ITEM 1. REPORT TO STOCKHOLDERS.
The
Annual
Report to Stockholders is filed herewith.
September 30, 2012
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Annual Report
Western Asset Variable Rate Strategic Fund Inc.
(GFY)
INVESTMENT PRODUCTS: NOT FDIC INSURED
·
NO BANK GUARANTEE
·
MAY LOSE VALUE
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II
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Western Asset Variable Rate Strategic Fund Inc.
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Fund objective
The Funds investment objective is to maintain a high level of current income.
Whats inside
Letter from chairman
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II
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Investment commentary
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III
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Fund overview
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1
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Fund at a glance
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6
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Spread duration
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7
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Effective duration
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8
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Schedule of investments
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9
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Statement of assets and liabilities
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26
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Statement of operations
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27
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Statements of changes in net assets
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28
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Financial highlights
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29
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Notes to financial statements
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30
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Report of independent registered public accounting firm
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50
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Additional information
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51
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Annual chief executive officer and principal financial officer certifications
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57
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Other shareholder communications regarding accounting matters
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58
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Dividend reinvestment plan
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59
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Important tax information
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61
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Letter from the chairman
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Dear Shareholder,
We are pleased to provide the annual report of Western Asset Variable Rate Strategic Fund Inc. for the twelve-month reporting period ended September 30, 2012. Please read on for a detailed look at prevailing economic and market conditions during the Funds reporting period and to learn how those conditions have affected Fund performance.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.lmcef.com. Here you can gain immediate access to market and investment information, including:
·
Fund prices and performance,
·
Market insights and commentaries from our portfolio managers, and
·
A host of educational resources.
We look forward to helping you meet your financial goals.
Sincerely,
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
October 26, 2012
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Western Asset Variable Rate Strategic Fund Inc.
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III
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Investment commentary
Economic review
The U.S. economy continued to grow over the twelve months ended September 30, 2012, albeit at an uneven pace. U.S. gross domestic product (GDP)
i
growth, as reported by the U.S. Department of Commerce, was 1.3% and 4.1% in the third and fourth quarters of 2011, respectively. Economic growth in the U.S. then decelerated, as the Commerce Department reported that first quarter 2012 GDP growth was 2.0%. This was primarily due to less robust private inventory and non-residential fixed investments. The economy slowed further in the second quarter, as GDP growth was a tepid 1.3%. Moderating growth was partially due to weaker consumer spending, which rose only 1.5% in the second quarter, versus 2.4% during the first three months of the year. According to the Commerce Departments initial estimate, GDP growth then moved to 2.0% in the third quarter. The uptick was partially due to an increase in consumer spending, which rose 2.0% in the third quarter.
The job market remained weak. While there was some improvement during the reporting period, unemployment remained elevated. When the reporting period began, unemployment, as reported by the U.S. Department of Labor, was 9.0%. Unemployment then generally declined and was 8.1% in April 2012, the lowest rate since January 2009. The unemployment rate then moved higher, reaching 8.3% in July, before falling to 7.8% in September. However, the recent moderation in unemployment was partially due to people leaving the workforce and an increase in part-time workers.
Meanwhile, the housing market brightened, as sales have started to improve of late and home prices appear to be firming. According to the National Association of Realtors (NAR), existing-home sales fluctuated throughout the period. While existing-home sales declined 1.7% on a seasonally adjusted basis in September 2012 versus the previous month, they were 11% higher than in September 2011. In addition, the NAR reported that the median existing-home price for all housing types was $183,900 in September 2012, up 11.3% from September 2011. This marked the seventh consecutive month that home prices rose compared to the same period a year earlier. Furthermore, the inventory of homes available for sale fell 3.3% in September, which represents a 5.9-month supply at the current sales pace. The inventory has declined 20% compared to September 2011.
While the manufacturing sector overcame a soft patch that occurred in the summer of 2011, it again weakened toward the end of the reporting period. Looking back, based on the Institute for Supply Managements PMI (PMI)
ii
, in August 2011 the manufacturing sector expanded at its weakest pace in two years, with a reading of 50.6 (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). The PMI was then somewhat choppy over the next eight months, but rose as high as 54.8 in April 2012. The PMI then fell to 49.7 in June, which represented the first contraction in the manufacturing sector since July 2009. Manufacturing continued to contract in July and August before ticking up to 51.5 in September.
The Federal Reserve Board (Fed)
iii
took a number of actions as it sought to meet its dual mandate of fostering maximum employment and price stability. As has been the case since December 2008, the Fed kept the federal funds rate
iv
at a
IV
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Western Asset Variable Rate Strategic Fund Inc.
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Investment commentary (contd)
historically low range between zero and 0.25%. In September 2011, the Fed announced its intention to purchase $400 billion of longer-term Treasury securities and to sell an equal amount of shorter-term Treasury securities by June 2012 (often referred to as Operation Twist). In January 2012, the Fed extended the period it expects to keep rates on hold, saying economic conditions including low rates of resource utilization and a subdued outlook for inflation over the medium run are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. In June, the Fed announced that it would extend Operation Twist until the end of 2012. Finally, in September the Fed announced a third round of quantitative easing, which involves purchasing $40 billion each month of agency mortgage-backed securities on an open-end basis. In addition, the Fed said that Operation Twist would continue and that it will keep the federal funds rate on hold until at least mid-2015.
As always, thank you for your confidence in our stewardship of your assets.
Sincerely,
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
October 26, 2012
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results.
i
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Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time.
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ii
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The Institute for Supply Managements PMI is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. It offers an early reading on the health of the manufacturing sector.
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iii
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The Federal Reserve Board (Fed) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.
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iv
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The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day.
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Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
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1
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Fund overview
Q. What is the Funds investment strategy?
A.
The Fund seeks to maintain a high level of current income. The Fund invests primarily in variable rate instruments of U.S. and non-U.S. issuers, including U.S. and non-U.S. investment grade and high-yield debt, senior loans, emerging market debt and derivatives related to these securities.
At Western Asset Management Company (Western Asset), the Funds subadviser, we utilize a fixed-income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Assets senior portfolio management personnel, research analysts and an in-house economist. Under this team approach, management of client fixed-income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization. The individuals responsible for development of investment strategy, day-to-day portfolio management, oversight and coordination of the Fund are Stephen A. Walsh, Andrea A. Mack, Dennis J. McNamara and Michael Y. Pak.
Q. What were the overall market conditions during the Funds reporting period?
A.
The spread sectors (non-Treasuries) experienced periods of volatility during the reporting period, but ultimately generated positive results. After falling sharply in August and September 2011 (prior to the beginning of the reporting period) most spread sectors then rallied in October, given hopes of progress in the European sovereign debt crisis and some better-than-expected economic data. While risk aversion returned in November, demand for the spread sectors resumed in December and generally remained robust during the next three months. This shift in investor sentiment was triggered by indications that the U.S. economy was gathering momentum and signs of progress in the European sovereign debt crisis. However, fears that the economy may be experiencing a soft patch and contagion fears from Europe led to periods of heightened risk aversion during portions of March, April and May. The spread sectors then rallied from June through September as investor sentiment improved.
Both short- and long-term Treasury yields declined during the reporting period. When the period began, two-year Treasury yields were 0.25%. They moved as low as 0.21% on January 17, 2012 and as high as 0.41% on March 20, 2012. Ten-year Treasury yields were 1.92% at the beginning of the period and peaked at 2.42% on October 27, 2011. On July 25, 2012, ten-year Treasuries closed at an all-time low of 1.43%. Yields then edged higher due to some positive developments in Europe and hopes for additional Federal Reserve Board (Fed)
i
actions to stimulate the economy. When the reporting period ended on September 30, 2012, two-year Treasury yields were 0.23% and ten-year Treasury yields were 1.65%.
All told, the Barclays U.S. Aggregate Index
ii
, returned 5.16% for the twelve months ended September 30, 2012. For comparison purposes, riskier fixed-income securities, including high-yield bond and emerging market debt, produced stronger results. Over the fiscal year, the Barclays U.S. Corporate High Yield 2% Issuer Cap Index
iii
and the JPMorgan Emerging Markets Bond Index Global (EMBI
2
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Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
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Fund overview (contd)
Global)
iv
returned 19.35% and 20.59%, respectively.
Q. How did we respond to these changing market conditions?
A.
A number of adjustments were made to the Funds portfolio during the reporting period, including lengthening its duration
v
. We also made a number of adjustments from a sector perspective in an attempt to reduce the Funds overall risk exposure. These initiatives include reducing the Funds allocations to high-yield corporate bonds and bank loans, as well as paring its exposure to non-agency mortgage-backed securities (MBS). In contrast, we increased the Funds allocation to floating rate agency MBS.
The use of leverage was tactically managed during the reporting period. We ended the period with leverage at roughly 4.72% of the gross assets of the Fund, versus roughly 14.42% at the beginning of the period. The use of leverage was positive for performance during the twelve months ended September 30, 2012.
During the reporting period, we utilized U.S. Treasury futures and Eurodollar futures to manage the portfolios duration and yield curve
vi
exposure. These positions slightly added to performance over the period. Currency forwards were utilized to hedge the Funds Brazilian currency exposures. The gains in our currency hedges served their purpose by offsetting the decline in the value of our Brazilian bonds when translated back to U.S. dollars. High-yield index swaps (CDX), which were used to manage our high-yield exposure, had no meaningful impact. We used CDS-FSAGLF (Financial Security Assurance Global Funding Limited), as part of a paired trade to hedge specific non-agency MBS holdings that were insured by Financial Services Authority. The net effect of these credit default swaps minimally detracted from performance during the reporting period. Written options, which were used to express our views on interest rates, were a positive for performance as interest rates declined. Interest rate swaps (IRS) were used to manage the interest rate exposure of our credit holdings. Our IRS were mostly pay fixed, which convert fixed rate bonds to a floating equivalent. As rates fell, we lost value in the IRS. However, we made corresponding gains in the fixed rate bonds we own. On a paired basis, this strategy added to performance.
Performance review
For the twelve months ended September 30, 2012, Western Asset Variable Rate Strategic Fund Inc. returned 15.05% based on its net asset value (NAV)
vii
and 25.59% based on its New York Stock Exchange (NYSE) market price per share. The Funds unmanaged benchmark, the BofA Merrill Lynch USD LIBOR 3-Month Constant Maturity Index
viii
, returned 0.48% for the same period. The Lipper Global Income Closed-End Funds Category Average
ix
returned 16.62% over the same time frame. Please note that Lipper performance returns are based on each funds NAV.
During the twelve-month period, the Fund made distributions to shareholders totaling $0.80 per share. The performance table shows the Funds twelve-month total return based on its NAV and market price as of September 30, 2012.
Past performance is no guarantee of future results.
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Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
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3
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Performance Snapshot
as of September 30, 2012
Price Per Share
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12-Month
Total Return
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*
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$18.46 (NAV)
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15.05%
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$18.45 (Market Price)
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25.59%
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All figures represent past performance and are not a guarantee of future results.
* Total returns are based on changes in NAV or market price, respectively.
Total return assumes the reinvestment of all distributions at NAV.
Total return assumes the reinvestment of all distributions in additional shares in accordance with the Funds Dividend Reinvestment Plan.
Q. What were the leading contributors to performance?
A.
The largest contributor to the Funds relative performance during the reporting period was our overweight exposure to non-agency MBS. The asset class was supported by signs of improvement in the housing market and positive supply/demand technicals. The Funds overweights to high-yield and investment grade corporate bonds were rewarded as their spreads narrowed given generally strong demand from investors seeking to generate incremental income in the low interest rate environment. Individual high-yield holdings that added the most value included our overweights in Ally Financial, Inc., Univision Communications, Inc. and Energy Future Intermediate Holding Co. Many of the best performing investment grade corporate bond holdings were in the Financials and Industrials sector, such as our overweights in Credit Agricole, Petrobras International, American International Group, HSBC Finance and Bank of America. Elsewhere, our positioning on the yield curve was positive for results.
Q. What were the leading detractors from performance?
A.
The Fund significantly outperformed its benchmark during the reporting period. Modestly detracting from the Funds relative performance were its overweight positions in several high-yield bonds, including NewPage Corp., Edison Madison Energy and Ceridian Corp.
Looking for additional information?
The Fund is traded under the symbol GFY and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available on-line under the symbol XGFYX on most financial websites.
Barrons
and the
Wall Street Journals
Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.lmcef.com.
In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Funds current NAV, market price and other information.
Thank you for your investment in Western Asset Variable Rate Strategic Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Funds investment goals.
Sincerely,
Western Asset Management Company
October 16, 2012
4
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Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
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Fund overview (contd)
RISKS:
The Fund is a non-diversified, closed-end management investment company designed primarily as a long term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. Common shares at any point in time may be worth less than when invested, even after taking into account the reinvestment of Fund dividends and distributions. The Fund invests in fixed income securities which are subject to credit risks, including the risk of nonpayment of scheduled interest or loan payments, which could lower the Funds value. The Funds investments are subject to credit risk, inflation risk and interest rate risk. As interest rates rise, the value of a fixed-income portfolio generally declines, reducing the value of the Fund. However, the Fund can normally be expected to have less significant interest rate related fluctuations in its NAV than investment companies investing primarily in fixed-rate fixed-income securities (other than money market funds) because the floating or variable rate securities in which the Fund invests float in response to changes in prevailing market interest rates. The Fund may invest in high-yield and foreign securities, including emerging markets, which involve risks beyond those inherent solely in higher-rated and domestic investments. High-yield bonds involve greater credit and liquidity risks than investment grade bonds. Investing in foreign securities is subject to certain risks typically not associated with domestic investing, such as currency fluctuations and changes in political conditions. These risks are magnified in emerging or developing markets. Derivatives, such as options or futures, can be illiquid and hard to value, especially in declining markets. A small investment in certain derivatives may have a potentially large impact on Fund performance.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. The Funds top five sector holdings (as a percentage of total net assets) as of September 30, 2012 were: Collateralized Mortgage Obligations (32.4%), Asset-Backed Securities (21.3%), Financials (12.0%), Consumer Discretionary (6.0%) and Energy (5.8%). The Funds portfolio composition is subject to change at any time.
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
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Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
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5
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i
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The Federal Reserve Board (Fed) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.
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ii
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The Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity.
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iii
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The Barclays U.S. Corporate High Yield 2% Issuer Cap Index is an index of the 2% Issuer Cap component of the Barclays U.S. Corporate High Yield Index, which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
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iv
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The JPMorgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds and local market instruments.
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v
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Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows.
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vi
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The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.
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vii
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Net asset value (NAV) is calculated by subtracting total liabilities and outstanding preferred stock (if any) from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total investments) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Funds market price as determined by supply of and demand for the Funds shares.
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viii
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The BofA Merrill Lynch USD LIBOR 3-Month Constant Maturity Index is based on the assumed purchase of a synthetic instrument having three months to maturity and with a coupon equal to the closing quote for three-month LIBOR. That issue is sold the following day (priced at a yield equal to the current day closing three-month LIBOR rate) and is rolled into a new three-month instrument. The Index, therefore, will always have a constant maturity equal to exactly three months.
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ix
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Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the twelve-month period ended September 30, 2012, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 13 funds in the Funds Lipper category.
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6
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Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
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Fund at a glance
(unaudited)
Investment breakdown
(%) as a percent of total investments
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The bar graph above represents the composition of the Funds investments as of September 30, 2012 and September 30, 2011. and does not include derivatives, such as future contracts, written options, forward foreign currency contracts and swap contracts. The Fund is actively managed. As a result, the composition of the Funds investments is subject to change at any time.
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Represents less than 0.1%.
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Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
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7
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Spread duration (unaudited)
Economic exposure
September 30, 2012
Spread duration measures the sensitivity to changes in spreads. The spread over Treasuries is the annual risk premium demanded by investors to hold non-Treasury securities. Spread duration is quantified as the % change in price resulting from a 100 basis points change in spreads. For a security with positive spread duration, an increase in spreads would result in a price decline and a decline in spreads would result in a price increase. This chart highlights the market sector exposure of the Funds sectors relative to the selected benchmark sectors as of the end of the reporting period.
ABS
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Asset Backed Securities
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EM
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Emerging Markets
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GFY
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Western Asset Variable Rate Strategic Fund Inc.
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HY
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High Yield
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IG Credit
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Investment Grade Credit
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MBS
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Mortgage Backed Securities
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ML USD LIBOR
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BofA Merrill Lynch USD LIBOR 3-Month Constant Maturity
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8
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Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
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Effective duration (unaudited)
Interest rate exposure
September 30, 2012
Effective duration measures the sensitivity to changes in relevant interest rates. Effective duration is quantified as the % change in price resulting from a 100 basis points change in interest rates. For a security with positive effective duration, an increase in interest rates would result in a price decline and a decline in interest rates would result in a price increase. This chart highlights the interest rate exposure of the Funds sectors relative to the selected benchmark sectors as of the end of the reporting period.
ABS
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Asset Backed Securities
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EM
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Emerging Markets
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GFY
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Western Asset Variable Rate Strategic Fund Inc.
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IG Credit
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Investment Grade Credit
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HY
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High Yield
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MBS
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Mortgage Backed Securities
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ML USD LIBOR
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BofA Merrill Lynch USD LIBOR 3-Month Constant Maturity
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Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
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9
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Schedule of investments
September 30, 2012
Western Asset Variable Rate Strategic Fund Inc.
Security
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Rate
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Maturity
Date
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Face
Amount
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Value
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Corporate Bonds & Notes 34.3%
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Consumer Discretionary 3.8%
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Automobiles 0.7%
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Ford Motor Credit Co., LLC, Senior Notes
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2.750
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%
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5/15/15
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590,000
|
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$ 602,083
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Ford Motor Credit Co., LLC, Senior Notes
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5.875
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%
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8/2/21
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250,000
|
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283,336
|
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Total Automobiles
|
|
|
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885,419
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Consumer Finance 0.1%
|
|
|
|
|
|
|
|
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Abbey National Treasury Services PLC, Senior Notes
|
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2.028
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%
|
4/25/14
|
|
180,000
|
|
178,717
|
(a)
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Diversified Consumer Services 0.0%
|
|
|
|
|
|
|
|
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Service Corp. International, Senior Notes
|
|
7.625
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%
|
10/1/18
|
|
30,000
|
|
35,700
|
|
Hotels, Restaurants & Leisure 0.9%
|
|
|
|
|
|
|
|
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Caesars Entertainment Operating Co. Inc., Senior Secured Notes
|
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11.250
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%
|
6/1/17
|
|
175,000
|
|
189,000
|
|
Choctaw Resort Development Enterprise, Senior Notes
|
|
7.250
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%
|
11/15/19
|
|
218,000
|
|
191,840
|
(b)
|
Chukchansi Economic Development Authority, Secured Notes
|
|
9.750
|
%
|
5/30/20
|
|
238,000
|
|
157,080
|
(b)
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El Pollo Loco Inc., Secured Notes
|
|
17.000
|
%
|
1/1/18
|
|
125,353
|
|
130,994
|
(b)(c)
|
MGM Resorts International, Senior Notes
|
|
7.625
|
%
|
1/15/17
|
|
230,000
|
|
244,950
|
|
MGM Resorts International, Senior Secured Notes
|
|
10.375
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%
|
5/15/14
|
|
20,000
|
|
22,600
|
|
MGM Resorts International, Senior Secured Notes
|
|
11.125
|
%
|
11/15/17
|
|
55,000
|
|
61,118
|
|
NCL Corp. Ltd., Senior Secured Notes
|
|
11.750
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%
|
11/15/16
|
|
60,000
|
|
69,450
|
|
Snoqualmie Entertainment Authority, Senior Secured Notes
|
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4.476
|
%
|
2/1/14
|
|
10,000
|
|
9,950
|
(a)(b)
|
Station Casinos Inc., Senior Subordinated Notes
|
|
6.875
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%
|
3/1/16
|
|
15,000
|
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0
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(d)(e)(f)(g)
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Total Hotels, Restaurants & Leisure
|
|
|
|
|
|
|
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1,076,982
|
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Household Durables 0.0%
|
|
|
|
|
|
|
|
|
|
Newell Rubbermaid Inc., Senior Notes
|
|
2.000
|
%
|
6/15/15
|
|
40,000
|
|
40,556
|
|
Media 1.8%
|
|
|
|
|
|
|
|
|
|
Comcast Corp., Senior Notes
|
|
6.500
|
%
|
1/15/17
|
|
400,000
|
|
485,127
|
|
DISH DBS Corp., Senior Notes
|
|
6.750
|
%
|
6/1/21
|
|
400,000
|
|
438,000
|
|
Nara Cable Funding Ltd., Senior Secured Notes
|
|
8.875
|
%
|
12/1/18
|
|
600,000
|
|
550,500
|
(b)
|
News America Inc., Notes
|
|
5.300
|
%
|
12/15/14
|
|
200,000
|
|
220,210
|
(h)
|
Time Warner Cable Inc., Senior Notes
|
|
4.125
|
%
|
2/15/21
|
|
400,000
|
|
442,990
|
|
UPC Holding BV, Senior Notes
|
|
9.875
|
%
|
4/15/18
|
|
30,000
|
|
33,150
|
(b)
|
Virgin Media Finance PLC, Senior Bonds
|
|
9.500
|
%
|
8/15/16
|
|
25,000
|
|
27,813
|
|
Total Media
|
|
|
|
|
|
|
|
2,197,790
|
|
See Notes to Financial Statements.
10
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
Schedule of investments (contd)
September 30, 2012
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Specialty Retail 0.3%
|
|
|
|
|
|
|
|
|
|
Lowes Cos. Inc., Senior Notes
|
|
2.125
|
%
|
4/15/16
|
|
300,000
|
|
$
311,826
|
(h)
|
Total Consumer Discretionary
|
|
|
|
|
|
|
|
4,726,990
|
|
Consumer Staples 2.8%
|
|
|
|
|
|
|
|
|
|
Beverages 0.4%
|
|
|
|
|
|
|
|
|
|
Anheuser-Busch InBev Worldwide Inc., Senior Notes
|
|
4.125
|
%
|
1/15/15
|
|
90,000
|
|
97,113
|
|
Anheuser-Busch InBev Worldwide Inc., Senior Notes
|
|
2.875
|
%
|
2/15/16
|
|
300,000
|
|
319,840
|
|
Total Beverages
|
|
|
|
|
|
|
|
416,953
|
|
Food & Staples Retailing 0.8%
|
|
|
|
|
|
|
|
|
|
CVS Corp., Pass-through Certificates
|
|
6.117
|
%
|
1/10/13
|
|
312,903
|
|
317,596
|
(b)
|
Kroger Co., Notes
|
|
3.900
|
%
|
10/1/15
|
|
360,000
|
|
391,692
|
(h)
|
Wal-Mart Stores Inc., Senior Notes
|
|
2.800
|
%
|
4/15/16
|
|
300,000
|
|
322,199
|
(h)
|
Total Food & Staples Retailing
|
|
|
|
|
|
|
|
1,031,487
|
|
Food Products 0.4%
|
|
|
|
|
|
|
|
|
|
Kraft Foods Group Inc., Senior Notes
|
|
5.375
|
%
|
2/10/20
|
|
104,000
|
|
123,796
|
(b)
|
Kraft Foods Inc., Senior Notes
|
|
2.625
|
%
|
5/8/13
|
|
260,000
|
|
263,063
|
(h)
|
Kraft Foods Inc., Senior Notes
|
|
5.375
|
%
|
2/10/20
|
|
96,000
|
|
115,991
|
|
Total Food Products
|
|
|
|
|
|
|
|
502,850
|
|
Tobacco 1.2%
|
|
|
|
|
|
|
|
|
|
Alliance One International Inc., Senior Notes
|
|
10.000
|
%
|
7/15/16
|
|
70,000
|
|
72,800
|
|
Altria Group Inc., Senior Notes
|
|
9.250
|
%
|
8/6/19
|
|
350,000
|
|
497,646
|
|
BAT International Finance PLC, Senior Notes
|
|
1.400
|
%
|
6/5/15
|
|
600,000
|
|
604,994
|
(b)(h)
|
Reynolds American Inc., Senior Secured Notes
|
|
7.300
|
%
|
7/15/15
|
|
270,000
|
|
310,661
|
|
Total Tobacco
|
|
|
|
|
|
|
|
1,486,101
|
|
Total Consumer Staples
|
|
|
|
|
|
|
|
3,437,391
|
|
Energy 5.7%
|
|
|
|
|
|
|
|
|
|
Energy Equipment & Services 0.3%
|
|
|
|
|
|
|
|
|
|
Hercules Offshore LLC, Senior Secured Notes
|
|
10.500
|
%
|
10/15/17
|
|
60,000
|
|
63,525
|
(b)
|
Key Energy Services Inc., Senior Notes
|
|
6.750
|
%
|
3/1/21
|
|
350,000
|
|
357,000
|
|
Total Energy Equipment & Services
|
|
|
|
|
|
|
|
420,525
|
|
Oil, Gas & Consumable Fuels 5.4%
|
|
|
|
|
|
|
|
|
|
Anadarko Petroleum Corp., Senior Notes
|
|
7.625
|
%
|
3/15/14
|
|
160,000
|
|
174,939
|
(h)
|
Anadarko Petroleum Corp., Senior Notes
|
|
6.375
|
%
|
9/15/17
|
|
240,000
|
|
289,663
|
|
BP Capital Markets PLC, Senior Notes
|
|
3.125
|
%
|
10/1/15
|
|
530,000
|
|
566,339
|
(h)
|
Chesapeake Energy Corp., Senior Notes
|
|
7.250
|
%
|
12/15/18
|
|
285,000
|
|
307,800
|
|
Chesapeake Energy Corp., Senior Notes
|
|
6.625
|
%
|
8/15/20
|
|
150,000
|
|
155,438
|
|
CONSOL Energy Inc., Senior Notes
|
|
8.250
|
%
|
4/1/20
|
|
160,000
|
|
168,400
|
|
Devon Energy Corp., Senior Notes
|
|
2.400
|
%
|
7/15/16
|
|
400,000
|
|
417,956
|
|
See Notes to Financial Statements.
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
11
|
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Oil, Gas & Consumable Fuels continued
|
|
|
|
|
|
|
|
|
|
El Paso Corp., Medium-Term Notes
|
|
7.375
|
%
|
12/15/12
|
|
194,000
|
|
$ 196,613
|
|
Enterprise Products Operating LLC, Senior Notes
|
|
3.200
|
%
|
2/1/16
|
|
450,000
|
|
474,781
|
(h)
|
Enterprise Products Operating LLP, Junior Subordinated Notes
|
|
8.375
|
%
|
8/1/66
|
|
80,000
|
|
90,275
|
(a)
|
Enterprise Products Operating LLP, Subordinated Notes
|
|
7.034
|
%
|
1/15/68
|
|
120,000
|
|
134,550
|
(a)
|
Kinder Morgan Energy Partners LP, Senior Notes
|
|
6.000
|
%
|
2/1/17
|
|
170,000
|
|
199,850
|
|
LUKOIL International Finance BV, Bonds
|
|
6.356
|
%
|
6/7/17
|
|
210,000
|
|
240,433
|
(b)
|
LUKOIL International Finance BV, Senior Notes
|
|
7.250
|
%
|
11/5/19
|
|
240,000
|
|
290,112
|
(b)
|
Petrobras International Finance Co., Senior Notes
|
|
3.875
|
%
|
1/27/16
|
|
250,000
|
|
265,703
|
|
Petrobras International Finance Co., Senior Notes
|
|
5.750
|
%
|
1/20/20
|
|
780,000
|
|
892,942
|
|
Plains Exploration & Production Co., Senior Notes
|
|
8.625
|
%
|
10/15/19
|
|
40,000
|
|
44,800
|
|
Range Resources Corp., Senior Subordinated Notes
|
|
6.750
|
%
|
8/1/20
|
|
550,000
|
|
607,750
|
|
Shell International Finance BV, Senior Notes
|
|
3.100
|
%
|
6/28/15
|
|
380,000
|
|
406,459
|
(h)
|
Teekay Corp., Senior Notes
|
|
8.500
|
%
|
1/15/20
|
|
110,000
|
|
116,050
|
|
TNK-BP Finance SA, Senior Notes
|
|
7.875
|
%
|
3/13/18
|
|
200,000
|
|
243,000
|
(b)
|
Williams Cos. Inc., Senior Notes
|
|
8.750
|
%
|
3/15/32
|
|
229,000
|
|
318,544
|
|
Total Oil, Gas & Consumable Fuels
|
|
|
|
|
|
|
|
6,602,397
|
|
Total Energy
|
|
|
|
|
|
|
|
7,022,922
|
|
Financials 12.0%
|
|
|
|
|
|
|
|
|
|
Capital Markets 1.6%
|
|
|
|
|
|
|
|
|
|
Goldman Sachs Capital III, Preferred Securities
|
|
4.000
|
%
|
11/13/12
|
|
550,000
|
|
414,947
|
(a)(i)
|
Goldman Sachs Group Inc., Senior Notes
|
|
5.250
|
%
|
10/15/13
|
|
340,000
|
|
354,943
|
|
Morgan Stanley, Senior Notes
|
|
2.937
|
%
|
5/14/13
|
|
310,000
|
|
313,102
|
(a)
|
Morgan Stanley, Senior Notes
|
|
6.000
|
%
|
5/13/14
|
|
400,000
|
|
424,149
|
|
UBS AG Stamford CT, Senior Notes
|
|
3.875
|
%
|
1/15/15
|
|
400,000
|
|
424,182
|
|
Total Capital Markets
|
|
|
|
|
|
|
|
1,931,323
|
|
Commercial Banks 3.0%
|
|
|
|
|
|
|
|
|
|
Barclays Bank PLC, Senior Notes
|
|
5.000
|
%
|
9/22/16
|
|
200,000
|
|
222,324
|
|
BBVA US Senior SAU, Senior Notes
|
|
3.250
|
%
|
5/16/14
|
|
400,000
|
|
397,084
|
|
Commonwealth Bank of Australia, Senior Notes
|
|
1.950
|
%
|
3/16/15
|
|
370,000
|
|
378,359
|
|
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, Senior Notes
|
|
3.375
|
%
|
1/19/17
|
|
190,000
|
|
201,870
|
|
Credit Agricole SA, Subordinated Notes
|
|
8.375
|
%
|
10/13/19
|
|
620,000
|
|
606,050
|
(a)(b)(i)
|
Danske Bank A/S, Senior Notes
|
|
1.505
|
%
|
4/14/14
|
|
300,000
|
|
296,950
|
(a)(b)
|
Intesa Sanpaolo SpA, Senior Notes
|
|
3.625
|
%
|
8/12/15
|
|
140,000
|
|
137,292
|
(b)
|
Rabobank Nederland NV, Junior Subordinated Notes
|
|
11.000
|
%
|
6/30/19
|
|
260,000
|
|
343,519
|
(a)(b)(i)
|
Wachovia Capital Trust III, Junior Subordinated Bonds
|
|
5.570
|
%
|
11/9/12
|
|
300,000
|
|
297,750
|
(a)(i)
|
See Notes to Financial Statements.
12
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
Schedule of investments (contd)
September 30, 2012
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Commercial Banks continued
|
|
|
|
|
|
|
|
|
|
Wells Fargo & Co., Senior Notes
|
|
3.750
|
%
|
10/1/14
|
|
450,000
|
|
$ 477,552
|
|
Wells Fargo & Co., Senior Notes
|
|
3.676
|
%
|
6/15/16
|
|
250,000
|
|
272,367
|
|
Total Commercial Banks
|
|
|
|
|
|
|
|
3,631,117
|
|
Consumer Finance 4.0%
|
|
|
|
|
|
|
|
|
|
Ally Financial Inc., Senior Notes
|
|
6.750
|
%
|
12/1/14
|
|
307,000
|
|
330,025
|
|
Ally Financial Inc., Senior Notes
|
|
8.000
|
%
|
3/15/20
|
|
280,000
|
|
329,000
|
|
American Express Co., Senior Notes
|
|
8.125
|
%
|
5/20/19
|
|
450,000
|
|
609,601
|
|
GMAC Inc., Senior Notes
|
|
2.618
|
%
|
12/1/14
|
|
1,956,000
|
|
1,932,581
|
(a)
|
HSBC Finance Corp., Senior Notes
|
|
6.676
|
%
|
1/15/21
|
|
500,000
|
|
580,802
|
|
SLM Corp.
|
|
0.751
|
%
|
1/27/14
|
|
700,000
|
|
680,007
|
(a)
|
Toyota Motor Credit Corp., Senior Notes
|
|
2.000
|
%
|
9/15/16
|
|
400,000
|
|
415,975
|
|
Total Consumer Finance
|
|
|
|
|
|
|
|
4,877,991
|
|
Diversified Financial Services 3.1%
|
|
|
|
|
|
|
|
|
|
Bank of America Corp., Senior Notes
|
|
3.750
|
%
|
7/12/16
|
|
600,000
|
|
637,150
|
|
CDP Financial Inc., Senior Notes
|
|
3.000
|
%
|
11/25/14
|
|
300,000
|
|
314,902
|
(b)
|
Citigroup Inc., Senior Notes
|
|
6.375
|
%
|
8/12/14
|
|
850,000
|
|
925,395
|
(h)
|
Citigroup Inc., Senior Notes
|
|
5.500
|
%
|
10/15/14
|
|
120,000
|
|
129,463
|
(h)
|
General Electric Capital Corp., Senior Notes
|
|
2.950
|
%
|
5/9/16
|
|
550,000
|
|
582,072
|
(h)
|
International Lease Finance Corp., Senior Notes
|
|
8.750
|
%
|
3/15/17
|
|
490,000
|
|
575,750
|
|
JPMorgan Chase & Co., Senior Notes
|
|
3.150
|
%
|
7/5/16
|
|
550,000
|
|
582,245
|
|
Unitymedia GmbH, Senior Secured Bonds
|
|
8.125
|
%
|
12/1/17
|
|
100,000
|
|
108,000
|
(b)
|
Total Diversified Financial Services
|
|
|
|
|
|
|
|
3,854,977
|
|
Insurance 0.1%
|
|
|
|
|
|
|
|
|
|
American International Group Inc., Senior Notes
|
|
3.750
|
%
|
11/30/13
|
|
170,000
|
|
174,562
|
(b)
|
Thrifts & Mortgage Finance 0.2%
|
|
|
|
|
|
|
|
|
|
Santander Holdings USA Inc., Senior Notes
|
|
4.625
|
%
|
4/19/16
|
|
240,000
|
|
251,633
|
|
Total Financials
|
|
|
|
|
|
|
|
14,721,603
|
|
Health Care 0.9%
|
|
|
|
|
|
|
|
|
|
Health Care Providers & Services 0.9%
|
|
|
|
|
|
|
|
|
|
Humana Inc., Senior Notes
|
|
6.450
|
%
|
6/1/16
|
|
300,000
|
|
344,180
|
|
McKesson Corp., Senior Notes
|
|
3.250
|
%
|
3/1/16
|
|
300,000
|
|
323,065
|
(h)
|
Tenet Healthcare Corp., Senior Secured Notes
|
|
8.875
|
%
|
7/1/19
|
|
326,000
|
|
370,010
|
|
Vanguard Health Holdings Co., II LLC, Senior Notes
|
|
8.000
|
%
|
2/1/18
|
|
80,000
|
|
85,800
|
|
Total Health Care
|
|
|
|
|
|
|
|
1,123,055
|
|
Industrials 1.4%
|
|
|
|
|
|
|
|
|
|
Airlines 0.3%
|
|
|
|
|
|
|
|
|
|
Air 2 US, Notes
|
|
8.027
|
%
|
10/1/19
|
|
76,361
|
|
78,652
|
(b)
|
DAE Aviation Holdings Inc., Senior Notes
|
|
11.250
|
%
|
8/1/15
|
|
160,000
|
|
165,600
|
(b)
|
See Notes to Financial Statements.
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
13
|
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Airlines continued
|
|
|
|
|
|
|
|
|
|
Delta Air Lines Inc., Pass-Through Certificates, Secured Notes
|
|
8.021
|
%
|
8/10/22
|
|
57,756
|
|
$ 62,376
|
|
Delta Air Lines Inc., Senior Secured Notes
|
|
9.500
|
%
|
9/15/14
|
|
24,000
|
|
25,260
|
(b)
|
Total Airlines
|
|
|
|
|
|
|
|
331,888
|
|
Building Products 0.0%
|
|
|
|
|
|
|
|
|
|
Ashton Woods USA LLC/Ashton Woods Finance Co., Senior Subordinated Notes
|
|
11.000
|
%
|
6/30/15
|
|
7,800
|
|
7,527
|
(b)(e)
|
Commercial Services & Supplies 0.3%
|
|
|
|
|
|
|
|
|
|
Altegrity Inc., Senior Subordinated Notes
|
|
10.500
|
%
|
11/1/15
|
|
120,000
|
|
105,600
|
(b)
|
Waste Management Inc., Senior Notes
|
|
2.600
|
%
|
9/1/16
|
|
300,000
|
|
315,211
|
|
Total Commercial Services & Supplies
|
|
|
|
|
|
|
|
420,811
|
|
Construction & Engineering 0.5%
|
|
|
|
|
|
|
|
|
|
Odebrecht Finance Ltd., Senior Notes
|
|
6.000
|
%
|
4/5/23
|
|
580,000
|
|
646,700
|
(b)
|
Industrial Conglomerates 0.1%
|
|
|
|
|
|
|
|
|
|
Leucadia National Corp., Senior Notes
|
|
8.125
|
%
|
9/15/15
|
|
80,000
|
|
90,600
|
|
Road & Rail 0.2%
|
|
|
|
|
|
|
|
|
|
Kansas City Southern de Mexico, Senior Notes
|
|
12.500
|
%
|
4/1/16
|
|
163,000
|
|
182,967
|
|
Total Industrials
|
|
|
|
|
|
|
|
1,680,493
|
|
Information Technology 0.2%
|
|
|
|
|
|
|
|
|
|
IT Services 0.1%
|
|
|
|
|
|
|
|
|
|
First Data Corp., Senior Secured Notes
|
|
6.750
|
%
|
11/1/20
|
|
100,000
|
|
99,875
|
(b)
|
Semiconductors & Semiconductor Equipment 0.1%
|
|
|
|
|
|
|
|
Freescale Semiconductor Inc., Senior Secured Notes
|
|
9.250
|
%
|
4/15/18
|
|
130,000
|
|
142,025
|
(b)
|
Total Information Technology
|
|
|
|
|
|
|
|
241,900
|
|
Materials 3.0%
|
|
|
|
|
|
|
|
|
|
Containers & Packaging 0.2%
|
|
|
|
|
|
|
|
|
|
Reynolds Group Issuer Inc./ Reynolds Group Issuer LLC/ Reynolds Group Issuer Lu, Senior Secured Notes
|
|
7.125
|
%
|
4/15/19
|
|
250,000
|
|
265,000
|
|
Metals & Mining 2.5%
|
|
|
|
|
|
|
|
|
|
ArcelorMittal, Senior Notes
|
|
4.000
|
%
|
2/25/15
|
|
350,000
|
|
349,965
|
|
ArcelorMittal, Senior Notes
|
|
4.000
|
%
|
8/5/15
|
|
50,000
|
|
49,717
|
|
Barrick Gold Corp., Senior Notes
|
|
1.750
|
%
|
5/30/14
|
|
250,000
|
|
253,800
|
|
Barrick International Barbados Corp., Senior Notes
|
|
5.750
|
%
|
10/15/16
|
|
200,000
|
|
231,724
|
(b)
|
Cliffs Natural Resources Inc., Senior Notes
|
|
4.875
|
%
|
4/1/21
|
|
300,000
|
|
294,138
|
|
Metals USA Inc., Senior Secured Notes
|
|
11.125
|
%
|
12/1/15
|
|
150,000
|
|
154,875
|
|
Rio Tinto Finance USA Ltd., Senior Notes
|
|
2.500
|
%
|
5/20/16
|
|
500,000
|
|
522,554
|
|
Steel Dynamics Inc., Senior Notes
|
|
7.625
|
%
|
3/15/20
|
|
370,000
|
|
403,300
|
|
Vale Overseas Ltd., Notes
|
|
6.250
|
%
|
1/23/17
|
|
338,000
|
|
392,575
|
|
See Notes to Financial Statements.
14
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
Schedule of investments (contd)
September 30, 2012
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Metals & Mining continued
|
|
|
|
|
|
|
|
|
|
Vedanta Resources PLC, Senior Notes
|
|
8.750
|
%
|
1/15/14
|
|
390,000
|
|
$ 408,525
|
(b)
|
Vedanta Resources PLC, Senior Notes
|
|
8.750
|
%
|
1/15/14
|
|
70,000
|
|
73,325
|
(b)
|
Total Metals & Mining
|
|
|
|
|
|
|
|
3,134,498
|
|
Paper & Forest Products 0.3%
|
|
|
|
|
|
|
|
|
|
Appleton Papers Inc., Senior Secured Notes
|
|
11.250
|
%
|
12/15/15
|
|
199,000
|
|
199,995
|
|
NewPage Corp., Senior Secured Notes
|
|
11.375
|
%
|
12/31/14
|
|
205,000
|
|
130,175
|
(d)
|
Total Paper & Forest Products
|
|
|
|
|
|
|
|
330,170
|
|
Total Materials
|
|
|
|
|
|
|
|
3,729,668
|
|
Telecommunication Services 3.2%
|
|
|
|
|
|
|
|
|
|
Diversified Telecommunication Services 2.1%
|
|
|
|
|
|
|
|
|
|
Axtel SAB de CV, Senior Notes
|
|
7.625
|
%
|
2/1/17
|
|
377,000
|
|
237,510
|
(b)
|
British Telecommunications PLC, Senior Notes
|
|
2.000
|
%
|
6/22/15
|
|
280,000
|
|
288,079
|
|
CC Holdings GS V LLC, Senior Secured Notes
|
|
7.750
|
%
|
5/1/17
|
|
150,000
|
|
160,875
|
(b)
|
Cincinnati Bell Telephone Co., Senior Debentures
|
|
6.300
|
%
|
12/1/28
|
|
45,000
|
|
41,400
|
|
Deutsche Telekom International Finance BV, Senior Notes
|
|
4.875
|
%
|
7/8/14
|
|
300,000
|
|
319,370
|
(h)
|
Deutsche Telekom International Finance BV, Senior Notes
|
|
5.750
|
%
|
3/23/16
|
|
140,000
|
|
159,613
|
|
Intelsat Jackson Holdings Ltd., Senior Notes
|
|
8.500
|
%
|
11/1/19
|
|
140,000
|
|
158,550
|
|
Qwest Corp., Senior Notes
|
|
3.639
|
%
|
6/15/13
|
|
250,000
|
|
251,391
|
(a)
|
Telecom Italia Capital, Senior Notes
|
|
5.250
|
%
|
10/1/15
|
|
320,000
|
|
337,600
|
|
Telefonica Emisiones SAU, Senior Notes
|
|
3.992
|
%
|
2/16/16
|
|
230,000
|
|
229,425
|
|
Verizon Communications Inc., Senior Notes
|
|
4.600
|
%
|
4/1/21
|
|
300,000
|
|
356,479
|
|
Total Diversified Telecommunication Services
|
|
|
|
|
|
|
|
2,540,292
|
|
Wireless Telecommunication Services 1.1%
|
|
|
|
|
|
|
|
|
|
Cricket Communications Inc., Senior Secured Notes
|
|
7.750
|
%
|
5/15/16
|
|
125,000
|
|
132,500
|
|
Rogers Cable Inc., Senior Secured Second Priority Notes
|
|
6.750
|
%
|
3/15/15
|
|
300,000
|
|
341,778
|
(h)
|
Sprint Capital Corp., Senior Notes
|
|
6.875
|
%
|
11/15/28
|
|
650,000
|
|
601,250
|
|
Vodafone Group PLC, Senior Notes
|
|
5.000
|
%
|
12/16/13
|
|
266,000
|
|
280,450
|
(h)
|
Total Wireless Telecommunication Services
|
|
|
|
|
|
|
|
1,355,978
|
|
Total Telecommunication Services
|
|
|
|
|
|
|
|
3,896,270
|
|
Utilities 1.3%
|
|
|
|
|
|
|
|
|
|
Electric Utilities 0.3%
|
|
|
|
|
|
|
|
|
|
Edison International, Senior Notes
|
|
3.750
|
%
|
9/15/17
|
|
300,000
|
|
322,612
|
|
Independent Power Producers & Energy Traders 0.7%
|
|
|
|
|
|
|
|
Calpine Corp., Senior Secured Notes
|
|
7.500
|
%
|
2/15/21
|
|
280,000
|
|
303,800
|
(b)
|
Energy Future Intermediate Holding Co. LLC/ EFIH Finance Inc., Senior Secured Notes
|
|
10.000
|
%
|
12/1/20
|
|
459,000
|
|
518,670
|
|
Total Independent Power Producers & Energy Traders
|
|
|
|
|
|
822,470
|
|
See Notes to Financial Statements.
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
15
|
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Multi-Utilities 0.3%
|
|
|
|
|
|
|
|
|
|
Dominion Resources Inc., Senior Notes
|
|
1.950
|
%
|
8/15/16
|
|
400,000
|
|
$
413,805
|
|
Total Utilities
|
|
|
|
|
|
|
|
1,558,887
|
|
Total Corporate Bonds & Notes (Cost $39,774,722)
|
|
|
|
42,139,179
|
|
Asset-Backed Securities 21.3%
|
|
|
|
|
|
|
|
|
|
ABFS Mortgage Loan Trust, 2002-3 M1
|
|
5.902
|
%
|
9/15/33
|
|
831,324
|
|
611,566
|
|
Access Group Inc., 2005-B A2
|
|
0.681
|
%
|
7/25/22
|
|
304,583
|
|
296,135
|
(a)
|
Ameriquest Mortgage Securities Inc., 2002-AR1 M1
|
|
1.307
|
%
|
9/25/32
|
|
220,606
|
|
188,295
|
(a)
|
Ameriquest Mortgage Securities Inc., 2005-R1 M1
|
|
0.667
|
%
|
3/25/35
|
|
800,000
|
|
786,681
|
(a)
|
Argent Securities Inc., 2003-W3 M1
|
|
1.342
|
%
|
9/25/33
|
|
121,333
|
|
116,967
|
(a)
|
Argent Securities Inc., 2003-W8 M1
|
|
1.267
|
%
|
12/25/33
|
|
643,813
|
|
602,044
|
(a)
|
Argent Securities Inc., 2005-W3 A2D
|
|
0.557
|
%
|
11/25/35
|
|
683,932
|
|
597,356
|
(a)
|
Bear Stearns Asset-Backed Securities Trust, 2001-3 A1
|
|
1.117
|
%
|
10/27/32
|
|
32,608
|
|
29,284
|
(a)
|
Bear Stearns Asset-Backed Securities Trust, 2005-SD3 1A
|
|
0.707
|
%
|
7/25/35
|
|
578,270
|
|
543,120
|
(a)
|
Bear Stearns Asset-Backed Securities Trust, 2007-SD1 1A2A
|
|
6.000
|
%
|
10/25/36
|
|
1,007,402
|
|
754,596
|
|
Chase Funding Mortgage Loan Asset-Backed Certificates, 2004-1 1A7
|
|
3.985
|
%
|
11/25/33
|
|
568,091
|
|
534,212
|
|
Citigroup Mortgage Loan Trust Inc., 2005-OPT1 M1
|
|
0.637
|
%
|
2/25/35
|
|
244,419
|
|
211,427
|
(a)
|
Citigroup Mortgage Loan Trust Inc., 2005-OPT4 M2
|
|
0.647
|
%
|
7/25/35
|
|
750,000
|
|
733,453
|
(a)
|
Countrywide Asset-Backed Certificates, 2003-5 AF5
|
|
5.916
|
%
|
2/25/34
|
|
631,145
|
|
642,390
|
|
Countrywide Asset-Backed Certificates, 2004-BC1 M1
|
|
0.967
|
%
|
2/25/34
|
|
131,029
|
|
116,524
|
(a)
|
Countrywide Asset-Backed Certificates, 2007-13 2A1
|
|
1.117
|
%
|
10/25/47
|
|
807,031
|
|
593,837
|
(a)
|
Countrywide Home Equity Loan Trust, 2006-HW 2A1B
|
|
0.371
|
%
|
11/15/36
|
|
875,324
|
|
639,083
|
(a)
|
Credit-Based Asset Servicing and Securitization LLC, 2007-SP1 A4
|
|
6.020
|
%
|
12/25/37
|
|
600,000
|
|
591,414
|
(b)
|
EFS Volunteer No. 3 LLC, 2012-1 A3
|
|
1.217
|
%
|
4/25/33
|
|
640,000
|
|
637,351
|
(a)(b)
|
EMC Mortgage Loan Trust, 2004-C A1
|
|
0.767
|
%
|
3/25/31
|
|
172,985
|
|
154,984
|
(a)(b)
|
Equity One ABS Inc., 2004-1 AF5
|
|
5.110
|
%
|
4/25/34
|
|
300,000
|
|
295,312
|
|
First Franklin Mortgage Loan Asset-Backed Certificates, 2005-FFH4 2A4
|
|
0.567
|
%
|
12/25/35
|
|
278,299
|
|
268,072
|
(a)
|
First Horizon ABS Trust, 2007-HE1 A
|
|
0.366
|
%
|
9/25/29
|
|
101,445
|
|
77,205
|
(a)
|
Ford Credit Auto Lease Trust, 2012-B A2
|
|
0.540
|
%
|
11/15/14
|
|
600,000
|
|
600,139
|
|
Greenpoint Home Equity Loan Trust, 2004-4 A
|
|
0.781
|
%
|
8/15/30
|
|
437,366
|
|
296,243
|
(a)
|
Greenpoint Manufactured Housing, 1999-3 1A7
|
|
7.270
|
%
|
6/15/29
|
|
230,000
|
|
219,510
|
|
GSAMP Trust, 2004-OPT B1
|
|
1.817
|
%
|
11/25/34
|
|
89,456
|
|
42,933
|
(a)
|
GSAMP Trust, 2004-SEA2 M2
|
|
1.467
|
%
|
3/25/34
|
|
1,000,000
|
|
619,821
|
(a)
|
GSRPM Mortgage Loan Trust, 2007-1 A
|
|
0.617
|
%
|
10/25/46
|
|
136,391
|
|
66,233
|
(a)(b)
|
See Notes to Financial Statements.
16
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
Schedule of investments (contd)
September 30, 2012
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Asset-Backed Securities continued
|
|
|
|
|
|
|
|
|
|
Hertz Vehicle Financing LLC, 2009-2A A1
|
|
4.260
|
%
|
3/25/14
|
|
630,000
|
|
$636,599
|
(b)
|
Home Equity Mortgage Trust, 2006-2 2A1
|
|
0.377
|
%
|
7/25/36
|
|
551,013
|
|
178,032
|
(a)
|
IXIS Real Estate Capital Trust, 2005-HE4 A3
|
|
0.557
|
%
|
2/25/36
|
|
154,429
|
|
143,669
|
(a)
|
Lehman XS Trust, (Structured Asset Securities Corp.), 2005-1 2A2
|
|
1.717
|
%
|
7/25/35
|
|
1,004,436
|
|
821,050
|
(a)
|
Lehman XS Trust, 2005-5N 3A1A
|
|
0.517
|
%
|
11/25/35
|
|
352,443
|
|
279,447
|
(a)
|
Long Beach Mortgage Loan Trust, 2001-3 M1
|
|
1.042
|
%
|
9/25/31
|
|
234,371
|
|
170,060
|
(a)
|
Long Beach Mortgage Loan Trust, 2002-1 2M1
|
|
1.342
|
%
|
5/25/32
|
|
549,899
|
|
434,466
|
(a)
|
MASTR Asset-Backed Securities Trust, 2005-AB1 A5A
|
|
5.712
|
%
|
11/25/35
|
|
720,000
|
|
258,464
|
|
MASTR Specialized Loan Trust, 2007-1 A
|
|
0.587
|
%
|
1/25/37
|
|
491,715
|
|
235,368
|
(a)(b)
|
Merrill Lynch Mortgage Investors Trust, 2007-SD1 A1
|
|
0.667
|
%
|
2/25/47
|
|
1,055,988
|
|
509,025
|
(a)
|
Morgan Stanley ABS Capital I, 2007-NC2 M1
|
|
0.587
|
%
|
2/25/37
|
|
617,392
|
|
1,374
|
(a)
|
Morgan Stanley Capital Inc., 2003-NC9 M
|
|
1.342
|
%
|
9/25/33
|
|
1,186,589
|
|
904,100
|
(a)
|
Morgan Stanley Capital Inc., 2004-HE8 A7
|
|
0.747
|
%
|
9/25/34
|
|
74,135
|
|
61,729
|
(a)
|
New Century Home Equity Loan Trust, 2004-3 M1
|
|
1.147
|
%
|
11/25/34
|
|
638,898
|
|
484,184
|
(a)
|
Option One Mortgage Loan Trust, 2005-1 A4
|
|
0.617
|
%
|
2/25/35
|
|
183,739
|
|
171,683
|
(a)
|
Origen Manufactured Housing, 2007-A A2
|
|
3.720
|
%
|
4/15/37
|
|
814,385
|
|
529,350
|
(a)
|
Park Place Securities Inc., 2004-WHQ2 M2
|
|
0.847
|
%
|
2/25/35
|
|
750,000
|
|
726,414
|
(a)
|
Peoples Choice Home Loan Securities Trust, 2004-2 M1
|
|
1.117
|
%
|
10/25/34
|
|
189,548
|
|
165,734
|
(a)
|
RAAC Series, 2006-RP2 A
|
|
0.467
|
%
|
2/25/37
|
|
242,217
|
|
227,945
|
(a)(b)
|
RAAC Series, 2006-RP3 A
|
|
0.487
|
%
|
5/25/36
|
|
988,216
|
|
804,942
|
(a)(b)
|
RAAC Series, 2006-RP4 A
|
|
0.507
|
%
|
1/25/46
|
|
527,544
|
|
464,145
|
(a)(b)
|
RAAC Series, 2007-RP3 M1
|
|
1.017
|
%
|
10/25/46
|
|
1,200,000
|
|
59,545
|
(a)(b)
|
RAAC Series, 2007-RP4 A
|
|
0.567
|
%
|
11/25/46
|
|
1,016,974
|
|
558,891
|
(a)(b)
|
Renaissance Home Equity Loan Trust, 2003-1 A
|
|
1.077
|
%
|
6/25/33
|
|
191,200
|
|
150,028
|
(a)
|
Renaissance Home Equity Loan Trust, 2003-2 A
|
|
0.657
|
%
|
8/25/33
|
|
158,637
|
|
139,444
|
(a)
|
Renaissance Net Interest Margin Trust, 2007-2 N
|
|
8.353
|
%
|
6/25/37
|
|
128,633
|
|
1
|
(b)(d)(e)
|
Residential Asset Mortgage Products Inc., 2003-RS7 MII1
|
|
1.342
|
%
|
8/25/33
|
|
46,881
|
|
40,156
|
(a)
|
Residential Asset Mortgage Products Inc., 2003-RZ4 A7
|
|
4.790
|
%
|
6/25/33
|
|
150,760
|
|
156,128
|
|
Residential Asset Mortgage Products Inc., 2004-RZ3 MII2
|
|
1.867
|
%
|
9/25/34
|
|
400,000
|
|
334,699
|
(a)
|
SACO I Trust, 2005-WM3 A3
|
|
0.917
|
%
|
9/25/35
|
|
201,812
|
|
82,541
|
(a)
|
SACO I Trust, 2006-3 A3
|
|
0.677
|
%
|
4/25/36
|
|
398,276
|
|
208,622
|
(a)
|
SACO I Trust, 2006-4 A1
|
|
0.557
|
%
|
3/25/36
|
|
425,741
|
|
256,698
|
(a)
|
Sail Net Interest Margin Notes, 2004-2A A
|
|
5.500
|
%
|
3/27/34
|
|
107,070
|
|
1
|
(b)(d)(e)
|
SLM Student Loan Trust, 2003-01 A5C
|
|
1.139
|
%
|
12/15/32
|
|
451,749
|
|
446,102
|
(a)(b)
|
See Notes to Financial Statements.
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
17
|
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Asset-Backed Securities continued
|
|
|
|
|
|
|
|
|
|
SLM Student Loan Trust, 2003-04 A5A
|
|
1.139
|
%
|
3/15/33
|
|
193,930
|
|
$ 191,566
|
(a)(b)
|
SLM Student Loan Trust, 2003-04 A5E
|
|
1.139
|
%
|
3/15/33
|
|
514,858
|
|
502,116
|
(a)(b)
|
SLM Student Loan Trust, 2012-06 A1
|
|
0.380
|
%
|
2/27/17
|
|
300,000
|
|
300,065
|
(a)
|
Soundview Home Equity Loan Trust, 2005-3 M2
|
|
0.997
|
%
|
6/25/35
|
|
258,657
|
|
251,979
|
(a)
|
Structured Asset Investment Loan Trust, 2004-9 M4
|
|
2.167
|
%
|
10/25/34
|
|
135,276
|
|
39,610
|
(a)
|
Structured Asset Securities Corp., 2003-AL1 A
|
|
3.357
|
%
|
4/25/31
|
|
126,818
|
|
123,776
|
(b)
|
Structured Asset Securities Corp., 2004-6XS A5B
|
|
5.550
|
%
|
3/25/34
|
|
573,920
|
|
579,598
|
|
Structured Asset Securities Corp., 2005-4XS 2A1A
|
|
1.996
|
%
|
3/25/35
|
|
551,313
|
|
491,187
|
(a)
|
Structured Asset Securities Corp., 2005-SC1 1A1
|
|
0.487
|
%
|
5/25/31
|
|
743,519
|
|
376,129
|
(a)(b)
|
Structured Asset Securities Corp., 2005-WF1 A3
|
|
0.547
|
%
|
2/25/35
|
|
239,130
|
|
232,550
|
(a)
|
Structured Asset Securities Corp., 2006-GEL1 A2
|
|
0.567
|
%
|
11/25/35
|
|
376,720
|
|
361,512
|
(a)(b)
|
Structured Asset Securities Corp., 2007-BC3 2A3
|
|
0.397
|
%
|
5/25/47
|
|
290,000
|
|
88,473
|
(a)
|
Vanderbilt Mortgage Finance, 2000-B IB2
|
|
9.250
|
%
|
7/7/30
|
|
180,717
|
|
183,468
|
(a)
|
Total Asset-Backed Securities (Cost $28,428,161)
|
|
|
|
26,228,852
|
|
Collateralized Mortgage Obligations 32.4%
|
|
|
|
|
|
|
|
|
|
Adjustable Rate Mortgage Trust, 2005-11 5A1
|
|
0.487
|
%
|
2/25/36
|
|
249,508
|
|
173,458
|
(a)
|
Banc of America Funding Corp., 2003-1 A1
|
|
6.000
|
%
|
5/20/33
|
|
169,737
|
|
179,846
|
|
Banc of America Funding Corp., 2004-B 6A1
|
|
2.912
|
%
|
12/20/34
|
|
748,613
|
|
473,788
|
(a)
|
Banc of America Funding Corp., 2005-E 8A1
|
|
2.546
|
%
|
6/20/35
|
|
621,234
|
|
378,148
|
(a)
|
Bayview Commercial Asset Trust, 2006-1A B2
|
|
1.917
|
%
|
4/25/36
|
|
915,150
|
|
271,488
|
(a)(b)
|
Bear Stearns Alt-A Trust, 2004-03 A1
|
|
0.857
|
%
|
4/25/34
|
|
664,542
|
|
603,276
|
(a)
|
Bear Stearns Alt-A Trust, 2004-10 1A3
|
|
1.217
|
%
|
9/25/34
|
|
142,385
|
|
140,649
|
(a)
|
Bear Stearns ARM Trust, 2004-08 11A1
|
|
2.647
|
%
|
11/25/34
|
|
523,635
|
|
465,321
|
(a)
|
Bear Stearns Asset-Backed Securities Trust, 2005-AC3 1A1
|
|
0.717
|
%
|
7/25/35
|
|
741,974
|
|
519,691
|
(a)
|
Countrywide Alternative Loan Trust, 2005-24 4A1
|
|
0.449
|
%
|
7/20/35
|
|
707,995
|
|
518,471
|
(a)
|
Countrywide Home Loan, Mortgage Pass-Through Trust, 2004-29 2A1
|
|
0.547
|
%
|
2/25/35
|
|
68,148
|
|
53,440
|
(a)
|
Countrywide Home Loans, 2004-20 2A1
|
|
2.803
|
%
|
9/25/34
|
|
676,502
|
|
526,179
|
(a)
|
Countrywide Home Loans, 2004-R1 2A
|
|
6.500
|
%
|
11/25/34
|
|
149,675
|
|
152,427
|
(b)
|
Countrywide Home Loans, 2005-HYB9 3A1A
|
|
2.809
|
%
|
2/20/36
|
|
942,410
|
|
738,871
|
(a)
|
Countrywide Home Loans, 2005-R2 2A1
|
|
7.000
|
%
|
6/25/35
|
|
329,755
|
|
321,191
|
(b)
|
Countrywide Home Loans, 2005-R3 AF
|
|
0.617
|
%
|
9/25/35
|
|
532,638
|
|
446,544
|
(a)(b)
|
Countrywide Home Loans, 2006-R2 AF1
|
|
0.637
|
%
|
7/25/36
|
|
258,879
|
|
224,479
|
(a)(b)
|
Countrywide Home Loans Mortgage Pass-Through Trust, 2005-R1 1AF1
|
|
0.577
|
%
|
3/25/35
|
|
471,245
|
|
388,187
|
(a)(b)
|
Deutsche Mortgage Securities Inc., 2004-4 3AR1
|
|
3.116
|
%
|
6/25/34
|
|
321,407
|
|
290,959
|
(a)
|
Downey Savings & Loan Association Mortgage Loan Trust, 2005-AR5 2A1A
|
|
0.549
|
%
|
9/19/45
|
|
695,407
|
|
487,307
|
(a)
|
See Notes to Financial Statements.
18
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
Schedule of investments (contd)
September 30, 2012
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Collateralized Mortgage Obligations continued
|
|
|
|
|
|
|
|
|
|
Downey Savings & Loan Association Mortgage Loan Trust, 2006-AR1 1A1A
|
|
1.068
|
%
|
3/19/46
|
|
401,127
|
|
$ 229,081
|
(a)
|
Federal Home Loan Mortgage Corp. (FHLMC), PAC IO
|
|
5.000
|
%
|
1/15/19
|
|
665,867
|
|
22,792
|
|
Federal Home Loan Mortgage Corp. (FHLMC), PAC IO, 2638 DI
|
|
5.000
|
%
|
5/15/23
|
|
916,565
|
|
78,081
|
|
Federal Home Loan Mortgage Corp. (FHLMC), PAC-1 IO
|
|
5.000
|
%
|
3/15/22
|
|
1,030,900
|
|
42,979
|
|
Federal National Mortgage Association (FNMA), STRIPS, IO
|
|
5.000
|
%
|
7/1/33
|
|
3,648,007
|
|
463,276
|
|
Federal National Mortgage Association (FNMA), STRIPS, IO, 339 30
|
|
5.500
|
%
|
7/1/18
|
|
1,215,203
|
|
113,502
|
(a)
|
Government National Mortgage Association (GNMA), 2010-H03 FA
|
|
0.785
|
%
|
3/20/60
|
|
185,807
|
|
186,800
|
(a)
|
Government National Mortgage Association (GNMA), 2010-H10 FC
|
|
1.235
|
%
|
5/20/60
|
|
158,952
|
|
162,870
|
(a)
|
Government National Mortgage Association (GNMA), 2010-H11 FA
|
|
1.235
|
%
|
6/20/60
|
|
864,644
|
|
890,090
|
(a)
|
Government National Mortgage Association (GNMA), 2011-H01 AF
|
|
0.694
|
%
|
11/20/60
|
|
1,569,214
|
|
1,572,371
|
(a)
|
Government National Mortgage Association (GNMA), 2011-H03 FA
|
|
0.744
|
%
|
1/20/61
|
|
184,348
|
|
185,160
|
(a)
|
Government National Mortgage Association (GNMA), 2011-H05 FB
|
|
0.744
|
%
|
12/20/60
|
|
212,471
|
|
213,433
|
(a)
|
Government National Mortgage Association (GNMA), 2011-H06 FA
|
|
0.694
|
%
|
2/20/61
|
|
790,280
|
|
791,872
|
(a)
|
Government National Mortgage Association (GNMA), 2011-H07 FA
|
|
0.744
|
%
|
2/20/61
|
|
490,226
|
|
492,375
|
(a)
|
Government National Mortgage Association (GNMA), 2011-H08 FD
|
|
0.744
|
%
|
2/20/61
|
|
591,273
|
|
593,829
|
(a)
|
Government National Mortgage Association (GNMA), 2011-H09 AF
|
|
0.744
|
%
|
3/20/61
|
|
954,221
|
|
958,598
|
(a)
|
Government National Mortgage Association (GNMA), 2011-H11 FB
|
|
0.744
|
%
|
4/20/61
|
|
188,476
|
|
189,366
|
(a)
|
Government National Mortgage Association (GNMA), 2012-H18 NA
|
|
0.764
|
%
|
8/20/62
|
|
897,498
|
|
893,908
|
(a)(f)
|
Granite Mortgages PLC, 2003-2 1A3
|
|
0.955
|
%
|
7/20/43
|
|
56,307
|
|
55,654
|
(a)(b)
|
Granite Mortgages PLC, 2004-1 2A1
|
|
0.699
|
%
|
3/20/44
|
|
97,381
|
|
96,028
|
(a)
|
Granite Mortgages PLC, 2004-3 2A1
|
|
0.659
|
%
|
9/20/44
|
|
36,759
|
|
36,134
|
(a)
|
GSMPS Mortgage Loan Trust, 2005-LT1 A1
|
|
0.447
|
%
|
2/25/35
|
|
185,434
|
|
146,956
|
(a)(b)(f)
|
GSMPS Mortgage Loan Trust, 2005-RP2 1AF
|
|
0.567
|
%
|
3/25/35
|
|
949,276
|
|
789,469
|
(a)(b)
|
GSMPS Mortgage Loan Trust, 2005-RP3 1AF
|
|
0.567
|
%
|
9/25/35
|
|
212,904
|
|
172,993
|
(a)(b)
|
GSMPS Mortgage Loan Trust, 2006-RP2 1AF1
|
|
0.617
|
%
|
4/25/36
|
|
450,857
|
|
376,845
|
(a)(b)
|
See Notes to Financial Statements.
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
19
|
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Collateralized Mortgage Obligations continued
|
|
|
|
|
|
|
|
|
|
Harborview Mortgage Loan Trust, 2004-10 4A
|
|
2.924
|
%
|
1/19/35
|
|
404,370
|
|
$ 409,939
|
(a)
|
Harborview Mortgage Loan Trust, 2004-11 3A1A
|
|
0.569
|
%
|
1/19/35
|
|
236,502
|
|
167,327
|
(a)
|
Harborview Mortgage Loan Trust, 2005-14 3A1A
|
|
2.898
|
%
|
12/19/35
|
|
237,796
|
|
193,725
|
(a)
|
IMPAC Secured Assets Corp., 2005-2 A1
|
|
0.537
|
%
|
3/25/36
|
|
2,070,044
|
|
1,203,884
|
(a)
|
Indymac Index Mortgage Loan Trust, 2004-AR07 A2
|
|
1.077
|
%
|
9/25/34
|
|
278,756
|
|
212,431
|
(a)
|
Indymac Index Mortgage Loan Trust, 2004-AR08 2A2A
|
|
1.017
|
%
|
11/25/34
|
|
75,088
|
|
56,539
|
(a)
|
Indymac Index Mortgage Loan Trust, 2004-AR12 A1
|
|
0.997
|
%
|
12/25/34
|
|
96,073
|
|
67,770
|
(a)
|
Indymac Index Mortgage Loan Trust, 2005-AR21 4A1
|
|
3.171
|
%
|
10/25/35
|
|
614,106
|
|
536,423
|
(a)
|
JPMorgan Mortgage Trust, 2005-A3 3A4
|
|
2.583
|
%
|
6/25/35
|
|
400,000
|
|
391,213
|
(a)
|
Luminent Mortgage Trust, 2006-2 A1A
|
|
0.417
|
%
|
2/25/46
|
|
947,248
|
|
526,378
|
(a)
|
MASTR ARM Trust, 2003-6 2A1
|
|
2.688
|
%
|
12/25/33
|
|
182,413
|
|
180,273
|
(a)
|
MASTR ARM Trust, 2004-7 6M1
|
|
0.867
|
%
|
8/25/34
|
|
550,000
|
|
451,857
|
(a)
|
MASTR Asset Securitization Trust, 2003-11 6A16
|
|
5.250
|
%
|
12/25/33
|
|
127,069
|
|
129,440
|
|
MASTR Reperforming Loan Trust, 2005-2 1A1F
|
|
0.567
|
%
|
5/25/35
|
|
1,420,304
|
|
1,135,058
|
(a)(b)
|
MASTR Reperforming Loan Trust, 2006-2 1A1
|
|
5.190
|
%
|
5/25/36
|
|
517,028
|
|
485,136
|
(a)(b)
|
MASTR Reperforming Loan Trust, 2006-2 2A1
|
|
3.140
|
%
|
5/25/36
|
|
177,682
|
|
160,511
|
(a)(b)
|
Morgan Stanley Mortgage Loan Trust, 2006-3AR 1A3
|
|
0.477
|
%
|
3/25/36
|
|
379,319
|
|
224,521
|
(a)
|
Morgan Stanley Mortgage Loan Trust, 2006-6AR 2A
|
|
2.883
|
%
|
5/25/36
|
|
999,033
|
|
686,698
|
(a)
|
Residential Accredit Loans Inc., 2004-QA2 A2
|
|
0.657
|
%
|
6/25/34
|
|
646,716
|
|
645,508
|
(a)
|
Residential Accredit Loans Inc., 2005-QO4 2A1
|
|
0.497
|
%
|
12/25/45
|
|
439,932
|
|
303,374
|
(a)
|
Residential Asset Mortgage Products Inc., 2003-SL1 M1
|
|
7.342
|
%
|
4/25/31
|
|
826,319
|
|
720,141
|
(a)
|
Structured ARM Loan Trust, 2004-09XS A
|
|
0.587
|
%
|
7/25/34
|
|
852,128
|
|
775,526
|
(a)
|
Structured ARM Loan Trust, 2004-20 1A1
|
|
2.828
|
%
|
1/25/35
|
|
174,278
|
|
136,950
|
(a)
|
Structured Asset Mortgage Investments Inc., 2004-AR3 1A1
|
|
0.819
|
%
|
7/19/34
|
|
544,025
|
|
534,893
|
(a)
|
Structured Asset Mortgage Investments Inc., 2006-AR2 A1
|
|
0.447
|
%
|
2/25/36
|
|
887,034
|
|
536,899
|
(a)
|
Structured Asset Mortgage Investments Inc., 2006-AR3 11A1
|
|
0.427
|
%
|
4/25/36
|
|
395,662
|
|
254,610
|
(a)
|
Structured Asset Securities Corp., 1998-2 M1
|
|
1.317
|
%
|
2/25/28
|
|
45,269
|
|
43,441
|
(a)
|
Structured Asset Securities Corp., 1998-3 M1
|
|
1.217
|
%
|
3/25/28
|
|
86,186
|
|
83,786
|
(a)
|
Structured Asset Securities Corp., 1998-8 M1
|
|
1.157
|
%
|
8/25/28
|
|
270,779
|
|
256,217
|
(a)
|
Structured Asset Securities Corp., 2005-4XS 3A4
|
|
4.790
|
%
|
3/25/35
|
|
271,581
|
|
272,321
|
|
Structured Asset Securities Corp., 2005-RF1 A
|
|
0.567
|
%
|
3/25/35
|
|
274,598
|
|
224,382
|
(a)(b)
|
Structured Asset Securities Corp., 2005-RF2 A
|
|
0.567
|
%
|
4/25/35
|
|
294,445
|
|
237,740
|
(a)(b)
|
Structured Asset Securities Corp., 2005-RF3 1A
|
|
0.567
|
%
|
6/25/35
|
|
271,923
|
|
219,669
|
(a)(b)
|
Structured Asset Securities Corp., 2005-RF3 2A
|
|
3.499
|
%
|
6/25/35
|
|
4,183,887
|
|
3,723,636
|
(a)(b)
|
Voyager Dwnys Delaware Trust, 2009-1 UGL2, IO
|
|
1.068
|
%
|
3/20/47
|
|
653
|
|
35
|
(a)(b)(f)
|
See Notes to Financial Statements.
20
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
Schedule of investments (contd)
September 30, 2012
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Collateralized Mortgage Obligations continued
|
|
|
|
|
|
|
|
|
|
WaMu Mortgage Pass-Through Certificates, 2003-AR11 A6
|
|
2.466
|
%
|
10/25/33
|
|
422,475
|
|
$ 433,043
|
(a)
|
WaMu Mortgage Pass-Through Certificates, 2004-AR14 A1
|
|
2.445
|
%
|
1/25/35
|
|
219,455
|
|
223,405
|
(a)
|
WaMu Mortgage Pass-Through Certificates, 2005-AR13 A1C3
|
|
0.707
|
%
|
10/25/45
|
|
334,108
|
|
224,114
|
(a)
|
WaMu Mortgage Pass-Through Certificates, 2007-HY3 1A1
|
|
2.593
|
%
|
3/25/37
|
|
202,377
|
|
147,492
|
(a)
|
WaMu Mortgage Pass-Through Certificates, 2007-OA6 1A
|
|
0.958
|
%
|
7/25/47
|
|
1,280,227
|
|
1,011,596
|
(a)
|
WaMu Mortgage Pass-Through Certificates, 2007-OA6 2A
|
|
2.344
|
%
|
7/25/47
|
|
573,328
|
|
420,086
|
(a)
|
Washington Mutual Inc., 2004-AR11
|
|
2.451
|
%
|
10/25/34
|
|
267,435
|
|
267,657
|
(a)
|
Washington Mutual Inc., 2004-AR12 A2A
|
|
0.640
|
%
|
10/25/44
|
|
230,854
|
|
213,497
|
(a)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2003-AR8
|
|
0.577
|
%
|
10/25/45
|
|
783,417
|
|
648,789
|
(a)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2004-AR13 A1A
|
|
0.610
|
%
|
11/25/34
|
|
603,846
|
|
601,283
|
(a)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2005-AR01 A1A
|
|
0.537
|
%
|
1/25/45
|
|
39,114
|
|
37,053
|
(a)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2005-AR01 A2A3
|
|
0.617
|
%
|
1/25/45
|
|
175,591
|
|
165,570
|
(a)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2006-AR08 1A3
|
|
2.728
|
%
|
8/25/46
|
|
346,788
|
|
273,124
|
(a)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2006-AR11 1A
|
|
1.108
|
%
|
9/25/46
|
|
512,577
|
|
401,801
|
(a)
|
Washington Mutual Inc. Pass-Through Certificates, 2003-AR10 A7
|
|
2.438
|
%
|
10/25/33
|
|
174,702
|
|
180,444
|
(a)
|
Washington Mutual Inc. Pass-Through Certificates, 2005-AR08 2AB3
|
|
0.577
|
%
|
7/25/45
|
|
507,092
|
|
449,717
|
(a)
|
Washington Mutual Inc. Pass-Through Certificates, 2006-AR02 A1A
|
|
1.088
|
%
|
4/25/46
|
|
281,550
|
|
178,319
|
(a)
|
Wells Fargo Mortgage Backed Securities Trust, 2004-DD 1A1
|
|
2.615
|
%
|
1/25/35
|
|
616,238
|
|
614,021
|
(a)
|
Total Collateralized Mortgage Obligations (Cost $40,964,812)
|
|
|
|
39,787,444
|
|
Collateralized Senior Loans 7.2%
|
|
|
|
|
|
|
|
|
|
Consumer Discretionary 2.2%
|
|
|
|
|
|
|
|
|
|
Hotels, Restaurants & Leisure 0.2%
|
|
|
|
|
|
|
|
|
|
Caesars Entertainment Operating Co. Inc., Extended Term Loan B6
|
|
5.467
|
%
|
1/26/18
|
|
276,565
|
|
252,069
|
(j)
|
See Notes to Financial Statements.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
21
|
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Media 1.6%
|
|
|
|
|
|
|
|
|
|
Charter Communications Operating LLC, Extended Term Loan C
|
|
3.470
|
%
|
9/6/16
|
|
656,762
|
|
$
|
658,632
|
(j)
|
Charter Communications Operating LLC, Term Loan D
|
|
4.000
|
%
|
5/15/19
|
|
498,750
|
|
502,054
|
(j)
|
Univision Communications Inc., Extended Term Loan
|
|
4.466
|
%
|
3/31/17
|
|
799,454
|
|
793,347
|
(j)
|
Total Media
|
|
|
|
|
|
|
|
1,954,033
|
|
Multiline Retail 0.4%
|
|
|
|
|
|
|
|
|
|
Neiman Marcus Group Inc., Extended Term Loan
|
|
4.750
|
%
|
5/16/18
|
|
465,000
|
|
468,355
|
(j)
|
Total Consumer Discretionary
|
|
|
|
|
|
|
|
2,674,457
|
|
Consumer Staples 1.2%
|
|
|
|
|
|
|
|
|
|
Food Products 0.8%
|
|
|
|
|
|
|
|
|
|
Del Monte Foods Co., Term Loan B
|
|
4.500
|
%
|
3/8/18
|
|
958,759
|
|
959,159
|
(j)
|
Household Products 0.4%
|
|
|
|
|
|
|
|
|
|
Visant Corp., Term Loan B
|
|
5.250
|
%
|
12/22/16
|
|
473,306
|
|
458,347
|
(j)
|
Total Consumer Staples
|
|
|
|
|
|
|
|
1,417,506
|
|
Energy 0.1%
|
|
|
|
|
|
|
|
|
|
Oil, Gas & Consumable Fuels 0.1%
|
|
|
|
|
|
|
|
|
|
Chesapeake Energy Corp., Term Loan
|
|
8.500
|
%
|
12/1/17
|
|
170,000
|
|
170,779
|
(j)
|
Health Care 1.5%
|
|
|
|
|
|
|
|
|
|
Biotechnology 0.8%
|
|
|
|
|
|
|
|
|
|
Exopack LLC, Term Loan B
|
|
6.500
|
%
|
5/31/17
|
|
987,500
|
|
984,209
|
(j)
|
Health Care Providers & Services 0.7%
|
|
|
|
|
|
|
|
|
|
Community Health Systems Inc., Term Loan
|
|
3.862 - 3.923
|
%
|
1/25/17
|
|
30,326
|
|
30,505
|
(j)
|
Emergency Medical Services Corp., Term Loan B
|
|
5.250
|
%
|
5/25/18
|
|
254,017
|
|
255,658
|
(j)
|
HCA Inc., Term Loan B
|
|
2.466
|
%
|
11/18/13
|
|
630,983
|
|
632,264
|
(j)
|
Total Health Care Providers & Services
|
|
|
|
|
|
|
|
918,427
|
|
Total Health Care
|
|
|
|
|
|
|
|
1,902,636
|
|
Industrials 0.2%
|
|
|
|
|
|
|
|
|
|
Marine 0.0%
|
|
|
|
|
|
|
|
|
|
Trico Shipping AS, New Term Loan A
|
|
10.000
|
%
|
5/13/14
|
|
6,589
|
|
6,589
|
(e)(j)
|
Trico Shipping AS, New Term Loan B
|
|
|
|
5/13/14
|
|
11,602
|
|
11,602
|
(e)(k)
|
Total Marine
|
|
|
|
|
|
|
|
18,191
|
|
Road & Rail 0.2%
|
|
|
|
|
|
|
|
|
|
Hertz Corp., Term Loan
|
|
3.750
|
%
|
3/9/18
|
|
246,250
|
|
246,074
|
(j)
|
Total Industrials
|
|
|
|
|
|
|
|
264,265
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
22
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Schedule of investments (contd)
September 30, 2012
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Information Technology 0.3%
|
|
|
|
|
|
|
|
|
|
IT Services 0.3%
|
|
|
|
|
|
|
|
|
|
First Data Corp., Extended Term Loan B
|
|
4.217
|
%
|
3/23/18
|
|
301,701
|
|
$
|
288,930
|
(j)
|
First Data Corp., Non-Extended Term Loan B2
|
|
2.967
|
%
|
9/24/14
|
|
16,236
|
|
16,171
|
(j)
|
Total Information Technology
|
|
|
|
|
|
|
|
305,101
|
|
Materials 0.6%
|
|
|
|
|
|
|
|
|
|
Construction Materials 0.6%
|
|
|
|
|
|
|
|
|
|
Fairmount Minerals Ltd., New Term Loan B
|
|
5.250
|
%
|
3/15/17
|
|
735,484
|
|
734,932
|
(j)
|
Telecommunication Services 0.6%
|
|
|
|
|
|
|
|
|
|
Diversified Telecommunication Services 0.6%
|
|
|
|
|
|
|
|
|
|
Intelsat Jackson Holdings Ltd., Term Loan
|
|
5.250
|
%
|
4/2/18
|
|
742,481
|
|
746,148
|
(j)
|
Utilities 0.5%
|
|
|
|
|
|
|
|
|
|
Electric Utilities 0.5%
|
|
|
|
|
|
|
|
|
|
Texas Competitive Electric Holdings Co. LLC, Extended Term Loan
|
|
4.728 - 4.938
|
%
|
10/10/17
|
|
930,144
|
|
643,107
|
(j)
|
Total Collateralized Senior Loans (Cost $8,863,797)
|
|
|
|
|
|
|
|
8,858,931
|
|
Mortgage-Backed Securities 3.9%
|
|
|
|
|
|
|
|
|
|
GNMA 3.9%
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association (GNMA)
|
|
6.500
|
%
|
8/15/34
|
|
402,431
|
|
472,639
|
|
Government National Mortgage Association (GNMA)
|
|
1.000
|
%
|
9/28/72
|
|
910,000
|
|
912,275
|
(f)
|
Government National Mortgage Association (GNMA), 2012 H
|
|
0.760
|
%
|
10/30/62
|
|
700,000
|
|
700,000
|
(f)
|
Government National Mortgage Association (GNMA) II
|
|
1.310
|
%
|
8/20/58
|
|
175,848
|
|
177,958
|
(a)
|
Government National Mortgage Association (GNMA) II
|
|
1.650
|
%
|
10/20/59
|
|
188,023
|
|
192,254
|
(a)
|
Government National Mortgage Association (GNMA) II
|
|
3.164
|
%
|
10/20/59
|
|
75,348
|
|
79,963
|
(a)
|
Government National Mortgage Association (GNMA) II
|
|
1.620
|
%
|
12/20/59
|
|
794,972
|
|
812,859
|
(a)
|
Government National Mortgage Association (GNMA) II
|
|
1.621
|
%
|
12/20/59
|
|
233,745
|
|
239,004
|
(a)
|
Government National Mortgage Association (GNMA) II
|
|
1.650
|
%
|
1/20/60
|
|
860,468
|
|
866,099
|
(a)(f)
|
Government National Mortgage Association (GNMA) II
|
|
1.426
|
%
|
7/20/60
|
|
192,492
|
|
196,553
|
(a)
|
Government National Mortgage Association (GNMA) II
|
|
1.484
|
%
|
7/20/60
|
|
194,022
|
|
198,368
|
(a)
|
Total Mortgage-Backed Securities (Cost $4,840,114)
|
|
|
|
|
|
|
|
4,847,972
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
23
|
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
Value
|
|
Municipal Bonds 1.2%
|
|
|
|
|
|
|
|
|
|
Carroll County, KY, PCR, Kentucky Utilities Co. Project, AMBAC
|
|
0.242
|
%
|
10/1/32
|
|
500,000
|
|
$
|
402,029
|
(a)(f)
|
Florida Educational Loan Marketing Corp., Education Loan Revenue
|
|
0.071
|
%
|
12/1/18
|
|
700,000
|
|
629,724
|
(a)(f)(l)
|
North Carolina State Education Assistance Authority Revenue, Student Loan Backed Notes
|
|
1.351
|
%
|
10/25/41
|
|
400,000
|
|
390,172
|
(a)
|
Total Municipal Bonds (Cost $1,401,089)
|
|
|
|
|
|
|
|
1,421,925
|
|
Sovereign Bonds 4.1%
|
|
|
|
|
|
|
|
|
|
Brazil 2.7%
|
|
|
|
|
|
|
|
|
|
Brazil Nota do Tesouro Nacional, Notes
|
|
10.000
|
%
|
1/1/14
|
|
421,000
|
BRL
|
213,100
|
|
Brazil Nota do Tesouro Nacional, Notes
|
|
10.000
|
%
|
1/1/17
|
|
5,902,000
|
BRL
|
3,015,571
|
|
Brazil Nota do Tesouro Nacional, Notes
|
|
10.000
|
%
|
1/1/21
|
|
301,000
|
BRL
|
151,843
|
|
Total Brazil
|
|
|
|
|
|
|
|
3,380,514
|
|
Mexico 0.3%
|
|
|
|
|
|
|
|
|
|
United Mexican States, Medium-Term Notes
|
|
6.750
|
%
|
9/27/34
|
|
265,000
|
|
378,685
|
|
Russia 0.4%
|
|
|
|
|
|
|
|
|
|
Russian Foreign Bond Eurobond
|
|
12.750
|
%
|
6/24/28
|
|
254,000
|
|
492,760
|
(b)
|
Venezuela 0.7%
|
|
|
|
|
|
|
|
|
|
Bolivarian Republic of Venezuela
|
|
5.750
|
%
|
2/26/16
|
|
912,000
|
|
835,620
|
(b)
|
Total Sovereign Bonds (Cost $5,042,536)
|
|
|
|
|
|
|
|
5,087,579
|
|
U.S. Government & Agency Obligations 0.2%
|
|
|
|
|
|
|
|
|
|
U.S. Government Obligations 0.2%
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bonds
|
|
3.125
|
%
|
2/15/42
|
|
190,000
|
|
202,142
|
|
U.S. Treasury Notes
|
|
0.500
|
%
|
7/31/17
|
|
50,000
|
|
49,762
|
|
Total U.S. Government & Agency Obligations
(Cost $256,198)
|
|
|
|
|
|
|
|
251,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Common Stocks 0.1%
|
|
|
|
|
|
|
|
|
|
Consumer Discretionary 0.0%
|
|
|
|
|
|
|
|
|
|
Media 0.0%
|
|
|
|
|
|
|
|
|
|
Cumulus Media Inc., Class A Shares
|
|
|
|
|
|
1,407
|
|
3,855
|
*
|
Industrials 0.1%
|
|
|
|
|
|
|
|
|
|
Marine 0.1%
|
|
|
|
|
|
|
|
|
|
DeepOcean Group Holding AS
|
|
|
|
|
|
3,101
|
|
56,284
|
(e)(f)
|
Total Common Stocks (Cost $72,508)
|
|
|
|
|
|
|
|
60,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
Date
|
|
Rights
|
|
|
|
Rights 0.0%
|
|
|
|
|
|
|
|
|
|
Twin River Worldwide Holdings Inc.
(Cost $13,125)
|
|
|
|
11/5/17
|
|
75,000
|
|
5,063
|
*
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
24
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Schedule of investments (contd)
September 30, 2012
Western Asset Variable Rate Strategic Fund Inc.
Security
|
|
|
|
Expiration
Date
|
|
Warrants
|
|
Value
|
|
Warrants 0.0%
|
|
|
|
|
|
|
|
|
|
Charter Communications Inc.
|
|
|
|
11/30/14
|
|
22
|
|
$ 572
|
*
(f)
|
Nortek Inc.
|
|
|
|
12/7/14
|
|
115
|
|
575
|
*
(e)(f)
|
SemGroup Corp.
|
|
|
|
11/30/14
|
|
122
|
|
1,621
|
*
(e)(f)
|
Total Warrants (Cost $1,510)
|
|
|
|
|
|
|
|
2,768
|
|
Total Investments before Short-Term Investments
(Cost $129,658,572)
|
|
|
|
|
|
|
|
128,691,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
Maturity
Date
|
|
Face
Amount
|
|
|
|
Short-Term Investments 1.5%
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements 1.5%
|
|
|
|
|
|
|
|
|
|
State Street Bank & Trust Co. repurchase agreement dated 9/28/12; Proceeds at maturity $1,904,002; (Fully collateralized by U.S. Government Obligations, 3.125% due 11/15/41; Market value $1,945,306)
(Cost $1,904,000)
|
|
0.010
|
%
|
10/1/12
|
|
1,904,000
|
|
1,904,000
|
|
Total Investments 106.2% (Cost $131,562,572#)
|
|
|
|
|
|
|
|
130,595,756
|
|
Liabilities in Excess of Other Assets (6.2)%
|
|
|
|
|
|
|
|
(7,655,636
|
)
|
Total Net Assets 100.0%
|
|
|
|
|
|
|
|
$122,940,120
|
|
|
Face amount denominated in U.S. dollars, unless otherwise noted.
|
*
|
Non-income producing security.
|
(a)
|
Variable rate security. Interest rate disclosed is as of the most recent information available.
|
(b)
|
Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors, unless otherwise noted.
|
(c)
|
Payment-in-kind security for which part of the income earned may be paid as additional principal.
|
(d)
|
The coupon payment on these securities is currently in default as of September 30, 2012.
|
(e)
|
Illiquid security (unaudited).
|
(f)
|
Security is valued in good faith in accordance with procedures approved by the Board of Directors (See Note 1).
|
(g)
|
Value is less than $1.
|
(h)
|
All or a portion of this security is held by the counterparty as collateral for open reverse repurchase agreements.
|
(i)
|
Security has no maturity date. The date shown represents the next call date.
|
(j)
|
Interest rates disclosed represent the effective rates on collateralized senior loans. Ranges in interest rates are attributable to multiple contracts under the same loan.
|
(k)
|
All or a portion of this loan is unfunded as of September 30, 2012. The interest rate for fully unfunded term loans is to be determined.
|
(l)
|
Income from this issue is considered a preference item for purposes of calculating the alternative minimum tax (AMT).
|
#
|
Aggregate cost for federal income tax purposes is $131,946,821.
|
See Notes to Financial Statements.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
25
|
Western Asset Variable Rate Strategic Fund Inc.
Abbreviations used in this schedule:
ARM
|
Adjustable Rate Mortgage
|
BRL
|
Brazilian Real
|
IO
|
Interest Only
|
PAC
|
Planned Amortization Class
|
STRIPS
|
Separate Trading of Registered Interest and Principal Securities
|
Schedule of Written Options
Security
|
|
Expiration
Date
|
|
Strike
Rate
|
|
Notional
Par
|
|
Value
|
|
Interest rate swaption with Credit Suisse, Put (Premiums received $120,768)
|
|
8/26/14
|
|
2.50%
|
|
28,669,000
|
|
$9,340
|
|
See Notes to Financial Statements.
26
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Statement of assets and liabilities
September 30, 2012
Assets:
|
|
|
|
Investments, at value (Cost $131,562,572)
|
|
$130,595,756
|
|
Foreign currency, at value (Cost $11,585)
|
|
12,677
|
|
Cash
|
|
413
|
|
Interest receivable
|
|
838,152
|
|
Deposits with brokers for swap contracts
|
|
500,000
|
|
Receivable for securities sold
|
|
341,985
|
|
Swaps, at value (premiums paid $3,164)
|
|
176,459
|
|
Deposits with brokers for open futures contracts
|
|
73,896
|
|
Receivable for open swap contracts
|
|
17,180
|
|
Receivable from broker variation margin on open futures contracts
|
|
4,484
|
|
Unrealized appreciation on forward foreign currency contracts
|
|
2,783
|
|
Prepaid expenses
|
|
13,834
|
|
Other receivables
|
|
11,215
|
|
Total Assets
|
|
132,588,834
|
|
|
|
|
|
Liabilities:
|
|
|
|
Payable for open reverse repurchase agreements
|
|
6,263,054
|
|
Payable for securities purchased
|
|
2,221,054
|
|
Swaps, at value (premiums received $68)
|
|
826,188
|
|
Payable for open swap contracts
|
|
127,965
|
|
Investment management fee payable
|
|
80,066
|
|
Written options, at value (premiums received $120,768)
|
|
9,340
|
|
Unrealized depreciation on forward foreign currency contracts
|
|
4,286
|
|
Interest payable
|
|
2,662
|
|
Directors fees payable
|
|
84
|
|
Accrued expenses
|
|
114,015
|
|
Total Liabilities
|
|
9,648,714
|
|
Total Net Assets
|
|
$122,940,120
|
|
|
|
|
|
Net Assets:
|
|
|
|
Par value ($0.001 par value; 6,661,327 shares issued and outstanding; 100,000,000 shares authorized)
|
|
$ 6,661
|
|
Paid-in capital in excess of par value
|
|
131,684,571
|
|
Undistributed net investment income
|
|
3,116,039
|
|
Accumulated net realized loss on investments, futures contracts, written options, swap contracts and foreign currency transactions
|
|
(10,345,605)
|
|
Net unrealized depreciation on investments, futures contracts, written options, swap contracts and foreign currencies
|
|
(1,521,546)
|
|
Total Net Assets
|
|
$122,940,120
|
|
|
|
|
|
Shares Outstanding
|
|
6,661,327
|
|
|
|
|
|
Net Asset Value
|
|
$18.46
|
|
See Notes to Financial Statements.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
27
|
Statement of operations
For the Year Ended September 30, 2012
Investment Income:
|
|
|
|
Interest
|
|
$ 7,403,114
|
|
Dividends
|
|
6,382
|
|
Total Investment Income
|
|
7,409,496
|
|
|
|
|
|
Expenses:
|
|
|
|
Investment management fee (Note 2)
|
|
967,810
|
|
Interest expense (Note 3)
|
|
103,938
|
|
Excise tax (Note 1)
|
|
83,994
|
|
Audit and tax
|
|
80,400
|
|
Shareholder reports
|
|
35,147
|
|
Legal fees
|
|
32,651
|
|
Stock exchange listing fees
|
|
20,791
|
|
Directors fees
|
|
20,631
|
|
Transfer agent fees
|
|
19,180
|
|
Custody fees
|
|
11,692
|
|
Fund accounting fees
|
|
11,546
|
|
Insurance
|
|
3,644
|
|
Miscellaneous expenses
|
|
6,460
|
|
Total Expenses
|
|
1,397,884
|
|
Net Investment Income
|
|
6,011,612
|
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options, Swap Contracts and Foreign Currency Transactions (Notes 1, 3 and 4):
|
|
|
|
Net Realized Gain (Loss) From:
|
|
|
|
Investment transactions
|
|
(1,203,980)
|
|
Futures contracts
|
|
140,223
|
|
Written options
|
|
158,240
|
|
Swap contracts
|
|
(1,462,524)
|
|
Foreign currency transactions
|
|
197,479
|
|
Net Realized Loss
|
|
(2,170,562)
|
|
Change in Net Unrealized Appreciation (Depreciation) From:
|
|
|
|
Investments
|
|
11,855,929
|
|
Futures contracts
|
|
(60,176)
|
|
Written options
|
|
95,370
|
|
Swap contracts
|
|
611,517
|
|
Foreign currencies
|
|
12,565
|
|
Change in Net Unrealized Appreciation (Depreciation)
|
|
12,515,205
|
|
Net Gain on Investments, Futures Contracts, Written Options, Swap Contracts and Foreign Currency Transactions
|
|
10,344,643
|
|
Increase in Net Assets from Operations
|
|
$16,356,255
|
|
See Notes to Financial Statements.
28
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Statements of changes in net assets
For the Years Ended September 30,
|
|
2012
|
|
2011
|
|
Operations:
|
|
|
|
|
|
Net investment income
|
|
$ 6,011,612
|
|
$ 5,756,628
|
|
Net realized loss
|
|
(2,170,562)
|
|
(6,850,323)
|
|
Change in net unrealized appreciation (depreciation)
|
|
12,515,205
|
|
4,013,918
|
|
Increase in Net Assets From Operations
|
|
16,356,255
|
|
2,920,223
|
|
|
|
|
|
|
|
Distributions to Shareholders From (Note 1):
|
|
|
|
|
|
Net investment income
|
|
(5,356,963)
|
|
(4,293,561)
|
|
Net realized gains
|
|
|
|
(267,682)
|
|
Decrease in Net Assets From Distributions to Shareholders
|
|
(5,356,963)
|
|
(4,561,243)
|
|
Fund Share Transactions:
|
|
|
|
|
|
Proceeds from shares issued on reinvestment of distribution (2,579 and 0 shares issued, respectively)
|
|
46,687
|
|
|
|
Increase in Net Assets From Fund Share Transactions
|
|
46,687
|
|
|
|
Increase (Decrease) in Net Assets
|
|
11,045,979
|
|
(1,641,020)
|
|
|
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
Beginning of year
|
|
111,894,141
|
|
113,535,161
|
|
End of year*
|
|
$122,940,120
|
|
$111,894,141
|
|
* Includes undistributed net investment income of:
|
|
$3,116,039
|
|
$2,204,105
|
|
See Notes to Financial Statements.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
29
|
Financial highlights
For a share of capital stock outstanding throughout each year ended September 30:
|
|
2012
1
|
|
2011
1
|
|
2010
1
|
|
2009
1
|
|
2008
1
|
|
Net asset value, beginning of year
|
|
$16.80
|
|
$17.05
|
|
$15.18
|
|
$15.12
|
|
$18.85
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
0.90
|
|
0.86
|
|
0.82
|
|
0.75
|
|
0.96
|
|
Net realized and unrealized gain (loss)
|
|
1.56
|
|
(0.43)
|
|
1.66
|
|
0.04
|
|
(3.57)
|
|
Total income (loss) from operations
|
|
2.46
|
|
0.43
|
|
2.48
|
|
0.79
|
|
(2.61)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
(0.80)
|
|
(0.64)
|
|
(0.67)
|
|
(0.68)
|
|
(0.96)
|
|
Net realized gains
|
|
|
|
(0.04)
|
|
|
|
(0.05)
|
|
(0.16)
|
|
Total distributions
|
|
(0.80)
|
|
(0.68)
|
|
(0.67)
|
|
(0.73)
|
|
(1.12)
|
|
Increase in net asset value due to shares repurchased in tender offer
|
|
|
|
|
|
0.06
|
|
|
|
|
|
Net asset value, end of year
|
|
$18.46
|
|
$16.80
|
|
$17.05
|
|
$15.18
|
|
$15.12
|
|
Market price, end of year
|
|
$18.45
|
|
$15.43
|
|
$15.86
|
|
$13.78
|
|
$12.00
|
|
Total return, based on NAV
2,3
|
|
15.05
|
%
|
2.45
|
%
|
17.08
|
%
|
5.91
|
%
|
(14.40)
|
%
4
|
Total return, based on Market Price
5
|
|
25.59
|
%
|
1.44
|
%
|
20.40
|
%
|
22.20
|
%
|
(23.67)
|
%
4
|
Net assets, end of year (000s)
|
|
$122,940
|
|
$111,894
|
|
$113,535
|
|
$126,385
|
|
$125,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
1.20
|
%
|
0.99
|
%
|
1.09
|
%
|
1.16
|
%
|
1.06
|
%
|
Net expenses
6
|
|
1.20
|
|
0.99
|
|
1.09
|
|
1.16
|
|
1.06
|
|
Net investment income
|
|
5.17
|
|
4.91
|
|
5.09
|
|
5.41
|
|
5.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
18
|
%
|
31
|
%
|
43
|
%
|
68
|
%
7
|
77
|
%
7
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
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.
|
3
|
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results.
|
4
|
The investment manager fully reimbursed the Fund for losses incurred resulting from an investment transaction error. Without this reimbursement, total return would not have changed.
|
5
|
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.
|
6
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
7
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 146% and 205% for the year ended September 30, 2009 and 2008, respectively.
|
See Notes to Financial Statements.
30
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements
1. Organization and significant accounting policies
Western Asset Variable Rate Strategic Fund Inc. (the Fund) was incorporated in Maryland on August 3, 2004 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 Board of Directors authorized 100 million shares of $0.001 par value common stock. The Funds primary investment objective is to maintain a high level of current income.
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. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investments fair value. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Funds Board of Directors.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
31
|
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 American 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.
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.)
32
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements (contd)
·
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:
Description
|
|
Quoted Prices
(Level 1)
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
Corporate bonds & notes
|
|
|
|
$42,139,179
|
|
$ 0*
|
|
$ 42,139,179
|
|
Asset-backed securities
|
|
|
|
26,228,852
|
|
|
|
26,228,852
|
|
Collateralized mortgage obligations
|
|
|
|
39,787,444
|
|
|
|
39,787,444
|
|
Collateralized senior loans
|
|
|
|
8,858,931
|
|
|
|
8,858,931
|
|
Mortgage-backed securities
|
|
|
|
4,847,972
|
|
|
|
4,847,972
|
|
Municipal bonds
|
|
|
|
1,421,925
|
|
|
|
1,421,925
|
|
Sovereign bonds
|
|
|
|
5,087,579
|
|
|
|
5,087,579
|
|
U.S. government & agency obligations
|
|
|
|
251,904
|
|
|
|
251,904
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
$3,855
|
|
|
|
|
|
3,855
|
|
Industrials
|
|
|
|
|
|
56,284
|
|
56,284
|
|
Rights
|
|
|
|
5,063
|
|
|
|
5,063
|
|
Warrants
|
|
|
|
2,193
|
|
575
|
|
2,768
|
|
Total long-term investments
|
|
$3,855
|
|
$128,631,042
|
|
$56,859
|
|
$128,691,756
|
|
Short-term investments
|
|
|
|
1,904,000
|
|
|
|
1,904,000
|
|
Total investments
|
|
$3,855
|
|
$130,535,042
|
|
$56,859
|
|
$130,595,756
|
|
Other financial instruments:
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
|
$1,876
|
|
|
|
|
|
$ 1,876
|
|
Forward foreign currency contracts
|
|
|
|
$ 2,783
|
|
|
|
2,783
|
|
Interest rate swaps
|
|
|
|
166,294
|
|
|
|
166,294
|
|
Credit default swaps on corporate issues buy protection
|
|
|
|
10,165
|
|
|
|
10,165
|
|
Total other financial instruments
|
|
$1,876
|
|
$ 179,242
|
|
|
|
$ 181,118
|
|
Total
|
|
$5,731
|
|
$130,714,284
|
|
$56,859
|
|
$130,776,874
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
33
|
Description
|
|
Quoted Prices
(Level 1)
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Other financial instruments:
|
|
|
|
|
|
|
|
|
|
Written options
|
|
|
|
$ 9,340
|
|
|
|
$ 9,340
|
|
Futures contracts
|
|
$14,781
|
|
|
|
|
|
14,781
|
|
Forward foreign currenct contracts
|
|
|
|
4,286
|
|
|
|
4,286
|
|
Interest rate swaps
|
|
|
|
825,250
|
|
|
|
825,250
|
|
Credit default swaps on corporate issues buy protection
|
|
|
|
938
|
|
|
|
938
|
|
Total
|
|
$14,781
|
|
$839,814
|
|
|
|
$854,595
|
|
* Amount represents less than $1.
See Schedule of Investments for additional detailed categorizations.
Values include any premiums paid or received with respect to swap contracts.
(b) Repurchase agreements.
The Fund may enter into repurchase agreements with institutions that its investment adviser 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.
(c) 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
34
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements (contd)
equal in value to its obligations with respect to reverse repurchase agreements or will take other actions permitted by law to cover its obligations.
(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 cash equivalents 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. 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 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. The use of swaps involves risks that are different from those associated with other portfolio transactions.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
35
|
Swap contracts are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). 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.
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.
For average notional amounts of swaps held during the year ended September 30, 2012, see Note 4.
Credit default swaps
The Fund enters into credit default swap (CDS) contracts for investment purposes, to manage its credit risk or to add leverage. CDS agreements involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically corporate or sovereign issuers, on a specified obligation, or in the event of a write-down, principal shortfall, interest shortfall or default of all or part of the referenced entities comprising a credit index. The Fund may use a CDS to provide protection against defaults of the issuers (i.e., to reduce risk where the Fund has exposure to an issuer) or to take an active long or short position with respect to the likelihood of a particular issuers default. As a seller of protection, the Fund generally receives an upfront payment or a stream of payments throughout the term of the swap provided that there is no credit event. If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the maximum potential amount of future payments (undiscounted) that the Fund could be required to make under a credit default swap agreement would be an amount equal to the notional amount of the agreement. These amounts of potential payments will be partially offset by any recovery of values from the respective referenced obligations. As a seller of protection, the Fund effectively adds leverage to its portfolio because, in addition to its total net assets, the Fund is subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Fund generally receives an amount up to the notional value of the swap if a credit event occurs.
36
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements (contd)
Implied spreads are the theoretical prices a lender receives for credit default protection. When spreads rise, market perceived credit risk rises and when spreads fall, market perceived credit risk falls. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to enter into the agreement. Wider credit spreads and decreasing market values, when compared to the notional amount of the swap, represent a deterioration of the referenced entitys credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. Credit spreads utilized in determining the period end market value of credit default swap agreements on corporate or sovereign issues are disclosed in the Notes to Financial Statements and serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for credit derivatives. For credit default swap agreements on asset-backed securities and credit indices, the quoted market prices and resulting values, particularly in relation to the notional amount of the contract as well as the annual payment rate, serve as an indication of the current status of the payment/performance risk.
The Funds maximum risk of loss from counterparty risk, as the protection buyer, is the fair value of the contract (this risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Funds exposure to the counterparty). As the protection seller, the Funds maximum risk is the notional amount of the contract. Credit default swaps are considered to have credit risk-related contingent features since they require payment by the protection seller to the protection buyer upon the occurrence of a defined credit event.
Entering into a CDS agreement involves, to varying degrees, elements of credit, market and documentation risk in excess of the related amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreement, and that there will be unfavorable changes in net interest rates.
Interest rate swaps
The Fund enters into interest rate swap contracts to manage its exposure to interest rate risk. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional principal amount. The Fund may elect to pay a fixed rate and receive a floating rate, or receive a fixed rate and pay a floating rate, on a notional principal amount. Interest rate swaps are marked-to-market daily based upon quotations from market makers and the change, if any, is recorded as an unrealized gain or loss in the Statement of Operations. When a swap contract is terminated early, the Fund records a realized gain or loss equal to the difference between the original cost and the settlement amount of the closing transaction.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
37
|
The risks of interest rate swaps include changes in market conditions that will affect the value of the contract or changes in the present value of the future cash flow streams and the possible inability of the counterparty to fulfill its obligations under the agreement. The Funds maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from the counterparty over the contracts remaining life, to the extent that that amount is positive. This risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Funds exposure to the counterparty.
(g) 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 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.
(h) Swaptions.
The Fund purchases and writes swaption contracts to manage exposure to an underlying instrument. The Fund may also purchase or write options to manage exposure to fluctuations in interest rates or to enhance yield. Swaption contracts written by the Fund represent an option that gives the purchaser the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date. Swaption contracts purchased by the Fund represent an option that gives the Fund the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date.
38
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements (contd)
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.
(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 pre-payment, 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.
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) 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.
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.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
39
|
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.
(k) 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.
(l) Unfunded loan commitments.
The Fund may enter into certain credit agreements all or a portion of which may be unfunded. The Fund is obligated to fund these commitments at the borrowers discretion. The commitments are disclosed in the accompanying Schedule of Investments. At September 30, 2012 the Fund had sufficient cash and/or securities to cover these commitments.
(m) Counterparty risk and credit-risk-related contingent features of derivative instruments.
The Fund may invest in certain securities or engage in other transactions, where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Funds investment manager 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
40
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements (contd)
(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 investment manager. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.
The Fund has entered into master agreements with certain of its derivative counterparties that provide for general obligations, representations, agreements, collateral, events 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.
As of September 30, 2012, the Fund held written options, forward foreign currency contracts, credit default swaps and interest rate swaps with credit related contingent features which had a liability position of $839,814. If a contingent feature in the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties. As of September 30, 2012, the Fund had posted with its counterparties cash and/or securities as collateral to cover the net liability of these derivatives amounting to $500,000, which could be used to reduce the required payment.
(n) Credit and market risk.
The Fund invests in high-yield and emerging market instruments that are subject to certain credit and market risks. The yields of high-yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The Funds investments in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Funds investments in non-U.S. dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations.
Investments in securities that are collateralized by residential real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
41
|
(o) Other risks.
Consistent with its objective to seek high current income, the Fund may invest in instruments whose values and interest rates are linked to foreign currencies, interest rates, indices or some other financial indicator. The value at maturity or interest rates for these instruments will increase or decrease according to the change in the indicator to which they are indexed, amongst other factors. These securities are generally more volatile in nature, and the risk of loss of principal may be greater.
(p) Security transactions and investment income.
Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. 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.
(q) Distributions to shareholders.
Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. 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.
(r) 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.
(s) 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.
However, due to the timing of when distributions are made by the Fund, the Fund may be subject to an excise tax of 4% of the amount by which 98% of the Funds annual taxable income and 98.2% of net realized gains exceed the distributions from such taxable income and realized gains for the calendar year. The Fund paid $83,994 of Federal excise taxes attributable to calendar year 2011 in March 2012 and estimates it will pay approximately $97,000 of Federal excise tax attributable to calendar year 2012.
42
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements (contd)
(t) 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 values per share. During the current year, the following reclassifications have been made:
|
Undistributed Net
Investment Income
|
Accumulated Net
Realized Loss
|
Paid-in Capital
|
(a)
|
$ 83,994
|
|
|
|
$(83,994
|
)
|
(b)
|
173,291
|
|
$(173,291
|
)
|
|
|
(a)
Reclassifications are primarily due to a non-deductible excise tax paid by the Fund.
(b)
Reclassifications are primarily due to foreign currency transactions treated as ordinary income for tax purposes, differences between book and tax amortization of premium on fixed income securities, losses from mortgage backed securities treated as capital losses for tax purposes and book/tax differences in the treatment of swaps contracts.
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 (Western Asset), Western Asset Management Company Limited (Western Asset Limited) and Western Asset Management Company Pte. Ltd. (Western Singapore) are the Funds subadvisers. LMPFA, Western Asset, Western Asset Limited and Western Singapore are wholly-owned subsidiaries of Legg Mason, Inc. (Legg Mason).
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.75% of the Funds average daily net assets plus the proceeds of any outstanding borrowings.
LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. Western Asset Limited and Western Singapore do not receive any compensation from the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund. In turn, Western Asset pays Western Asset Limited and Western Singapore a subadvisory fee of 0.30% on assets managed by Western Asset Limited and Western Singapore, respectively.
During periods in which the Fund utilizes financial leverage, the fees which are payable to the investment manager as a percentage of the Funds net assets 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.
All officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
43
|
3. Investments
During the year ended September 30, 2012, 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
|
$ 9,476,154
|
|
$12,410,208
|
|
Sales
|
33,963,981
|
|
149,891
|
|
At September 30, 2012, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
Gross unrealized appreciation
|
|
$
|
8,418,136
|
|
Gross unrealized depreciation
|
|
(9,769,201
|
)
|
Net unrealized depreciation
|
|
$
|
(1,351,065
|
)
|
Transactions in reverse repurchase agreements for the Fund during the year ended September 30, 2012 were as follows:
Average Daily
Balance*
|
|
Weighted Average
Interest Rate*
|
|
Maximum Amount
Outstanding
|
$12,755,763
|
|
0.81%
|
|
$19,925,321
|
* Averages based on the number of days that Fund had reverse repurchase agreements outstanding.
Interest rates on reverse repurchase agreements ranged from 0.70% to 0.85% during the year ended September 30, 2012. Interest expense incurred on reverse repurchase agreements totaled $103,938.
At September 30, 2012, the Fund had the following open reverse repurchase agreements:
Counterparty
|
Rate
|
Effective Date
|
Maturity Date
|
Face Amount of
Reverse Repurchase
Agreements
|
Deutsche Bank
|
0.85%
|
9/13/2012
|
1/8/2013
|
$6,263,054
|
On September 30, 2012, the total market value of underlying collateral (refer to the Schedule of Investments for positions held at the counterparty as collateral for reverse repurchase agreements) for open reverse repurchase agreements was $6,638,095.
44
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements (contd)
At September 30, 2012, the Fund had the following open futures contracts:
|
|
Number of
Contracts
|
|
Expiration
Date
|
|
Basis
Value
|
|
Market
Value
|
|
Unrealized
Gain (Loss)
|
|
Contracts to Buy:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury 2-Year Notes
|
|
67
|
|
12/12
|
|
$14,773,718
|
|
$14,775,594
|
|
$1,876
|
|
|
Contracts to Sell:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury 10-Year Notes
|
|
19
|
|
12/12
|
|
2,521,422
|
|
2,536,203
|
|
(14,781
|
)
|
|
Net unrealized loss on open futures contracts
|
|
|
|
|
|
|
|
|
|
$(12,905
|
)
|
|
During the year ended September 30, 2012, written option transactions for the Fund were as follows:
|
|
Number of Contracts/
Notional Par
|
|
Premiums
|
|
Written options, outstanding as of September 30, 2011
|
|
28,669,023
|
|
|
$128,456
|
|
Options written
|
|
10,000,207
|
|
|
150,552
|
|
Options closed
|
|
|
|
|
|
|
Options exercised
|
|
(38
|
)
|
|
(8,426
|
)
|
Options expired
|
|
(10,000,192
|
)
|
|
(149,814
|
)
|
Written options, outstanding as of September 30, 2012
|
|
28,669,000
|
|
|
$120,768
|
|
At September 30, 2012, the Fund had the following open forward foreign currency contracts:
Foreign Currency
|
|
Counterparty
|
|
Local
Currency
|
|
Market
Value
|
|
Settlement
Date
|
|
Unrealized
Gain (Loss)
|
|
Contracts to Buy:
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
UBS AG
|
|
100,000
|
|
$128,563
|
|
11/16/12
|
|
$ 2,783
|
|
Contracts to Sell:
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
UBS AG
|
|
100,000
|
|
128,563
|
|
11/16/12
|
|
(4,286)
|
|
Net unrealized loss on open forward foreign currency contracts
|
|
|
|
|
|
|
|
|
|
$(1,503)
|
|
At September 30, 2012, the Fund held the following open swap contracts:
Swap Counterparty
|
|
Notional
Amount
|
|
Termination
Date
|
|
Payments
Made
by the
Fund
|
|
Payments
Received
by the
Fund
|
|
Upfront
Premiums
Paid
(Received)
|
|
Unrealized
Appreciation
(Depreciation)
|
|
Barclays Capital Inc.
|
|
$ 10,000,000
|
|
6/14/16
|
|
1.785%
Semi-Annually
|
|
3-Month LIBOR
|
|
|
|
$(462,052
|
)
|
|
Barclays Capital Inc.
|
|
5,000,000
|
|
9/6/14
|
|
0.633%
Semi-Annually
|
|
3-Month LIBOR
|
|
|
|
(25,863
|
)
|
|
Morgan Stanley & Co. Inc.
|
|
10,000,000
|
|
10/18/13
|
|
0.658%
Semi-Annually
|
|
3-Month LIBOR
|
|
|
|
(33,109
|
)
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
45
|
Swap Counterparty
|
|
Notional
Amount
|
|
Termination
Date
|
|
Payments
Made
by the
Fund
|
|
Payments
Received
by the
Fund
|
|
Upfront
Premiums
Paid
(Received)
|
|
Unrealized
Appreciation
(Depreciation)
|
|
Credit Suisse First Boston Inc.
|
|
$ 5,000,000
|
|
5/10/22
|
|
1.985%
Semi-Annually
|
|
3-Month LIBOR
|
|
|
|
$(167,016
|
)
|
|
Barclays Capital Inc.
|
|
36,391,000
|
|
8/13/15
|
|
0.637%
Semi-Annually
|
|
3-Month LIBOR
|
|
|
|
(122,266
|
)
|
|
Barclays Capital Inc.
|
|
14,834,000
|
|
8/13/18
|
|
1.285%
Semi-Annually
|
|
3-Month LIBOR
|
|
|
|
159,200
|
|
|
Barclays Capital Inc.
|
|
2,500,000
|
|
9/7/22
|
|
1.670%
Semi-Annually
|
|
3-Month LIBOR
|
|
|
|
7,094
|
|
|
Barclays Capital Inc.
|
|
16,990,000
|
|
9/30/14
|
|
0.408%
Semi-Annually
|
|
3-Month LIBOR
|
|
|
|
(14,944
|
)
|
|
Total
|
|
$100,715,000
|
|
|
|
|
|
|
|
|
|
$(658,956
|
)
|
|
CREDIT DEFAULT SWAPS ON CORPORATE ISSUES BUY PROTECTION
1
Swap Counterparty
(Reference Entity)
|
|
Notional
Amount
2
|
|
Termination
Date
|
|
Implied
Credit
Spread at
September 30,
2012
3
|
|
Periodic
Payments
Made
by the
Fund
|
|
Market
Value
4
|
|
Upfront
Premiums
Paid
(Received)
|
|
Unrealized
Appreciation
(Depreciation)
|
|
Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480% due 11/15/13)
|
|
$ 90,000
|
|
3/20/15
|
|
5.262%
|
|
5.000% quarterly
|
|
$ 540
|
|
$ 433
|
|
$ 107
|
|
|
Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480% due 11/15/13)
|
|
120,000
|
|
3/20/20
|
|
6.410%
|
|
5.000% quarterly
|
|
8,774
|
|
2,359
|
|
6,415
|
|
|
Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)
|
|
60,000
|
|
3/20/13
|
|
2.181%
|
|
5.000% quarterly
|
|
(804
|
)
|
(62)
|
|
(742
|
)
|
|
Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)
|
|
10,000
|
|
3/20/13
|
|
2.181%
|
|
5.000% quarterly
|
|
(134
|
)
|
(6)
|
|
(128
|
)
|
|
Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)
|
|
20,000
|
|
3/20/15
|
|
5.262%
|
|
5.000% quarterly
|
|
120
|
|
134
|
|
(14
|
)
|
|
46
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements (contd)
Swap Counterparty
(Reference Entity)
|
|
Notional
Amount
2
|
|
Termination
Date
|
|
Implied
Credit
Spread at
September 30,
2012
3
|
|
Periodic
Payments
Made
by the
Fund
|
|
Market
Value
4
|
|
Upfront
Premiums
Paid
(Received)
|
|
Unrealized
Appreciation
(Depreciation)
|
|
Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)
|
|
$ 10,000
|
|
3/20/20
|
|
6.410%
|
|
5.000% quarterly
|
|
$
731
|
|
$ 238
|
|
$ 493
|
|
Total
|
|
$310,000
|
|
|
|
|
|
|
|
$9,227
|
|
$3,096
|
|
$6,131
|
|
1
If the Fund is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the underlying securities comprising the referenced index.
2
The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
3
Implied credit spreads, utilized in determining the market value of credit default swap agreements on corporate issues or sovereign issues of an emerging country as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entitys credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. A credit spread identified as Defaulted indicates a credit event has occurred for the referenced entity or obligation.
4
The quoted market prices and resulting values for credit default swap agreements on asset-backed securities and credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement been closed/sold as of the period end. Decreasing market values (sell protection) or increasing market values (buy protection) when compared to the notional amount of the swap, represent a deterioration of the referenced entitys credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
Percentage shown is an annual percentage rate.
4. Derivative instruments and hedging activities
Financial Accounting Standards Board Codification Topic 815 requires enhanced disclosure about an entitys derivative 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 September 30, 2012.
|
|
Interest Rate
Risk
|
|
Foreign
Exchange
Risk
|
|
Credit
Risk
|
|
Total
|
|
Futures contracts
2
|
|
$
|
1,876
|
|
|
|
|
|
$
1,876
|
|
Forward foreign currency contracts
|
|
|
|
$2,783
|
|
|
|
2,783
|
|
Swap contracts
3
|
|
166,294
|
|
|
|
$10,165
|
|
176,459
|
|
Total
|
|
$
|
168,170
|
|
$2,783
|
|
$10,165
|
|
$181,118
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
47
|
|
|
Interest Rate
Risk
|
|
Foreign
Exchange
Risk
|
|
Credit
Risk
|
|
Total
|
|
Written options
|
|
$ 9,340
|
|
|
|
|
|
$ 9,340
|
|
Futures contracts
2
|
|
14,781
|
|
|
|
|
|
14,781
|
|
Forward foreign currency contracts
|
|
|
|
$4,286
|
|
|
|
4,286
|
|
Swap contracts
3
|
|
825,250
|
|
|
|
$938
|
|
826,188
|
|
Total
|
|
$849,371
|
|
$4,286
|
|
$938
|
|
$854,595
|
|
1
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is payables/net unrealized appreciation (depreciation).
2
Includes cumulative appreciation (depreciation) of futures contracts as reported in the footnotes. Only variation margin is reported within the receivables and/or payables of the Statement of Assets and Liabilities.
3
Values include premiums paid (received) on swap contracts which are shown separately in the Statement of Assets and Liabilities.
The following tables provide information about the effect of derivatives and hedging activities on the Funds Statement of Operations for the year ended September 30, 2012. 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
|
|
Written options
|
|
$
|
158,240
|
|
|
|
|
|
$
|
158,240
|
|
Futures contracts
|
|
140,223
|
|
|
|
|
|
140,223
|
|
Forward foreign currency contracts
|
|
|
|
$232,018
|
|
|
|
232,018
|
|
Swap contracts
|
|
(1,457,154)
|
|
|
|
$ (5,370)
|
|
(1,462,524
|
)
|
Total
|
|
$
|
(1,158,691)
|
|
$232,018
|
|
$ (5,370)
|
|
$
|
(932,043
|
)
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
|
Interest Rate
Risk
|
|
Foreign
Exchange
Risk
|
|
Credit
Risk
|
|
Total
|
|
Written options
|
|
$
|
95,370
|
|
|
|
|
|
$
|
95,370
|
|
Futures contracts
|
|
(60,176)
|
|
|
|
|
|
(60,176
|
)
|
Forward foreign currency contracts
|
|
|
|
$ (3,947)
|
|
|
|
(3,947
|
)
|
Swap contracts
|
|
648,004
|
|
|
|
$(36,487)
|
|
611,517
|
|
Total
|
|
$
|
683,198
|
|
$
(3,947)
|
|
$(36,487)
|
|
$
|
642,764
|
|
48
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
|
Notes to financial statements (contd)
During the year ended September 30, 2012, the volume of derivative activity for the fund was as follows:
|
|
Average
Market Value
|
|
Written options
|
|
$ 82,414
|
|
Forward foreign currency contracts (to buy)
|
|
269,713
|
|
Forward foreign currency contracts (to sell)
|
|
723,440
|
|
Futures contracts (to buy)
|
|
20,622,230
|
|
Futures contracts (to sell)
|
|
7,953,982
|
|
|
|
Average
Notional Balance
|
|
Interest rate swap contracts
|
|
$40,565,769
|
|
Credit default swap contracts (to buy protection)
|
|
310,000
|
|
Credit default swap contracts (to sell protection)
|
|
1,025,385
|
|
At September 30, 2012, there was no open position held in this derivative.
5. Distributions subsequent to September 30, 2012
On August 8, 2012, the Funds Board of Directors (the Board) declared three distributions, each in the amount of $0.0725 per share, payable on September 28, 2012, October 26, 2012 and November 30, 2012 to shareholders of record on September 21, 2012, October 19, 2012 and November 23, 2012, respectively. The October and November record date distributions were made subsequent to the year end of this report.
On November 8, 2012, the Board declared three distributions, each in the amount of $0.0725 per share, payable on December 21, 2012, January 25, 2013 and February 22, 2013 to shareholders of record on December 14, 2012, January 18, 2013 and February 15, 2013, respectively.
6. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal years ended September 30, were as follows:
|
|
2012
|
|
2011
|
|
Distributions Paid From:
|
|
|
|
|
|
Ordinary income
|
|
$5,356,963
|
|
$4,561,243
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
49
|
As of September 30, 2012, the components of accumulated earnings on a tax basis were as follows:
Undistributed ordinary income net
|
|
$ 3,222,375
|
|
Capital loss carryforward*
|
|
(9,974,261
|
)
|
Other book/tax temporary differences
(a)
|
|
(93,431
|
)
|
Unrealized appreciation (depreciation)
(b)
|
|
(1,905,795
|
)
|
Total accumulated earnings (losses) net
|
|
$(8,751,112
|
)
|
* As of September 30, 2012, the Fund had the following net capital loss carryforward remaining:
Year of Expiration
|
|
Amount
|
|
No Expiration
|
|
$(5,239,040)
|
**
|
9/30/2019
|
|
(4,735,221)
|
|
|
|
$(9,974,261)
|
|
These amounts will be available to offset any future taxable capital gains.
**
Under the Regulated Investment Company Modernization Act of 2010, the Fund is permitted to carry forward these capital losses for an unlimited period. However, these losses will be required to be utilized prior to the Funds other capital losses with the expiration dates listed above. Additionally, these capital losses retain their character as either short-term or long-term capital losses rather than being considered all short -term under previous law.
(a)
Other book/tax temporary differences are attributable primarily to the realization for tax purposes of unrealized losses on certain futures and foreign currency contracts, differences between book/tax accrual of interest income on securities in default and book/tax differences in the timing of the deductibility of various expenses.
(b)
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable primarily to the tax deferral of losses on wash sales and the difference between book and tax amortization methods for premiums on fixed income securities.
50
|
|
Western Asset Variable Rate Strategic Fund Inc. 2012 Annual Report
|
|
Report of independent registered public accounting firm
The Board of Directors and Shareholders
Western Asset Variable Rate Strategic Fund Inc.:
We have audited the accompanying statement of assets and liabilities of Western Asset Variable Rate Strategic Fund Inc., including the schedule of investments, as of September 30, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Funds management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 2012, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Western Asset Variable Rate Strategic Fund Inc. as of September 30, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
November 16, 2012
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
51
|
Additional information (unaudited)
Information about Directors and Officers
The business and affairs of Western Asset Variable Rate Strategic Fund Inc. (the Fund) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is c/o R. Jay Gerken, 620 Eighth Avenue,
49th Floor,
New York, New York 10018. Information pertaining to the Directors and officers of the Fund is set forth below.
Independent Directors:
Carol L. Colman
|
|
|
Year of birth
|
|
1946
|
Position(s) held with Fund
1
|
|
Director and Member of the Nominating and Audit Committees, Class III
|
Term of office
1
and length of time served
|
|
Since 2004
|
Principal occupation(s) during past five years
|
|
President, Colman Consulting Company (consulting)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
28
|
Other board memberships held by Director
|
|
None
|
|
|
|
Daniel P. Cronin
|
|
|
Year of birth
|
|
1946
|
Position(s) held with Fund
1
|
|
Director and Member of the Nominating and Audit Committees, Class III
|
Term of office
1
and length of time served
|
|
Since 2004
|
Principal occupation(s) during past five years
|
|
Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
28
|
Other board memberships held by Director
|
|
None
|
|
|
|
Paolo M. Cucchi
|
|
|
Year of birth
|
|
1941
|
Position(s) held with Fund
1
|
|
Director and Member of the Nominating and Audit Committees, Class I
|
Term of office
1
and length of time served
|
|
Since 2007
|
Principal occupation(s) during past five years
|
|
Professor of French and Italian at Drew University; formerly, Vice President and Dean of College of Liberal Arts at Drew University (1984 to 2009)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
28
|
Other board memberships held by Director
|
|
None
|
52
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
Additional information (unaudited) (contd)
Information about Directors and Officers
Independent Directors contd
Leslie H. Gelb
|
|
|
Year of birth
|
|
1937
|
Position(s) held with Fund
1
|
|
Director and Member of the Nominating and Audit Committees, Class II
|
Term of office
1
and length of time served
|
|
Since 2004
|
Principal occupation(s) during past five years
|
|
President Emeritus and Senior Board Fellow (since 2003), The Council on Foreign Relations; formerly, President, (prior to 2003), the Council on Foreign Relations; formerly, Columnist, Deputy Editorial Page Editor and Editor, Op-Ed Page, The New York Times
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
28
|
Other board memberships held by Director
|
|
Director of two registered investment companies advised by Aberdeen Asset Management Asia Limited (since 1994)
|
|
|
|
William R. Hutchinson
|
|
|
Year of birth
|
|
1942
|
Position(s) held with Fund
1
|
|
Director and Member of the Nominating and Audit Committees, Class II
|
Term of office
1
and length of time served
|
|
Since 2004
|
Principal occupation(s) during past five years
|
|
President, W.R. Hutchinson & Associates Inc. (Consulting) (since 2001)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
28
|
Other board memberships held by Director
|
|
Director (Non-Executive Chairman of the Board (since December 1, 2009)), Associated Banc Corp. (banking) (since 1994)
|
|
|
|
Riordan Roett
|
|
|
Year of birth
|
|
1938
|
Position(s) held with Fund
1
|
|
Director and Member of the Nominating and Audit Committees, Class I
|
Term of office
1
and length of time served
|
|
Since 2004
|
Principal occupation(s) during past five years
|
|
The Sarita and Don Johnston Professor of Political Science and Director of Western Hemisphere Studies, Paul H. Nitze School of Advanced International Studies, The John Hopkins University (since 1973)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
28
|
Other board memberships held by Director
|
|
None
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
53
|
Independent Directors contd
Jeswald W. Salacuse
|
|
|
Year of birth
|
|
1938
|
Position(s) held with Fund
1
|
|
Director and Member of the Nominating and Audit Committees, Class I
|
Term of office
1
and length of time served
|
|
Since 2004
|
Principal occupation(s) during past five years
|
|
Henry J. Braker Professor of Commercial Law, The Fletcher School of Law and Diplomacy, Tufts University (since 1986); President and Member, Arbitration Tribunal, World Bank/ICSID (since 2004)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
28
|
Other board memberships held by Director
|
|
Director of two registered investment companies advised by Aberdeen Asset Management Asia Limited (since 1993)
|
Interested Director and Officer:
R. Jay Gerken
2
|
|
|
Year of birth
|
|
1951
|
Position(s) held with Fund
1
|
|
Director, Chairman, President and Chief Executive Officer, Class II
|
Term of office
1
and length of time served
|
|
Since 2004
|
Principal occupation(s) during past five years
|
|
Managing Director of Legg Mason & Co., LLC (Legg Mason & Co.) (since 2005); Officer and Trustee/Director of 159 funds associated with Legg Mason Partners Fund Advisor, LLC (LMPFA) or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer (CEO) of LMPFA (since 2006); President and CEO of Smith Barney Fund Management LLC (SBFM) (formerly a registered investment advisers) (since 2002)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
159
|
Other board memberships held by Director
|
|
None
|
54
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
Additional information (unaudited) (contd)
Information about Directors and Officers
Additional Officers:
Ted P. Becker
|
|
|
Legg Mason
|
|
|
620 Eighth Avenue, New York, NY 10018
|
|
|
Year of birth
|
|
1951
|
Position(s) held with Fund
1
|
|
Chief Compliance Officer
|
Term of office
1
and length of time served
|
|
Since 2006
|
Principal occupation(s) during past five years
|
|
Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006)
|
|
|
|
Vanessa A. Williams
|
|
|
Legg Mason
|
|
|
100 First Stamford Place, Stamford, CT 06902
|
|
|
Year of birth
|
|
1979
|
Position(s) with Fund
1
|
|
Identity Theft Prevention Officer
|
Term of office
1
and length of time served
|
|
Since 2011
|
Principal occupation(s) during past five years
|
|
Vice President of Legg Mason & Co. (since 2012); Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); formerly, Assistant Vice President and Senior Compliance Officer of Legg Mason & Co. (2008 to 2011); formerly, Compliance Analyst of Legg Mason & Co. (2006 to 2008) and Legg Mason & Co. predecessors (prior to 2006)
|
|
|
|
Robert I. Frenkel
|
|
|
Legg Mason
|
|
|
100 First Stamford Place, Stamford, CT 06902
|
|
|
Year of birth
|
|
1954
|
Position(s) held with Fund
|
|
Secretary and Chief Legal Officer
|
Term of office
1
and length of time served
|
|
Since 2004
|
Principal occupation(s) during past five years
|
|
Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
55
|
Additional Officers contd
Thomas C. Mandia
|
|
|
Legg Mason
|
|
|
100 First Stamford Place, Stamford, CT 06902
|
|
|
Year of birth
|
|
1962
|
Position(s) held with Fund
1
|
|
Assistant Secretary
|
Term of office
1
and length of time served
|
|
Since 2006
|
Principal occupation(s) during past five years
|
|
Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of SBFM and CFM (since 2002)
|
|
|
|
Richard F. Sennett
|
|
|
Legg Mason
|
|
|
100 International Drive, Baltimore, MD 21202
|
|
|
Year of birth
|
|
1970
|
Position(s) held with Fund
1
|
|
Principal Financial Officer
|
Term of office
1
and length of time served
|
|
Since 2011
|
Principal occupation(s) during past five years
|
|
Principal Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SECs Division of Investment Management (2007 to 2011); formerly, Assistant Chief Accountant within the SECs Division of Investment Management (2002 to 2007)
|
|
|
|
Steven Frank
|
|
|
Legg Mason
|
|
|
55 Water Street, New York, NY 10041
|
|
|
Year of birth
|
|
1967
|
Position(s) held with Fund
1
|
|
Treasurer
|
Term of office
1
and length of time served
|
|
Since 2010
|
Principal occupation(s) during past five years
|
|
Vice President of Legg Mason & Co. and Legg Mason & Co. predecessors (since 2002); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010)
|
56
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
Additional information (unaudited) (contd)
Information about Directors and Officers
Additional Officers contd
Jeanne M. Kelly
|
|
|
Legg Mason
|
|
|
620 Eighth Avenue, New York, NY 10018
|
|
|
Year of birth
|
|
1951
|
Position(s) with Fund
1
|
|
Senior Vice President
|
Term of office
1
and length of time served
|
|
Since 2007
|
Principal occupation(s) during past five years
|
|
Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005)
|
Directors who are not interested persons of the Fund within the meaning of Section 2(a)(19) of the 1940 Act.
1
The Funds Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2013, year 2014 and year 2015, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Funds executive officers are chosen each year at the first meeting of the Funds Board of Directors following the Annual Meeting of Stockholders, to hold office until the meeting of the Board following the next Annual Meeting of Stockholders and until their successors are duly elected and qualified.
2
Mr. Gerken is an interested person of the Fund as defined in the 1940 Act because Mr. Gerken is an officer of LMPFA and certain of its affiliates.
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
57
|
Annual chief executive officer and principal financial officer certifications (unaudited)
The Funds Chief Executive Officer (CEO) has submitted to the NYSE the required annual certification and the Fund also has included the certifications of the Funds CEO and Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Funds Form N-CSR filed with the SEC for the period of this report.
58
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
Other shareholder communications regarding accounting matters (unaudited)
The Funds Audit Committee has established guidelines and procedures regarding the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (collectively, Accounting Matters). Persons with complaints or concerns regarding Accounting Matters may submit their complaints to the Chief Compliance Officer (CCO). Persons who are uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Funds Audit Committee Chair (together with the CCO, Complaint Officers). Complaints may be submitted on an anonymous basis.
The CCO may be contacted at:
Legg Mason & Co., LLC
Compliance Department
620 Eighth Avenue, 49th Floor
New York, New York 10018
Complaints may also be submitted by telephone at 1-800-742-5274.
Complaints submitted through this number will be received by the CCO.
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
59
|
Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all distributions, on your common shares (the Common Shares) will be automatically reinvested by American Stock Transfer & Trust Company (AST), as agent for the holders of Common Shares (the Common Shareholders) (the Plan Agent), in additional Common Shares under the 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 AST, as dividend paying agent.
If you participate in the Plan, the number of Common Shares you will receive will be determined as follows:
1. If the market price of the Common Shares on the record date (or, if the record date is not a New York Stock Exchange (the Exchange) trading day, the immediately preceding trading day) for determining shareholders eligible to receive the relevant dividend or distribution (the determination date) is equal to or exceeds 98% of the net asset value per share of the Common Shares, the Fund will issue new Common Shares at a price equal to the greater of (a) 98% of the net asset value per share at the close of trading on the Exchange on the determination date or (b) 95% of the market price per share of the Common Shares on the determination date.
2. If 98% of the net asset value per share of the Common Shares exceeds the market price of the Common Shares on the determination date, the Plan Agent will receive the distribution in cash and will buy Common Shares in the open market, on the Exchange or elsewhere, for your account as soon as practicable commencing on the trading day following the determination date and terminating no later than the earlier of (a) 30 days after the distribution payment date, or (b) the record date for the next succeeding distribution to be made to the Common Shareholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price rises so that it equals or exceeds 98% of the net asset value per share of the Common Shares at the close of trading on the Exchange on the determination 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 Shares in the open market and the Fund shall issue the remaining Common Shares at a price per share equal to the greater of (a) 98% of the net asset value per share at the close of trading on the Exchange on the determination date or (b) 95% of the then current market price per share.
The Plan Agent maintains all participants accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. Common Shares in your account will be held by the Plan Agent in noncertificated form. Any proxy you receive will include all Common Shares you have received under the Plan.
60
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
Dividend reinvestment plan (unaudited) (contd)
You may withdraw from the Plan by notifying the Plan Agent in writing at 59 Maiden Lane, New York, New York 10038 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 distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agents investment of the most recently declared distribution on the Common Shares. The Plan may be terminated by the Fund upon notice in writing mailed to Common Shareholders at least 30 days prior to the record date for the payment of any distribution by the Fund for which the termination is to be effective. Upon any termination, you will be sent a certificate or certificates for the full Common Shares held for you under the Plan and cash for any fractional Common Shares. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your shares on your behalf. You will be charged a service charge and the Plan Agent is authorized to deduct brokerage charges actually incurred for this transaction from the proceeds.
There is no service charge for reinvestment of your distributions in Common Shares. 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 distributions will be automatically reinvested in additional Common Shares, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Shares 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. Investors will be subject to income tax on amounts reinvested under the plan.
Automatically reinvesting distributions does not mean that you do not have to pay income taxes due upon receiving distributions.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan and your account may be obtained from the Plan Agent at 1-888-888-0151.
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
61
|
Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended September 30, 2012:
Record date:
|
|
Monthly
|
|
3/23/2012
|
|
Monthly
|
|
|
October 2011 through
|
|
|
|
April 2012 through
|
Payable date:
|
|
February 2012
|
|
3/30/2012
|
|
September 2012
|
Ordinary income:
|
|
|
|
|
|
|
Qualified dividend income for individuals
|
|
0.03%
|
|
0.01%
|
|
|
Dividends qualifying for the dividends received deduction for corporations
|
|
0.03%
|
|
0.01%
|
|
|
Please retain this information for your records.
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 and certain closed-end funds managed or sub-advised by Legg Mason or its affiliates. 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:
·
Personal information included on applications or other forms;
·
Account balances, transactions, and mutual fund holdings and positions;
·
Online account access user IDs, passwords, security challenge question responses; and
·
Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individuals total debt, payment history, etc.).
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:
·
Employees, agents, and affiliates on a need to know basis to enable the Funds to conduct ordinary business or comply with obligations to government regulators;
·
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 marketing services solely for the Funds;
·
The Funds representatives such as legal counsel, accountants and auditors; and
·
Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
|
NOT PART OF THE ANNUAL REPORT
|
|
Legg Mason Funds Privacy and Security Notice (contd)
Except as otherwise permitted by applicable law, companies acting on the Funds behalf 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, or if you have questions about the Funds privacy practices, 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.lmcef.com
, or contact the Fund at 1-888-777-0102.
Revised April 2011
|
NOT PART OF THE ANNUAL REPORT
|
|
Western Asset Variable Rate Strategic Fund Inc.
Western Asset Variable Rate Strategic 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 common stock in the open market.
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 on Form N-Q. The Funds Forms N-Q are available on the SECs website at www.sec.gov. The Funds Forms N-Q may be reviewed and copied at the SECs Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 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) on the Funds website at
www.lmcef.com
and (3) on the SECs website at www.sec.gov.
This report is transmitted to the shareholders of Western Asset Variable Rate Strategic 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.
American Stock
Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
WASX01047 11/12 SR12-1791