WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
|
|
|
Schedule of investments (unaudited) (contd)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITY
|
|
RATE
|
|
|
MATURITY
DATE
|
|
|
FACE
AMOUNT
|
|
|
VALUE
|
|
COLLATERALIZED MORTGAGE OBLIGATIONS - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WaMu Mortgage Pass-Through Certificates, 2003-AR11 A6
|
|
|
2.446
|
%
|
|
|
10/25/33
|
|
|
|
296,595
|
|
|
$
|
299,019
|
(b)
|
WaMu Mortgage Pass-Through Certificates, 2004-AR14 A1
|
|
|
2.406
|
%
|
|
|
1/25/35
|
|
|
|
172,677
|
|
|
|
172,157
|
(b)
|
WaMu Mortgage Pass-Through Certificates, 2005-AR13 A1C3
|
|
|
0.655
|
%
|
|
|
10/25/45
|
|
|
|
288,326
|
|
|
|
251,795
|
(b)
|
WaMu Mortgage Pass-Through Certificates, 2007-HY3 1A1
|
|
|
2.283
|
%
|
|
|
3/25/37
|
|
|
|
162,293
|
|
|
|
130,787
|
(b)
|
WaMu Mortgage Pass-Through Certificates, 2007-OA6 1A
|
|
|
0.955
|
%
|
|
|
7/25/47
|
|
|
|
1,153,900
|
|
|
|
1,003,856
|
(b)
|
WaMu Mortgage Pass-Through Certificates, 2007-OA6 2A
|
|
|
2.213
|
%
|
|
|
7/25/47
|
|
|
|
509,648
|
|
|
|
369,425
|
(b)
|
Washington Mutual Inc., 2004-AR12 A2A
|
|
|
0.578
|
%
|
|
|
10/25/44
|
|
|
|
188,630
|
|
|
|
176,296
|
(b)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2003-AR8
|
|
|
0.525
|
%
|
|
|
10/25/45
|
|
|
|
676,066
|
|
|
|
617,747
|
(b)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2004-AR11
|
|
|
2.435
|
%
|
|
|
10/25/34
|
|
|
|
226,519
|
|
|
|
223,047
|
(b)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2004-AR13 A1A
|
|
|
0.548
|
%
|
|
|
11/25/34
|
|
|
|
509,079
|
|
|
|
494,577
|
(b)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2005-AR01 A1A
|
|
|
0.485
|
%
|
|
|
1/25/45
|
|
|
|
33,527
|
|
|
|
32,364
|
(b)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2005-AR01 A2A3
|
|
|
0.565
|
%
|
|
|
1/25/45
|
|
|
|
150,511
|
|
|
|
144,627
|
(b)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2006-AR08 1A3
|
|
|
2.402
|
%
|
|
|
8/25/46
|
|
|
|
281,489
|
|
|
|
245,062
|
(b)
|
Washington Mutual Inc. Mortgage Pass-Through Certificates, 2006-AR11 1A
|
|
|
1.104
|
%
|
|
|
9/25/46
|
|
|
|
456,734
|
|
|
|
392,644
|
(b)
|
Washington Mutual Inc. Pass-Through Certificates, 2003-AR10 A7
|
|
|
2.427
|
%
|
|
|
10/25/33
|
|
|
|
131,430
|
|
|
|
134,017
|
(b)
|
Washington Mutual Inc. Pass-Through Certificates, 2005-AR08 2AB3
|
|
|
0.525
|
%
|
|
|
7/25/45
|
|
|
|
440,362
|
|
|
|
411,288
|
(b)
|
Washington Mutual Inc. Pass-Through Certificates, 2006-AR02 A1A
|
|
|
1.079
|
%
|
|
|
4/25/46
|
|
|
|
262,088
|
|
|
|
202,815
|
(b)
|
Wells Fargo Mortgage Backed Securities Trust, 2004-DD 1A1
|
|
|
2.615
|
%
|
|
|
1/25/35
|
|
|
|
534,797
|
|
|
|
533,240
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost - $44,292,266)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,870,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE BONDS & NOTES - 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TELECOMMUNICATION SERVICES - 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified Telecommunication Services - 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axtel SAB de CV, Senior Secured Notes, Step Bond
(Cost - $32,734)
|
|
|
7.000
|
%
|
|
|
1/31/20
|
|
|
|
214,800
|
MXN
|
|
|
23,279
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORTGAGE-BACKED SECURITIES - 2.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA - 2.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association (GNMA)
|
|
|
6.500
|
%
|
|
|
8/15/34
|
|
|
|
293,670
|
|
|
|
333,789
|
(d)
|
Government National Mortgage Association (GNMA) II
|
|
|
1.201
|
%
|
|
|
8/20/58
|
|
|
|
165,311
|
|
|
|
167,127
|
(b)(d)
|
Government National Mortgage Association (GNMA) II
|
|
|
1.540
|
%
|
|
|
10/20/59-1/20/60
|
|
|
|
945,191
|
|
|
|
966,322
|
(b)(d)
|
Government National Mortgage Association (GNMA) II
|
|
|
3.140
|
%
|
|
|
10/20/59
|
|
|
|
67,089
|
|
|
|
70,290
|
(b)(d)
|
Government National Mortgage Association (GNMA) II
|
|
|
1.510
|
%
|
|
|
12/20/59
|
|
|
|
763,915
|
|
|
|
779,638
|
(b)(d)
|
Government National Mortgage Association (GNMA) II
|
|
|
1.514
|
%
|
|
|
12/20/59
|
|
|
|
221,234
|
|
|
|
225,503
|
(b)(d)
|
Government National Mortgage Association (GNMA) II
|
|
|
1.364
|
%
|
|
|
7/20/60
|
|
|
|
181,905
|
|
|
|
184,782
|
(b)(d)
|
See
Notes to Schedule of Investments.
9
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
|
|
|
Schedule of investments (unaudited) (contd)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITY
|
|
RATE
|
|
|
MATURITY
DATE
|
|
|
FACE
AMOUNT
|
|
|
VALUE
|
|
MORTGAGE-BACKED SECURITIES - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association (GNMA) II
|
|
|
1.378
|
%
|
|
|
7/20/60
|
|
|
|
182,677
|
|
|
$
|
185,224
|
(b)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL MORTGAGE-BACKED SECURITIES
(Cost - $2,912,754)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,912,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MUNICIPAL BONDS - 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Carolina - 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Carolina State Education Assistance Authority Revenue, Student Loan Backed Notes (Cost - $377,445)
|
|
|
1.166
|
%
|
|
|
10/25/41
|
|
|
|
400,000
|
|
|
|
391,084
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SENIOR LOANS - 4.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSUMER DISCRETIONARY - 1.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels, Restaurants & Leisure - 0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caesars Entertainment Operating Co., Extended Term Loan B6
|
|
|
5.488
|
%
|
|
|
1/26/18
|
|
|
|
220,806
|
|
|
|
211,266
|
(h)
|
Dunkin Brands Inc., Term Loan B3
|
|
|
3.750
|
%
|
|
|
2/14/20
|
|
|
|
299,182
|
|
|
|
300,651
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Hotels, Restaurants & Leisure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media - 1.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter Communications Operating LLC, Term Loan F
|
|
|
3.000
|
%
|
|
|
1/4/21
|
|
|
|
299,248
|
|
|
|
297,078
|
(h)
|
CSC Holdings Inc., New Term Loan B
|
|
|
2.669
|
%
|
|
|
4/17/20
|
|
|
|
249,373
|
|
|
|
247,303
|
(h)
|
Univision Communications Inc., Converted Extended Term Loan
|
|
|
4.500
|
%
|
|
|
3/2/20
|
|
|
|
793,458
|
|
|
|
798,984
|
(h)
|
Virgin Media Investment Holdings Ltd., USD Term Loan B
|
|
|
0.000
|
%
|
|
|
6/8/20
|
|
|
|
250,000
|
|
|
|
250,833
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Media
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,594,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Retail - 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michaels Stores Inc., New Term Loan
|
|
|
3.750
|
%
|
|
|
1/28/20
|
|
|
|
249,373
|
|
|
|
250,717
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CONSUMER DISCRETIONARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,356,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSUMER STAPLES - 1.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Products - 1.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Del Monte Foods Co., Term Loan
|
|
|
4.000
|
%
|
|
|
3/8/18
|
|
|
|
929,796
|
|
|
|
933,529
|
(h)
|
H.J. Heinz Co., Term Loan B2
|
|
|
3.500
|
%
|
|
|
6/5/20
|
|
|
|
299,248
|
|
|
|
301,916
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Food Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,235,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Household Products - 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Visant Corp., Term Loan B
|
|
|
5.250
|
%
|
|
|
12/22/16
|
|
|
|
459,604
|
|
|
|
454,577
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CONSUMER STAPLES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,690,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEALTH CARE - 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care Providers & Services - 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Envision Healthcare Corp., Term Loan
|
|
|
4.000
|
%
|
|
|
5/25/18
|
|
|
|
240,514
|
|
|
|
241,630
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INDUSTRIALS - 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airlines - 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Airlines Inc., Exit Term Loan
|
|
|
3.750
|
%
|
|
|
6/27/19
|
|
|
|
299,248
|
|
|
|
302,241
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INFORMATION TECHNOLOGY - 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT Services - 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Data Corp., Extended 2018 Term Loan B
|
|
|
4.164
|
%
|
|
|
3/23/18
|
|
|
|
301,701
|
|
|
|
302,436
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TELECOMMUNICATION SERVICES - 0.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified Telecommunication Services - 0.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intelsat Jackson Holdings SA, Term Loan B1
|
|
|
3.750
|
%
|
|
|
4/2/18
|
|
|
|
711,984
|
|
|
|
715,820
|
(h)
|
Windstream Corp., Term Loan B4
|
|
|
3.500
|
%
|
|
|
1/23/20
|
|
|
|
249,370
|
|
|
|
250,148
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL TELECOMMUNICATION SERVICES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
965,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Schedule of Investments.
10
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
|
|
|
Schedule of investments (unaudited) (contd)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITY
|
|
RATE
|
|
|
MATURITY
DATE
|
|
|
FACE
AMOUNT
|
|
|
VALUE
|
|
UTILITIES - 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utilities - 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipower Resources Holdings LLC, First Lien Term Loan
|
|
|
4.250
|
%
|
|
|
12/21/18
|
|
|
|
249,027
|
|
|
$
|
250,505
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SENIOR LOANS
(Cost - $5,910,749)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,109,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOVEREIGN BONDS - 4.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil - 2.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Nacional de Desenvolvimento Economico e Social, Senior Notes
|
|
|
3.375
|
%
|
|
|
9/26/16
|
|
|
|
420,000
|
|
|
|
425,250
|
(a)
|
Federative Republic of Brazil, Notes
|
|
|
10.000
|
%
|
|
|
1/1/14
|
|
|
|
421,000
|
BRL
|
|
|
178,447
|
|
Federative Republic of Brazil, Notes
|
|
|
10.000
|
%
|
|
|
1/1/17
|
|
|
|
5,985,000
|
BRL
|
|
|
2,404,449
|
|
Federative Republic of Brazil, Notes
|
|
|
10.000
|
%
|
|
|
1/1/21
|
|
|
|
521,000
|
BRL
|
|
|
192,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Brazil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,200,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico - 0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Mexican States, Bonds
|
|
|
6.500
|
%
|
|
|
6/9/22
|
|
|
|
7,270,000
|
MXN
|
|
|
564,280
|
|
United Mexican States, Medium-Term Notes
|
|
|
6.750
|
%
|
|
|
9/27/34
|
|
|
|
265,000
|
|
|
|
314,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russia - 0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russian Foreign Bond - Eurobond, Senior Bonds
|
|
|
12.750
|
%
|
|
|
6/24/28
|
|
|
|
254,000
|
|
|
|
431,165
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venezuela - 0.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bolivarian Republic of Venezuela, Senior Bonds
|
|
|
5.750
|
%
|
|
|
2/26/16
|
|
|
|
912,000
|
|
|
|
777,024
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SOVEREIGN BONDS
(Cost - $6,338,381)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,287,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
|
|
|
|
|
COMMON STOCKS - 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INDUSTRIALS - 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building Products - 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nortek Inc.
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
1,641
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine - 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeepOcean Group Holding AS
|
|
|
|
|
|
|
|
|
|
|
3,101
|
|
|
|
102,195
|
(e)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMMON STOCKS
(Cost - $73,834)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS
BEFORE SHORT-TERM INVESTMENTS
(Cost - $138,605,107)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,272,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FACE
AMOUNT
|
|
|
|
|
SHORT-TERM INVESTMENTS - 0.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements - 0.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Street Bank & Trust Co. repurchase agreement dated 12/31/13; Proceeds at maturity - $650,000; (Fully
collateralized by U.S. government agency obligations, 2.000% due 1/30/23; Market value - $667,254)
(Cost - $650,000)
|
|
|
0.000
|
%
|
|
|
1/2/14
|
|
|
|
650,000
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS - 112.4%
(Cost - $139,255,107#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,922,174
|
|
Liabilities in Excess of Other Assets - (12.4)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,706,741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NET ASSETS - 100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,215,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face amount denominated in U.S. dollars, unless otherwise noted.
|
*
|
Non-income producing security.
|
(a)
|
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.
|
(b)
|
Variable rate security. Interest rate disclosed is as of the most recent information available.
|
(c)
|
Security has no maturity date. The date shown represents the next call date.
|
(d)
|
All or a portion of this security is held by the counterparty as collateral for open reverse repurchase agreements.
|
(e)
|
Security is valued in good faith in accordance with procedures approved by the Board of Directors (See Note 1).
|
See
Notes to Schedule of Investments.
11
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
|
|
|
Schedule of Investments (unaudited) (contd)
|
|
December 31, 2013
|
(f)
|
The coupon payment on these securities is currently in default as of December 31, 2013.
|
(h)
|
Interest rates disclosed represent the effective rates on senior loans. Ranges in interest rates are attributable to multiple contracts under the same loan.
|
(i)
|
All or a portion of this loan is unfunded as of December 31, 2013. The interest rate for fully unfunded term loans is to be determined.
|
#
|
Aggregate cost for federal income tax purposes is substantially the same.
|
|
|
|
Abbreviations used in this schedule:
|
|
|
ARM
|
|
Adjustable Rate Mortgage
|
BRL
|
|
Brazilian Real
|
CDO
|
|
Collateralized Debt Obligation
|
CLO
|
|
Collateral Loan Obligation
|
IO
|
|
Interest Only
|
MXN
|
|
Mexican Peso
|
PAC
|
|
Planned Amortization Class
|
STRIPS
|
|
Separate Trading of Registered Interest and Principal Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE OF WRITTEN OPTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITY
|
|
EXPIRATION
DATE
|
|
|
STRIKE
PRICE
|
|
|
CONTRACTS
|
|
|
VALUE
|
|
Eurodollar Mid Curve 2-Year Futures, Put (Cost - $ 29,007)
|
|
|
6/13/14
|
|
|
$
|
98.38
|
|
|
|
44
|
|
|
$
|
37,125
|
|
See
Notes to Schedule of Investments.
12
Notes to Schedule of Investments (unaudited)
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 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).
(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.
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.
13
Notes to Schedule of Investments (unaudited) (continued)
GAAP establishes a disclosure hierarchy that categorizes the inputs to
valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
|
|
|
Level 1 quoted prices in active markets for identical investments
|
|
|
|
Level 2 other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk,
etc.)
|
|
|
|
Level 3 significant unobservable inputs (including the Funds own assumptions in determining the fair value of investments)
|
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with
investing in those securities.
The following is a summary of the inputs used in valuing the Funds
assets and liabilities carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
DESCRIPTION
|
|
QUOTED PRICES
(LEVEL
1)
|
|
|
OTHER SIGNIFICANT
OBSERVABLE
INPUTS
(LEVEL 2)
|
|
|
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)
|
|
|
TOTAL
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds & notes
|
|
|
|
|
|
$
|
42,758,181
|
|
|
|
|
|
|
$
|
42,758,181
|
|
Asset-backed securities
|
|
|
|
|
|
|
38,023,879
|
|
|
$
|
791,500
|
|
|
|
38,815,379
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
44,202,716
|
|
|
|
668,246
|
|
|
|
44,870,962
|
|
Convertible bonds & notes
|
|
|
|
|
|
|
23,279
|
|
|
|
|
|
|
|
23,279
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
2,912,675
|
|
|
|
|
|
|
|
2,912,675
|
|
Municipal bonds
|
|
|
|
|
|
|
391,084
|
|
|
|
|
|
|
|
391,084
|
|
Senior loans
|
|
|
|
|
|
|
6,109,634
|
|
|
|
|
|
|
|
6,109,634
|
|
Sovereign bonds
|
|
|
|
|
|
|
5,287,144
|
|
|
|
|
|
|
|
5,287,144
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
|
|
$
|
1,641
|
|
|
|
|
|
|
|
102,195
|
|
|
|
103,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$
|
1,641
|
|
|
$
|
139,708,592
|
|
|
$
|
1,561,941
|
|
|
$
|
141,272,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
650,000
|
|
|
|
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,641
|
|
|
$
|
140,358,592
|
|
|
$
|
1,561,941
|
|
|
$
|
141,922,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
|
$
|
10,559
|
|
|
|
|
|
|
|
|
|
|
$
|
10,559
|
|
Forward foreign currency contracts
|
|
|
|
|
|
$
|
139,451
|
|
|
|
|
|
|
|
139,451
|
|
OTC interest rate swaps
|
|
|
|
|
|
|
556,312
|
|
|
|
|
|
|
|
556,312
|
|
OTC credit default swaps on corporate issues - buy protection
|
|
|
|
|
|
|
4,105
|
|
|
|
|
|
|
|
4,105
|
|
Centrally cleared interest rate swaps
|
|
|
|
|
|
|
95,178
|
|
|
|
|
|
|
|
95,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other financial instruments
|
|
$
|
10,559
|
|
|
$
|
795,046
|
|
|
|
|
|
|
$
|
805,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,200
|
|
|
$
|
141,153,638
|
|
|
$
|
1,561,941
|
|
|
$
|
142,727,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
DESCRIPTION
|
|
QUOTED PRICES
(LEVEL
1)
|
|
|
OTHER SIGNIFICANT
OBSERVABLE
INPUTS
(LEVEL 2)
|
|
|
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)
|
|
|
TOTAL
|
|
Other financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written options
|
|
$
|
37,125
|
|
|
|
|
|
|
|
|
|
|
$
|
37,125
|
|
Forward foreign currency contracts
|
|
|
|
|
|
$
|
1,377
|
|
|
|
|
|
|
|
1,377
|
|
OTC interest rate swaps
|
|
|
|
|
|
|
11,932
|
|
|
|
|
|
|
|
11,932
|
|
OTC credit default swaps on corporate issues - buy protection
|
|
|
|
|
|
|
3,721
|
|
|
|
|
|
|
|
3,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,125
|
|
|
$
|
17,030
|
|
|
|
|
|
|
$
|
54,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Schedule of Investments for additional detailed categorizations.
|
|
Values include any premiums paid or received with respect to swap contracts.
|
14
Notes to Schedule of Investments (unaudited) (continued)
The following is a reconciliation of investments in which significant
unobservable inputs (Level 3) were used in determining fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCKS
|
|
|
|
|
INVESTMENTS IN SECURITIES
|
|
ASSET-
BACKED
SECURITIES
|
|
|
COLLATERALIZED
MORTGAGE
OBLIGATIONS
|
|
|
INDUSTRIALS
|
|
|
TOTAL
|
|
Balance as of September 30, 2013
|
|
|
|
|
|
$
|
699,136
|
|
|
$
|
95,165
|
|
|
$
|
794,301
|
|
Accrued premiums/discounts
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Realized gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized appreciation (depreciation)
(1)
|
|
|
(43
|
)
|
|
|
(1,776
|
)
|
|
|
7,030
|
|
|
|
5,211
|
|
Purchases
|
|
|
791,500
|
|
|
|
|
|
|
|
|
|
|
|
791,500
|
|
Sales
|
|
|
|
|
|
|
(29,114
|
)
|
|
|
|
|
|
|
(29,114
|
)
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
791,500
|
|
|
$
|
668,246
|
|
|
$
|
102,195
|
|
|
$
|
1,561,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation (depreciation) for investments in securitiesstill held at December 31, 2013
(1)
|
|
$
|
(43
|
) $
|
|
|
(1,776
|
)
|
|
$
|
7,030
|
|
|
$
|
5,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Funds policy is to recognize transfers between levels as of the end of the reporting period.
(1)
|
Change in unrealized appreciation (depreciation) includes net unrealized appreciation (depreciation) resulting from changes in investment values during the reporting
period and the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized.
|
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 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.
15
Notes to Schedule of Investments (unaudited) (continued)
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. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or
receivable. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded.
Futures contracts involve, to varying degrees, risk of loss. 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.
When entering into a forward foreign currency contract, 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. Swap agreements are privately negotiated in the over-the-counter market (OTC Swaps) or may be
executed on a registered exchange (Centrally Cleared Swaps). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.
Swap contracts are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of Centrally Cleared Swaps, if any, is recorded as a
receivable or payable for variation margin. 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.
The Funds maximum exposure in the event of a defined credit event on a credit default swap to sell protection is the notional amount. As of December 31, 2013, the Fund did not hold any credit
default swaps to sell protection.
For average notional amounts of swaps held during the period ended
December 31, 2013, see Note 3.
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.
16
Notes to Schedule of Investments (unaudited) (continued)
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 the Schedule of Investments 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. 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.
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 swaptions to manage exposure to fluctuations in interest rates or to enhance yield. Swaption contracts
17
Notes to Schedule of Investments (unaudited) (continued)
written by the Fund represent an option that gives the purchaser the right,
but not the obligation, to enter into a previously agreed upon swap contract at a future date. Swaption contracts purchased by the Fund represent an option that gives the Fund the right, but not the obligation, to enter into a previously agreed upon
swap contract at a future date.
When the Fund writes a swaption, an amount equal to the premium received by the Fund is recorded as a
liability, the value of which is marked-to-market daily to reflect the current market value of the swaption written. If the swaption expires, the Fund realizes a gain equal to the amount of the premium received.
When the Fund purchases a swaption, an amount equal to the premium paid by the Fund is recorded as an investment, 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.
(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.
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 where
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 December 31, 2013, 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
18
Notes to Schedule of Investments (unaudited) (continued)
each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions
may impact the assessment of such counterparty risk by the 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.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives while collateral terms are contract
specific for over-the-counter traded derivatives. Securities pledged as collateral, if any, to cover the obligations of the Fund under derivative contracts, are noted in the Schedule of Investments.
As of December 31, 2013, the Fund held written options, forward foreign currency contracts, OTC credit default swaps and OTC interest rate swaps
with credit related contingent features which had a liability position of $54,155. 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.
(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.
(o) Foreign investment risks.
The Funds investments in foreign securities may involve
risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign
currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political,
social or economic developments, all of which affect the market and/or credit risk of the investments.
(p) 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.
(q) Security transactions.
Security transactions are accounted for on a trade date basis.
2. Investments
At December 31,
2013, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
9,254,376
|
|
Gross unrealized depreciation
|
|
|
(6,587,309
|
)
|
|
|
|
|
|
Net unrealized appreciation
|
|
$
|
2,667,067
|
|
|
|
|
|
|
19
Notes to Schedule of Investments (unaudited) (continued)
Transactions in reverse repurchase
agreements for the Fund during the period ended December 31, 2013 were as follows:
|
|
|
|
|
Average
Daily
Balance*
|
|
Weighted
Average
Interest Rate*
|
|
Maximum
Amount
Outstanding
|
$12,809,713
|
|
0.48%
|
|
$16,618,751
|
*
|
Averages based on the number of days that Fund had reverse repurchase agreements outstanding.
|
Interest rates on reverse repurchase agreements ranged from 0.25% to 0.92% during the period ended December 31, 2013. Interest expense incurred on reverse repurchase agreements totaled $15,501.
At December 31, 2013, the Fund had the following open reverse repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Rate
|
|
|
Effective Date
|
|
Maturity Date
|
|
|
Face Amount of Reverse
Repurchase Agreements
|
|
Barclays
|
|
|
0.65
|
%
|
|
11/27/2013
|
|
|
2/27/2014
|
|
|
$
|
1,113,421
|
|
Barclays
|
|
|
0.65
|
%
|
|
12/10/2013
|
|
|
3/10/2014
|
|
|
|
835,078
|
|
Deutsche Bank
|
|
|
0.92
|
%
|
|
12/16/2013
|
|
|
1/16/2014
|
|
|
|
3,908,068
|
|
Deutsche Bank
|
|
|
0.34
|
%
|
|
12/16/2013
|
|
|
1/16/2014
|
|
|
|
10,716,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,573,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 31, 2013, 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 $18,605,490.
At December 31, 2013, the Fund had the following open futures contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Contracts
|
|
|
Expiration
Date
|
|
|
Basis
Value
|
|
|
Market
Value
|
|
|
Unrealized
Gain
|
|
Contracts to Sell:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury 5-Year Notes
|
|
|
1
|
|
|
|
3/14
|
|
|
$
|
120,825
|
|
|
$
|
119,313
|
|
|
$
|
1,512
|
|
U.S. Treasury 10-Year Notes
|
|
|
5
|
|
|
|
3/14
|
|
|
|
624,281
|
|
|
|
615,234
|
|
|
|
9,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on open futures contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian Real
|
|
Citibank N.A.
|
|
|
1,108,956
|
|
|
$
|
468,620
|
|
|
|
1/15/14
|
|
|
$
|
(1,377
|
)
|
Contracts to Sell:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian Real
|
|
Citibank N.A.
|
|
|
722,098
|
|
|
|
305,142
|
|
|
|
1/15/14
|
|
|
|
19,178
|
|
Brazilian Real
|
|
Citibank N.A.
|
|
|
5,842,244
|
|
|
|
2,468,800
|
|
|
|
1/15/14
|
|
|
|
120,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on open forward foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
138,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Notes to Schedule of Investments (unaudited) (continued)
During the period ended December 31,
2013, written option transactions for the Fund were as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Contracts
|
|
|
Premiums
|
|
Written options, outstanding as of September 30, 2013
|
|
|
|
|
|
|
|
|
Options written
|
|
|
44
|
|
|
$
|
29,007
|
|
Options closed
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written options, outstanding as of December 31, 2013
|
|
|
44
|
|
|
$
|
29,007
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013, the Fund had the following open swap contract:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC INTEREST RATE
SWAPS
|
|
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.
|
|
$
|
5,000,000
|
|
|
|
9/6/14
|
|
|
|
0.633
|
% Semi-Annually
|
|
|
3-Month LIBOR
|
|
|
|
|
|
|
$
|
(11,932
|
)
|
Barclays Capital Inc.
|
|
|
2,500,000
|
|
|
|
9/7/22
|
|
|
|
1.670
|
%
Semi-Annually
|
|
|
3-Month LIBOR
|
|
|
|
|
|
|
|
239,708
|
|
Credit Suisse First Boston Inc.
|
|
|
5,000,000
|
|
|
|
5/10/22
|
|
|
|
1.985
|
% Semi-Annually
|
|
|
3-Month LIBOR
|
|
|
|
|
|
|
|
316,604
|
|
Total
|
|
$
|
12,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
544,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC CREDIT DEFAULT SWAPS ON CORPORATE
ISSUESBUY PROTECTION
1
|
|
SWAP COUNTERPARTY
(REFERENCE ENTITY)
|
|
NOTIONAL
AMOUNT
2
|
|
|
TERMINATION
DATE
|
|
|
IMPLIED
CREDIT
SPREAD AT
DECEMBER
31, 2013
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
|
|
|
|
2.19
|
%
|
|
|
5.000
|
% quarterly
|
|
$
|
(3,044
|
)
|
|
$
|
212
|
|
|
$
|
(3,256
|
)
|
Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)
|
|
|
20,000
|
|
|
|
3/20/15
|
|
|
|
2.19
|
%
|
|
|
5.000
|
% quarterly
|
|
|
(677
|
)
|
|
|
66
|
|
|
|
(743
|
)
|
Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480% due 11/15/13)
|
|
|
120,000
|
|
|
|
3/20/20
|
|
|
|
5.66
|
%
|
|
|
5.000
|
% quarterly
|
|
|
3,789
|
|
|
|
1,963
|
|
|
|
1,826
|
|
Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13)
|
|
|
10,000
|
|
|
|
3/20/20
|
|
|
|
5.66
|
%
|
|
|
5.000
|
% quarterly
|
|
|
316
|
|
|
|
198
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
384
|
|
|
$
|
2,439
|
|
|
$
|
(2,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CENTRALLY CLEARED INTEREST RATE
SWAPS
|
|
Swap Counterparty
|
|
Notional
Amount
|
|
|
Termination
Date
|
|
|
Payments
Made by
the
Fund
|
|
|
Payments Received
by the Fund
|
|
|
Upfront
Premiums
Paid
(Received)
|
|
|
Unrealized
Appreciation
|
|
Credit Suisse First Boston Inc.
|
|
$
|
5,000,000
|
|
|
|
9/23/20
|
|
|
|
2.289
|
% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
|
|
|
$
|
37,207
|
|
Credit Suisse First Boston Inc.
|
|
|
10,000,000
|
|
|
|
10/18/18
|
|
|
|
1.580
|
% Semi-Annually
|
|
|
3-Month LIBOR
|
|
|
|
|
|
|
|
57,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Notes to Schedule of Investments (unaudited) (continued)
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
referenced obligation or 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 referenced
obligation or 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.
3. Derivative instruments and hedging activities
GAAP requires enhanced disclosure about an entitys derivative and hedging activities.
The following is a summary of the Funds derivative instruments categorized by risk exposure at December 31,
2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures Contracts
|
|
|
Forward Foreign Currency
Contracts
|
|
|
Centrally Cleared
Swap Contracts
|
|
|
|
|
|
|
|
Primary Underlying Risk
|
|
Written Options,
at value
|
|
|
Unrealized
Appreciation
|
|
|
Unrealized
Appreciation
|
|
|
Unrealized
Depreciation
|
|
|
Unrealized
Appreciation
|
|
|
Swap
Contracts,
at value
|
|
|
Total
|
|
Interest Rate Risk
|
|
$
|
(37,125
|
)
|
|
$
|
10,559
|
|
|
|
|
|
|
|
|
|
|
$
|
95,178
|
|
|
$
|
544,380
|
|
|
$
|
612,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Risk
|
|
|
|
|
|
|
|
|
|
$
|
139,451
|
|
|
$
|
(1,377
|
)
|
|
|
|
|
|
|
|
|
|
|
138,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(37,125
|
)
|
|
$
|
10,559
|
|
|
$
|
139,451
|
|
|
$
|
(1,377
|
)
|
|
$
|
95,178
|
|
|
$
|
544,764
|
|
|
$
|
751,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the period ended December 31, 2013, the volume of derivative activity for
the Fund was as follows:
|
|
|
|
|
|
|
Average market value
|
|
Written options
|
|
$
|
9,281
|
|
Futures contracts (to sell)
|
|
|
1,796,832
|
|
Forward foreign currency contracts (to buy)
|
|
|
234,710
|
|
Forward foreign currency contracts (to sell)
|
|
|
2,110,047
|
|
|
|
|
|
Average notional balance
|
|
Interest rate swap contracts
|
|
$
|
27,500,000
|
|
Credit default swap contracts (to buy protection)
|
|
|
240,000
|
|
22
ITEM 2.
|
CONTROLS AND PROCEDURES.
|
|
(a)
|
The registrants principal executive officer and principal financial officer have concluded that the registrants disclosure controls and procedures (as
defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the 1940 Act)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on
their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.
|
|
(b)
|
There were no changes in the registrants internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the
registrants last fiscal quarter that have materially affected, or are likely to materially affect the registrants internal control over financial reporting.
|
Certifications
pursuant to Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Western Asset Variable Rate Strategic Fund Inc.
|
|
|
By
|
|
/s/ K
ENNETH
D.
F
ULLER
|
|
|
Kenneth D. Fuller
|
|
|
Chief Executive Officer
|
|
|
Date:
|
|
February 25, 2014
|
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report
has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
By
|
|
/s/ K
ENNETH
D.
F
ULLER
|
|
|
Kenneth D. Fuller
|
|
|
Chief Executive Officer
|
|
|
Date:
|
|
February 25, 2014
|
|
|
By
|
|
/s/ R
ICHARD
F.
S
ENNETT
|
|
|
Richard F. Sennett
|
|
|
Principal Financial Officer
|
|
|
Date:
|
|
February 25, 2014
|
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