Just as equity research is vital to investing in a company's shares, good credit analysis is crucial when buying its bonds. The more independent the analysis, the better when evaluating corporate credits. A good manager never relies on the rating agencies alone.

Because of its size, PIMCO can afford to place a great deal of emphasis on fundamental, original research. The firm's team of 10 credit analysts, each with an average 13 years investment experience, cover both high grade and high yield credits in their particular industry sector. The advantage of size also gives us access to corporations' top management, as well as to customers, suppliers and competitors.

Talking to these is key to evaluating a company's strengths and weaknesses.

The analysts also look at all types of fixed income securities in a capital structure ranging from bank debt, the least risky, to the riskiest - subordinated debt. Lastly, our analysts compare credits around the world. Their aim is to make sound investment decisions for each credit within a specific industry, as well as for each security within a capital structure.

In general, we like companies with sound underlying businesses, a strong competitive position, and financial flexibility. The firm tends to invest in issues with improving credit profiles and the potential for upgrade by the rating agencies. These issues, of course, have the greatest potential for capital appreciation. PIMCO builds its credit analysis on four pillars:

p Evaluating the qualitative aspects of each company. This is often the most important aspect of credit analysis. It takes experienced credit analysts to make a sound assessment of a management team, or the competitive position of a company within an industry.

p Evaluating a company's historical and prospective cash flow after all expenditures. Unlike Wall Street analysts, we do not focus on simple interest coverage ratios. Instead, analysts aim to understand the restrictions other securities impose on cash flow prospects.

p Determining the asset support of a credit. PIMCO evaluates the quality of inventory, accounts receivable, and plant property and equity for each credit. This assessment is critical when evaluating the downside recovery values of each security within a capital structure when a company is restructuring.

p Evaluating the covenant package of a security. It's important to understand the contract that management makes with bondholders, and the potential risks inherent in that contract.And understanding the legal enforceability of that contract is critical to determining bondholders' rights and remedies in a restrucuring.

To sum up, analysts have to evaluate a huge array of different factors when they assess a credit. The deeper they can dig, and the more fundamental their ap-proach, the better their results will be. Ray Kennedy