statement of Assets and Liabilities.
|
3
|
Includes cumulative appreciation (depreciation) of futures contracts as reported in the Schedule of Investments. Only variation margin is reported within the
receivables and/or payables on the Statement of Assets and Liabilities.
|
4
|
Values include premiums paid (received) on swap contracts which are shown separately in the Statement of Assets and Liabilities.
|
|
|
|
38
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
The following tables provide information about the effect of derivatives and hedging activities on the Funds
Statement of Operations for the six months ended June 30, 2020. 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 Funds derivatives and hedging activities during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
|
|
|
|
Interest
Rate Risk
|
|
|
Foreign
Exchange Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
Futures contracts
|
|
$
|
(3,007,021)
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,007,021)
|
|
Swap contracts
|
|
|
|
|
|
|
|
|
|
$
|
(741,337)
|
|
|
|
(741,337)
|
|
Forward foreign currency contracts
|
|
|
|
|
|
$
|
(1,776)
|
|
|
|
|
|
|
|
(1,776)
|
|
Total
|
|
$
|
(3,007,021)
|
|
|
$
|
(1,776)
|
|
|
$
|
(741,337)
|
|
|
$
|
(3,750,134)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
|
|
|
Interest
Rate Risk
|
|
|
Foreign
Exchange Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
Purchased options
|
|
$
|
(58,151)
|
|
|
|
|
|
|
|
|
|
|
$
|
(58,151)
|
|
Written options
|
|
|
58,391
|
|
|
|
|
|
|
|
|
|
|
|
58,391
|
|
Futures contracts
|
|
|
(66,326)
|
|
|
|
|
|
|
|
|
|
|
|
(66,326)
|
|
Swap contracts
|
|
|
|
|
|
|
|
|
|
$
|
(54,693)
|
|
|
|
(54,693)
|
|
Forward foreign currency contracts
|
|
|
|
|
|
$
|
(839)
|
|
|
|
|
|
|
|
(839)
|
|
Total
|
|
$
|
(66,086)
|
|
|
$
|
(839)
|
|
|
$
|
(54,693)
|
|
|
$
|
(121,618)
|
|
During the six months ended June 30, 2020, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
Average Market
Value
|
|
Purchased options
|
|
$
|
12,499
|
|
Written options
|
|
|
10,693
|
|
Futures contracts (to buy)
|
|
|
5,778,098
|
|
Futures contracts (to sell)
|
|
|
18,625,886
|
|
Forward foreign currency contracts (to buy)
|
|
|
35,166
|
|
Forward foreign currency contracts (to sell)
|
|
|
8,725
|
|
|
|
Average Notional
Balance
|
|
Credit default swap contracts (to buy protection)
|
|
$
|
3,378,571
|
|
Credit default swap contracts (to sell protection)
|
|
|
4,504,286
|
|
|
At June 30, 2020, there were no open positions held in this derivative.
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
|
39
|
Notes to financial statements
(unaudited) (contd)
The following table presents the Funds 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, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
176,503
|
|
|
$
|
(113,853)
|
|
|
$62,650
|
|
$
|
(60,619)
|
|
|
$
|
2,031
|
|
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
The Fund has a revolving credit
agreement with Societe Generale (Credit Agreement) that allows the Fund to borrow up to an aggregate amount of $55,000,000 ($60,000,000 prior to August 13, 2020 and $105,000,000 prior to July 10, 2020). The Credit Agreement
renews daily for a 150-day term unless notice to the contrary is given to the Fund and it has a scheduled maturity date of August 13, 2022. The Fund pays a commitment fee on the unutilized portion of the
loan commitment amount at an annual rate of 0.90%, except that the commitment fee is 0.30% in the event that the aggregate outstanding principal balance of the loan is greater than 80% of the loan commitment amount. Prior to August 13, 2020,
the Fund paid a commitment fee on the unutilized portion of the loan commitment amount at an annual rate of 0.60%, except that the commitment fee was 0.20% 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 is calculated at a variable rate based on the LIBOR, plus any applicable margin. Securities held by the Fund are subject to a lien, granted to Societe Generale, to the extent of the
borrowing outstanding and any additional expenses. The Funds Credit Agreement contains customary covenants that, among other things, may limit the Funds 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 require asset coverage ratios in addition to those required by the 1940 Act. In addition, the Credit Agreement may be subject to early
termination under certain conditions and may contain other provisions that could limit the Funds ability to utilize borrowing under the agreement. Interest expense related to the loan for the six months ended June 30, 2020 was $917,403.
For the six months ended June 30, 2020, the Fund incurred commitment fees in the amount of $77,304. At June 30, 2020, the Fund had $60,000,000 of borrowings outstanding per this Credit Agreement. For the six months ended June 30,
2020, the Fund had an average loan balance outstanding of $77,209,890 and the weighted average interest rate was 2.39%.
|
|
|
40
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
6. Distributions subsequent to June 30, 2020
The following distributions have been declared by the Funds Board of Directors and are payable subsequent to the period end of this report:
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payable Date
|
|
|
Amount
|
|
6/23/2020
|
|
|
7/1/2020
|
|
|
$
|
0.1275
|
|
7/24/2020
|
|
|
8/3/2020
|
|
|
$
|
0.1275
|
|
8/24/2020
|
|
|
9/1/2020
|
|
|
$
|
0.1275
|
|
9/23/2020
|
|
|
10/1/2020
|
|
|
$
|
0.1125
|
|
10/23/2020
|
|
|
11/2/2020
|
|
|
$
|
0.1125
|
|
11/20/2020
|
|
|
12/1/2020
|
|
|
$
|
0.1125
|
|
7. Stock repurchase program
On November 16, 2015, the Fund announced that the Funds Board of Directors (the Board) had authorized the Fund to repurchase in the open market up to approximately 10% of the Funds
outstanding common stock when the Funds 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, 2020, the Fund did not repurchase any shares.
8. Capital shares
During the six months
ended June 30, 2020, 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 $50,000,000. 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 Funds then-current net asset value per common share.
Costs incurred by the Fund in connection with the shelf offering are recorded as a charge to paid-in capital. For the six months ended June 30, 2020, the Fund sold 449,932 shares of common stock and the
proceeds from such sales were $6,103,919, net of offering costs and sales charges of $113,936 and $60,527, respectively.
9. Deferred
capital losses
As of December 31, 2019, the Fund had deferred capital losses of $3,236,039, which have no expiration date, that will be
available to offset future taxable capital gains.
10. 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
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
|
|
41
|
Notes to financial statements
(unaudited) (contd)
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 Funds investments and negatively impact the Funds 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
Funds 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. Plans are underway to phase out the use of LIBOR by the end of 2021. There remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Funds transactions and the
financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Funds investments cannot yet be determined.
11. Subsequent event
On August 14, 2020, the Fund announced that it has elected, by
resolution unanimously adopted by the Funds Board of Directors, to be subject to the Maryland Control Share Acquisition Act (the MCSAA), effective immediately. The MCSAA protects the interests of all stockholders of a Maryland
corporation by providing that any holder of control shares acquired in a control share acquisition will not be entitled to vote its shares unless the other stockholders of the corporation reinstate those voting rights at a
meeting of stockholders by a vote of two-thirds of the votes entitled to be cast on the matter, excluding the acquiring person (i.e., the holder or group of holders acting in concert that acquires,
or proposes to acquire, control shares) and any other holders of interested shares as defined in the MCSAA. Generally, control shares are shares that, when aggregated with shares already owned by an acquiring
person, would entitle the acquiring person to exercise 10% or more, 33 1/3% or more, or a majority of the total voting power of shares entitled to vote in the election of directors.
Application of the MCSAA seeks to limit the ability of an acquiring person to achieve a short-term gain at the expense of the Funds ability to pursue its investment objective and policies and seek long-term
value for the rest of the Funds stockholders. The above description of the MCSAA is only a high-level summary and does not purport to be complete. Investors should refer to the actual provisions of the MCSAA and the Funds bylaws for more
information, including definitions of key terms, various exclusions and exemptions from the statutes scope, and the procedures by which stockholders may approve the reinstatement of voting rights to holders of control shares.
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Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report
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Board approval of new management and new subadvisory agreements (unaudited)
Background
On March 9, 2020, during a
telephonic meeting of the Boards of Directors (each, a Board and each Board member, a Director or a Board Member) of the closed-end funds under the Boards purview
(each, a Fund and together, the Funds), Board Members discussed with management of Legg Mason, Inc. (Legg Mason) and certain representatives of Franklin Resources, Inc. and its subsidiaries (together,
Franklin Templeton) the acquisition of Legg Mason by Franklin Templeton (the Transaction) and Franklin Templetons plans and intentions regarding the Funds and Legg Masons asset management business, including the
preservation and continued investment autonomy of the investment advisory businesses conducted by Legg Masons separate investment advisory subsidiaries and the combination of Legg Masons and Franklin Templetons distribution
resources. The Board of each Fund was advised that the Transaction, if completed, would constitute a change of control under the Investment Company Act of 1940, as amended (the 1940 Act), that would result in the termination of the
current management agreement between each Fund and Legg Mason Partners Fund Advisor, LLC (the Manager) (the Current Management Agreements) and the current subadvisory agreements with each Funds subadviser or subadvisers
(each, a Subadviser and together, the Subadvisers) (the Current Subadvisory Agreements).
At
meetings held on April 1, 2020 the Board of each Fund, including a majority of the Board Members who are not interested persons of the Fund or the Manager as defined in the 1940 Act (the Independent Board Members),
approved the new management agreement between each Fund and the Manager (each, a New Management Agreement) and each new subadvisory agreement between each Funds Manager and its Subadviser or Subadvisers relating to the Fund (each,
a New Subadvisory Agreement).1 (The New Management Agreement for a
Fund and the New Subadvisory Agreement or Agreements for the Fund are referred to, collectively, as the New Agreements, the Current Management Agreement for a Fund and the Current Subadvisory Agreement or Agreements for the Fund are
referred to, collectively, as the Current Agreements, and the Manager and the Subadviser or Subadvisers for a Fund are referred to, collectively, as the Advisers.)
At these meetings, which included meetings of the full Board of each Fund and separate meetings of the Independent Board Members, the Board considered, among other things, whether it would be in the best interests
of each Fund and its respective shareholders to approve the New Agreements, and the anticipated impacts of the Transaction on the Funds and their shareholders. To assist the Board of each Fund in its consideration of the New
1
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This meeting was held telephonically in reliance on an exemptive order issued by the Securities and Exchange Commission on March 13, 2020. Reliance on the
exemptive order is necessary and appropriate due to circumstances related to current or potential effects of COVID-19. All Board Members participating in the telephonic meeting were able to hear each other
simultaneously during the meeting. Reliance on the exemptive order requires Board Members, including a majority of the Independent Board Members, to ratify actions taken pursuant to the exemptive order by vote cast at the next in-person meeting.
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Board approval of new management and new subadvisory agreements (unaudited) (contd)
Agreements, Franklin Templeton provided materials and information about Franklin Templeton, including its financial condition and asset management capabilities and
organization, Legg Mason provided materials and information about Legg Mason, including performance and expense comparison data and profitability information by Fund and with respect to the Legg Mason fund complex as a whole, and Franklin Templeton
and Legg Mason provided materials and information about the proposed Transaction between Legg Mason and Franklin Templeton.
Before and during the
April 1, 2020 meetings, the Board of each Fund sought certain information as it deemed necessary and appropriate. In connection with their consideration of the New Agreements, the Independent Board Members worked with their independent legal
counsel to prepare requests for additional information that were submitted to Franklin Templeton and Legg Mason. The requests for information of the Board of each Fund sought information relevant to the Boards consideration of the New
Agreements and other anticipated impacts of the Transaction on the Funds and their shareholders. Franklin Templeton and Legg Mason provided documents and information in response to these requests for information. Following their review of this
information, the Independent Board Members requested additional information from Franklin Templeton and Legg Mason. Franklin Templeton and Legg Mason provided further information in response to these requests, which the Board of each Fund reviewed.
Senior management representatives from Franklin Templeton and Legg Mason participated in a portion of each of these meetings and addressed various questions raised by the Board of each Fund.
At the April 1, 2020 meeting of the Board of each Fund, representatives of Legg Mason and Franklin Templeton made presentations to, and responded to questions from, the Board. After the presentations and after
reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Agreements.
Board Approval of New Management Agreements and New Subadvisory Agreements
Each Funds
Boards evaluation of the New Agreements reflected the information provided specifically in connection with their review of the New Agreements, as well as, where relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Current Agreements at in-person meetings held on November 14, 2019 and at other Board meetings throughout the prior year.
Among other things, the Board Members considered:
(i)
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the reputation, experience, financial strength and resources of Franklin Templeton and its investment advisory subsidiaries;
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(ii)
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that Franklin Templeton has informed the Board of each Fund that it intends to maintain the investment autonomy of the Legg Mason investment advisory
subsidiaries;
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(iii)
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that Franklin Templeton and Legg Mason have informed the Board of each Fund that, following the Transaction, there is not expected to be any diminution
in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers, including compliance and other non-advisory services, and have represented that there are not
expected to be any changes in the portfolio management personnel managing the Funds as a result of the Transaction;
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(iv)
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that Franklin Templeton and Legg Mason have informed the Board of each Fund regarding transition plans, including Legg Masons provision of
retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templetons provision of long-term retention mechanisms for certain personnel following the closing;
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(v)
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that there are not expected to be any changes to any Funds custodian or other service providers as a result of the Transaction;
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(vi)
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that Franklin Templeton has informed the Board of each Fund that it has no present intention to alter currently effective expense waivers and
reimbursements after their expiration, and, while it reserves the right to do so in the future, it would consult with the applicable Funds Board before making any changes;
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(vii)
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that Franklin Templeton does not expect to propose any changes to the investment objective(s) of any Fund or any changes to the principal investment
strategies of any Fund as a result of the Transaction;
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(viii)
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the potential benefits to Fund shareholders from being part of a combined fund family with Franklin Templeton-sponsored funds and access to a broader
array of investment opportunities;
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(ix)
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that Franklin Templeton and Legg Mason will each derive benefits from the Transaction and that, as a result, they have a financial interest in the
matters that were being considered;
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(x)
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the fact that each Funds contractual management fee rates will remain the same and will not increase by virtue of the New Agreements;
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(xi)
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the terms and conditions of the New Agreements, including that each New Agreement is identical to its corresponding Current Agreement except for their
respective dates of execution, effectiveness and termination;
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Board approval of new management and new subadvisory agreements (unaudited) (contd)
(xii)
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the support expressed by the current senior management team at Legg Mason for the Transaction and Legg Masons recommendation that the Board of
each Fund approve the New Agreements;
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(xiii)
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that the Current Agreements, except in the case of newer Funds, are the product of multiple years of review and negotiation and information received and
considered by the applicable Funds Board in the exercise of their business judgment during those years, and that within the past six-months the Board of each Fund had performed a full review of and
approved the Current Agreements as required by the 1940 Act and had determined in the exercise of the Board Members business judgment that each applicable Adviser had the capabilities, resources and personnel necessary to provide the services
provided to each Fund, and that the management and subadvisory fees paid by or in respect of the Fund, taking into account any applicable agreed-upon fee reductions, represented reasonable compensation to the applicable Adviser in light of the
services provided, the costs to the Adviser of providing those services, the fees and other expenses paid by similar funds, and such other matters as the Board Members considered relevant in the exercise of their business judgment, and represented
an appropriate sharing between Fund shareholders and the Advisers of any economies of scale in the management of the Fund at current and anticipated asset levels;
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(xiv)
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that the Current Agreements were considered and approved as recently as November 2019, except in the case of one Fund, which is currently in the initial
term of its agreement;
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(xv)
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that the Funds will not bear the costs of obtaining shareholder approval of the New Agreements, including proxy solicitation costs, legal fees and the
costs of printing and mailing the proxy statement, regardless of whether the Transaction is consummated; and
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(xvi)
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that under the a definitive agreement between Legg Mason and Franklin Templeton (the Transaction Agreement), Franklin Templeton has
acknowledged that Legg Mason had entered into the Transaction Agreement in reliance upon the benefits and protections provided by Section 15(f) of the 1940 Act, and that, in furtherance of the foregoing, Franklin Templeton agreed to use
reasonable best efforts to conduct its business so that (a) for a period of not less than three years after the closing of the Transaction no more than 25% of the members of the Board of any Fund shall be interested persons (as
defined in the 1940 Act) of any investment adviser for a Fund, and (b) for a period of not less than two years after the closing, neither Franklin Templeton nor any of its affiliates shall impose an unfair burden (within the meaning
of the 1940 Act, including any interpretations or no-action letters of the Securities and Exchange Commission) on any Fund as a result of the transactions contemplated by the Transaction Agreement or any
express or implied terms, conditions or understandings applicable thereto.
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Certain of these considerations are
discussed in more detail below.
In their deliberations, the Board Members considered information received in connection with the most recent approval or
continuation of each Current Agreement in addition to information provided by Franklin Templeton and Legg Mason in connection with their evaluation of the terms and conditions of the New Agreements. In connection with the most recent approval or
continuation of each Current Agreement, and in connection with their review of each New Agreement, the Board Members did not identify any particular information that was all-important or controlling, and each
Board Member may have attributed different weights to the various factors. The Board Members evaluated all information available to them on a Fund-by-Fund basis with
respect to their consideration of the Current Agreements and the New Agreements, and their determinations were made separately in respect of each Fund.
The information provided and presentations made to the Board of each Fund encompassed each Fund and all other Funds for which the Board has responsibility. The
discussion below covers both the advisory and the administrative functions rendered by the Manager for each Fund, both of which functions are encompassed by the New Management Agreement for the Fund, as well as the advisory functions rendered by the
Subadviser(s) pursuant to the New Subadvisory Agreement(s) for the Fund. The Independent Board Members of each Fund considered the New Management Agreement and the New Subadvisory Agreement(s) separately in the course of their review. In doing so,
they considered the respective roles and compensation of the Manager and the Subadviser(s) in providing services to the Fund.
The Independent Board
Members were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Board Members of each Fund received a memorandum from their independent legal counsel discussing the legal standards for their
consideration of the New Agreements for the Fund. The Independent Board Members of each Fund, including Western Asset Mortgage Opportunity Fund Inc. (the Western Asset Fund), reviewed the proposed approval of the New Agreements for the
Fund on multiple occasions with their independent legal counsel in private sessions at which no representatives of Franklin Templeton, Legg Mason, or the Manager or Subadviser(s) for the Fund were present.
Nature, Extent and Quality of the Services under the New Agreements
The Board of each Fund received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Subadviser(s) under the Current Agreements. In evaluating
the nature, quality and extent of the services to be provided by the Advisers under the New Agreements, the Board Members considered,
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Board approval of new management and new subadvisory agreements (unaudited) (contd)
among other things, the expected impact, if any, of the Transaction on the operations, facilities, organization and personnel of each Adviser, and that Franklin
Templeton and Legg Mason have advised the Board of each Fund that, following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers,
including compliance and other non-advisory services, and that there are not expected to be any changes in portfolio management personnel as a result of the Transaction. In this regard, the Board of each Fund
took into account that Franklin Templeton and Legg Mason have informed the Board regarding Legg Masons provision of retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templetons
provision of long-term retention mechanisms for certain personnel following the closing. The Board of each Fund has received information at regular meetings throughout the past year related to the services rendered by the Manager in its management
of the Funds affairs and the Managers role in coordinating the activities of the Funds other service providers. Each Funds Boards evaluation of the services provided by the Manager and the Subadviser(s) took into
account the Board Members knowledge gained as Board Members of other Funds in the Legg Mason fund complex, including knowledge gained regarding the scope and quality of the investment management and other capabilities of the Manager and the
Subadviser(s), and the quality of the Managers administrative and other services. The Board of each Fund observed that the scope of services provided by the Manager and the Subadviser(s), and the undertakings required of the Manager and
Subadviser(s) in connection with those services, including maintaining and monitoring their own and the Funds compliance programs, liquidity management programs and cybersecurity programs, had expanded over time as a result of regulatory,
market and other developments. The Board of each Fund has received and reviewed on a regular basis information from the Manager and the Subadviser(s) regarding the Funds compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act, and took that information into account in its evaluation of the New Agreements. The Board of each Fund also considered the risks associated with the Fund borne by the Advisers and their
affiliates (such as entrepreneurial, operational, reputational, litigation and regulatory risk), as well as the risk management processes of the Manager and Subadviser(s).
The Board of each Fund considered information provided by Franklin Templeton regarding its business and operating structure, scale of operation, leadership and reputation, distribution capabilities, and financial
condition (pre- and post-closing).
The Board of each Fund also reviewed the qualifications, backgrounds and
responsibilities of the senior personnel of the Manager and the Subadviser(s) and the team of investment professionals primarily responsible for the day-to-day portfolio
management of the Fund. The Board of each Fund noted in particular that following the Transaction, Franklin Templeton is expected to have resources that will provide it with substantial capacity to
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invest across the business. The Board of each Fund also considered the financial resources of Legg Mason and Franklin Templeton and the importance of having a Fund manager with, or with access
to, significant organizational and financial resources.
The Board also considered the benefits to each Fund of being part of a larger combined
organization with greater financial resources following the Transaction, particularly during periods of market disruptions and volatility. In addition, the Board also considered Franklin Templetons significant experience in dealing with issues
unique to the management of closed-end funds.
The Board of each Fund also considered the policies and practices
of the Manager and the Subadvisers regarding the selection of brokers and dealers and the execution of portfolio transactions for the Fund.
The Board of
each Fund received performance information for the Fund, as well as for a group of funds (the Performance Universe) selected by Broadridge Financial Solutions, Inc. (Broadridge), an independent provider of investment company
data, based on classifications provided by Thomson Reuters Lipper (Lipper). The Board of each Fund was provided with a description of the methodology used to determine the similarity of the Fund with the funds included in the Performance
Universe. It was noted that while the Board of each Fund has found the Broadridge data generally useful they recognized its limitations, including that the data may vary depending on the end date selected and that the results of the performance
comparisons may vary depending on the selection of the peer group and its composition over time. It was also noted that the Board of each Fund has received and discussed with management information throughout the year at periodic intervals comparing
the Funds performance against its benchmark and against the Funds peers. In addition, the Board of each Fund considered the Funds performance in light of overall financial market conditions. Where a Funds performance was
below the median during one or more specified periods, the Funds Board noted the explanations from the Advisers concerning the Funds relative performance versus the peer group for the various periods
Based on their review of the materials provided and the assurances they had received from Franklin Templeton and Legg Mason, the Board Members of each Fund
determined that the Transaction was not expected to affect adversely the nature, extent and quality of services provided by each Adviser and that the Transaction was not expected to have an adverse effect on the ability of the Advisers to provide
those services, and the Board of each Fund, including the Western Asset Fund, concluded that, overall, the nature, extent and quality of services expected to be provided, including performance, under the New Agreements for the Fund were sufficient
for approval.
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Board approval of new management and new subadvisory agreements (unaudited) (contd)
Management Fees and Expense Ratios
The Board
of each Fund considered that it had reviewed the Funds management fee and total expense ratio at the November 2019 contract renewal meeting. The Board of each Fund considered that the New Management Agreement does not change any Funds
management fee rate or the computation method for calculating such fees, and that there is no present intention to alter expense waiver and reimbursement arrangements that are currently in effect. The Board of each Fund noted that by their terms
none of the current expense waiver and reimbursement arrangements would expire before December 2020 and that Franklin Templeton had indicated that it would consult with the applicable Funds Board before making any changes to the Funds
current expense waiver and reimbursement arrangements.
The Board of each Fund reviewed and considered the contractual management fee and the actual
management fees paid by the Fund to the Manager in light of the nature, extent and quality of the management and subadvisory services to be provided by the Manager and the Subadviser(s). The Board of each Fund also noted that the compensation paid
to the Subadviser(s) is the responsibility and expense of the Manager, or in some cases another Subadviser, and not the Fund. In addition, the Board of each Fund received and considered information provided by Broadridge comparing the contractual
management fee and the actual management fee for the Fund, as well as the total actual expenses for the Fund, with those of funds in both the relevant expense group and a broader group of funds, each selected by Broadridge based on classifications
provided by Lipper. It was noted that, while the Board of each Fund has found the Broadridge data generally useful, it recognized its limitations, including that the data may vary depending on the selection of the peer group. The Board of each Fund
also considered the overall management fee, the fees of each Subadviser and the portion of the management fee retained by the Manager after payment of the subadvisory fees, in each case in light of the services rendered for those amounts. The Board
of each Fund also received an analysis of Legg Mason complex-wide management fees for Funds with a similar strategy provided by the Manager, which, among other things, set out a framework of fees based on asset classes.
The Board of each Fund reviewed information regarding fees charged by the Manager and/or the Subadviser(s) to other U.S. clients investing primarily in an asset
class similar to that of the Fund, including, where applicable, separate accounts. The Manager reviewed with the Board of each Fund the differences in services provided to these different types of accounts, including that the Fund is provided with
certain administrative services, office facilities, and Fund officers (including the Funds chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by
other Fund service providers. The Board of each Fund considered the fee comparisons in light of the differences in management of these different types of accounts and the differences in associated risks borne by the Advisers.
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In evaluating the costs of the services
to be provided by the Advisers under the New Agreements, the Board Members considered, among other things, whether management fees or other expenses would change as a result of the Transaction. Based on their review of the materials provided and the
assurances they had received from Franklin Templeton and Legg Mason, the Board Members determined that the Transaction would not increase the total fees payable by any Fund for management services.
Taking all of the above into consideration, as well as the factors identified below, the Board of each Fund, including the Western Asset Fund, determined that the
management fee and the subadvisory fees for the Fund were reasonable in light of the nature, extent and quality of the services to be provided to the Fund under the New Agreements.
Profitability and Economies of Scale
The Board of each Fund received and considered an
analysis of the profitability of the Manager and its affiliates in providing services to the Fund. The Board of each Fund also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board of each
Fund received information with respect to the Managers allocation methodologies used in preparing this profitability data. It was noted that the allocation methodologies had been previously reviewed by an outside consultant. The profitability
of the Manager and its affiliates was considered by each Funds Board not to be excessive in light of the nature, extent and quality of the services provided to the Fund, including the Western Asset Fund.
The Board of each Fund received and considered information concerning whether the Advisers realize economies of scale as the Funds assets grow. In conjunction
with their most recent or prior deliberations concerning the Current Agreements, the Board Members have noted that advisory or management fee reductions had been implemented for certain Funds, as well as expense limitations, and that after taking
those reductions and expense limitations into account, the Board Members had determined that the total fees for management services, and administrative services for the applicable Funds, were reasonable in light of the services provided to the
Funds, including the Western Asset Fund, and that any economies of scale were being shared appropriately.
The Board Members noted that Franklin
Templeton and Legg Mason expected to realize cost savings from the Transaction based on synergies of operations, primarily at the holding company distribution level, as well as to benefit from possible growth of the Funds resulting from enhanced
distribution capabilities. The Board of each Fund took into account that cost synergies were not the primary driver of the Transaction. However, they noted that other factors could also affect profitability and potential economies of scale, and that
it was not possible to predict with any degree of certainty how the Transaction would affect the Advisers profitability from their relationship with the Funds, nor to quantify at this time any
possible future economies of scale. The Board Members noted they will have the opportunity to periodically re-examine such
profitability and any economies of scale going forward.
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Board approval of new management and new subadvisory agreements (unaudited) (contd)
Other Benefits to the Advisers
The Board of
each Fund considered other benefits received by the Manager, the Subadviser(s) and their affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders. In light
of the costs of providing investment management and other services to the Funds and the ongoing commitment of the Manager and the Subadviser(s) to the Funds, the Board of each Fund considered that the ancillary benefits that the Manager, the
Subadviser(s) and their affiliates received as a result of their relationship with the Fund, including the Western Asset Fund, were reasonable. In evaluating the fall-out benefits to be received by the
Advisers under the New Agreements, the Board Members considered whether the Transaction would have an impact on the fall-out benefits received by virtue of the Current Agreements.
The Board of each Fund considered that Franklin Templeton may derive reputational and other benefits from its ability to use the Legg Mason investment
affiliates names in connection with operating and marketing the Funds. The Board of each Fund considered that the Transaction, if completed, would significantly increase Franklin Templetons assets under management and expand Franklin
Templetons investment capabilities.
Conclusion
After consideration of the factors described above as well as other factors, and in the exercise of their business judgment, the Board Members, including the Independent Board Members, concluded that the New
Agreements, including the fees payable thereunder, were fair and reasonable to each Fund and that entering into the New Agreements for each Fund, including the Western Asset Fund, was in the best interests of the Funds shareholders, and they
voted to approve the New Agreements for each Fund and to recommend that the Funds shareholders approve the New Agreements.
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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 Funds
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 Agents investment of the most recently declared dividend or distribution on the Common Stock.
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Dividend reinvestment plan
(unaudited) (contd)
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 Funds 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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Western Asset Mortgage Opportunity Fund Inc.
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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
Robert I.
Frenkel
Secretary and Chief Legal Officer
Thomas
C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
*
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Effective April 17, 2020, Mr. Jensen became Chief Compliance Officer.
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Western Asset Mortgage Opportunity Fund Inc.
620 Eighth Avenue
49th 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
425 Lexington Avenue
New York, NY 10017
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, Legg Mason Investor Services, 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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Online account access user IDs, passwords, security challenge question responses; and
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Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individuals 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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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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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
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Legg Mason Funds Privacy and Security Notice (contd)
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 Funds at 1-888-777-0102.
Revised April 2018
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NOT PART OF THE SEMI-ANNUAL REPORT
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Western Asset Mortgage Opportunity Fund Inc.
Western Asset Mortgage Opportunity Fund Inc.
620 Eighth Avenue 49th 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 Funds Forms N-PORT are available on the SECs 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 SECs 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 8/20 SR20-3962