N-CSRS 1 d468754dncsrs.htm WESTERN ASSET MORTGAGE OPPORTUNITY FUND INC. (DMO) Western Asset Mortgage Opportunity Fund Inc. (DMO)
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-22369

 

 

Western Asset Mortgage Opportunity Fund Inc.

(Exact name of registrant as specified in charter)

 

 

620 Eighth Avenue, 47th Floor, New York, NY 10018

(Address of principal executive offices) (Zip code)

 

 

George P. Hoyt

Franklin Templeton

100 First Stamford Place

Stamford, CT 06902

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: (888) 777-0102

Date of fiscal year end: December 31

Date of reporting period: June 30, 2021

 

 

 


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ITEM 1.

REPORT TO STOCKHOLDERS.

The Semi-Annual Report to Stockholders is filed herewith.


Table of Contents

LOGO

 

Semi-Annual Report   June 30, 2021

WESTERN ASSET

MORTGAGE OPPORTUNITY FUND INC.

(DMO)

 

 

 

The Fund intends to no longer mail paper copies of the Fund’s shareholder reports like this one, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary (such as a broker-dealer or bank). Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.

If you invest through a financial intermediary and you already elected to receive shareholder reports electronically (“e-delivery”), you will not be affected by this change and you need not take any action. If you have not already elected e-delivery, you may elect to receive shareholder reports and other communications from the Fund electronically by contacting your financial intermediary.

You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. That election will apply to all Legg Mason Funds held in your account at that financial intermediary. If you are a direct shareholder with the Fund, you can call the Fund at 1-888-888-0151, or write to the Fund by regular mail at P.O. Box 505000, Louisville, KY 40233 or by overnight delivery to Computershare, 462 South 4th Street, Suite 1600, Louisville, KY 40202 to let the Fund know you wish to continue receiving paper copies of your shareholder reports. That election will apply to all Legg Mason Funds held in your account held directly with the fund complex.

 

LOGO

 

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE


Table of Contents
What’s inside      
Letter from the chairman     III  
Performance review     IV  
Fund at a glance     1  
Schedule of investments     2  
Statement of assets and liabilities     17  
Statement of operations     18  
Statements of changes in net assets     19  
Statement of cash flows     20  
Financial highlights     22  
Notes to financial statements     24  
Additional shareholder information     42  
Dividend reinvestment plan     43  

Fund objectives

The Fund’s primary investment objective is to provide current income. As a secondary investment objective, the Fund will seek capital appreciation.

The Fund seeks to achieve its investment objectives by investing primarily in a diverse portfolio of mortgage-backed securities and mortgage whole loans. Investments in mortgage-backed securities consist primarily of non-agency residential mortgage-backed securities and commercial mortgage-backed securities.

 

 

 

II

   Western Asset Mortgage Opportunity Fund Inc.


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Letter from the chairman

 

LOGO

 

Dear Shareholder,

We are pleased to provide the semi-annual report of Western Asset Mortgage Opportunity Fund Inc. for the six-month reporting period ended June 30, 2021. Please read on for Fund performance information during the Fund’s reporting period.

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,

 

LOGO

Jane Trust, CFA

Chairman, President and Chief Executive Officer

July 30, 2021

 

Western Asset Mortgage Opportunity Fund Inc.  

 

III


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Performance review

 

For the six months ended June 30, 2021, Western Asset Mortgage Opportunity Fund Inc. returned 5.44% based on its net asset value (“NAV”)i and 15.06% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmark, the ICE BofA U.S. Floating Rate Home Equity Loan Asset Backed Securities Indexii, returned 1.10% for the same period. The Lipper U.S. Mortgage Closed-End Funds Category Averageiii returned 4.59% over the same time frame. Please note that Lipper performance returns are based on each fund’s NAV.

During this six-month period, the Fund made distributions to shareholders totaling $ 0.68 per share. As of June 30, 2021, the Fund estimates that 67% of the distributions were sourced from net investment income and 33% constituted a return of capital.* The performance table shows the Fund’s six-month total return based on its NAV and market price as of June 30, 2021. Past performance is no guarantee of future results.

 

Performance Snapshot as of June 30, 2021
(unaudited)
 
Price Per Share   6-Month
Total Return**
 
$15.08 (NAV)     5.44 %† 
$15.59 (Market Price)     15.06 %‡ 

All figures represent past performance and are not a guarantee of future results. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.

† Total return assumes the reinvestment of all distributions, including returns of capital, if any, at NAV.

‡ Total return assumes the reinvestment of all distributions, including returns of capital, if any, in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.

Looking for additional information?

The Fund is traded under the symbol “DMO” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available online under the symbol “XDMOX” on most financial websites. Barron’s and The Wall Street Journal’s 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 (click on the name of the Fund).

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 Fund’s current NAV, market price and other information.

 

*

These estimates are not for tax purposes. The Fund will issue a Form 1099 with final composition of the distributions for tax purposes after year-end. A return of capital is not taxable and results in a reduction in the tax basis of a shareholder’s investment. For more information about a distribution’s composition, please refer to the Fund’s distribution press release or, if applicable, the Section 19 notice located in the press release section of our website, www.lmcef.com (click on the name of the Fund).

 

 

IV

   Western Asset Mortgage Opportunity Fund Inc.


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Thank you for your investment in Western Asset Mortgage Opportunity Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

Sincerely,

 

LOGO

Jane Trust, CFA

Chairman, President and Chief Executive Officer

July 30, 2021

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. The Fund’s common stock is traded on the New York Stock Exchange. Similar to stocks, the Fund’s share price will fluctuate with market conditions and, at the time of sale, may be worth more or less than the original investment. Shares of closed-end funds often trade at a discount to their net asset value. Because the Fund is non-diversified, it may be more susceptible to economic, political, or regulatory events than a diversified fund. The Fund’s investments are subject to a number of risks, including credit risk, inflation risk and interest rate risk. As interest rates rise, bond prices fall, reducing the value of the Fund’s fixed income holdings. The Fund may invest in lower-rated high-yield bonds (commonly known as “junk bonds”), which are subject to greater liquidity risk and credit risk (risk of default) than higher-rated obligations. Mortgage-backed securities (“MBS”) are subject to additional risks, including: (1) credit risk associated with the performance of the underlying mortgage properties and of the borrowers owning these properties; (2) adverse changes in economic conditions and circumstances, which are more likely to have an adverse impact on MBS secured by loans on certain types of commercial properties than on those secured by loans on residential properties;(3) prepayment risk, which can lead to significant fluctuations in value of the MBS and can limit the potential gains in a declining interest rate environment; (4) loss of all or part of the premium, if any, paid; and (5) decline in the market value of the security, whether resulting from changes in interest rates, prepayments on the underlying mortgage collateral or perceptions of the credit risk associated with the underlying mortgage collateral. To the extent the Fund invests in mortgage whole loans, certain of these risks may be magnified. In addition, risks associated with investments in whole loans include geographic concentration risk and risks relating to the reliance on third-party servicers to service and manage the mortgage whole loan. The Fund may invest in securities backed by subprime or distressed mortgages which involve a higher degree of risk and chance of loss. Leverage may result in greater volatility of NAV and the market price of common shares and increases a shareholder’s risk of loss. The Fund may make significant investments in derivative instruments. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The Fund is not guaranteed by the U.S. government, the U.S. Treasury or any government agency. The Fund may also invest in money market funds, including funds affiliated with the Fund’s manager and subadvisers. For more

 

Western Asset Mortgage Opportunity Fund Inc.  

 

V


Table of Contents

Performance review (cont’d)

 

information on Fund risks, see Summary of information regarding the Fund — Principal Risk Factors in the Fund’s most recent annual report.

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.

 

 

 

 

i 

Net asset value (“NAV”) is calculated by subtracting total liabilities, including liabilities associated with financial leverage (if any) from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) 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 Fund’s market price as determined by supply of and demand for the Fund’s shares.

 

ii

The ICE BofA U.S. Floating Rate Home Equity Loan Asset Backed Securities Index tracks the performance of U.S. dollar-denominated investment grade floating-rate asset-backed securities collateralized by home equity loans publicly issued in the U.S. domestic market. Qualifying securities must have an investment grade rating, at least one year remaining to final stated maturity, a floating-rate coupon, and an original deal size for the collateral group of at least $250 million.

 

iii 

Lipper, Inc., a wholly-owned subsidiary of Refinitiv, provides independent insight on global collective investments. Returns are based on the six-month period ended June 30, 2021, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 8 funds in the Fund’s Lipper category.

 

 

VI

   Western Asset Mortgage Opportunity Fund Inc.


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Fund at a glance (unaudited)

 

Investment breakdown (%) as a percent of total investments

 

 

LOGO

 

The bar graph above represents the composition of the Fund’s investments as of June 30, 2021 and December 31, 2020 and does not include derivatives, such as futures contracts, forward foreign currency contracts and swap contracts. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

1


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Schedule of investments (unaudited)

June 30, 2021

 

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
   

Face

Amount

    Value  
Residential Mortgage-Backed Securities (a) — 98.2%

 

                       

Adjustable Rate Mortgage Trust, 2005-5 1A1

    2.845     9/25/35     $ 97,337     $ 80,786  (b)  

Adjustable Rate Mortgage Trust, 2005-7 2A21

    2.590     10/25/35       207,041       192,927  (b)  

Adjustable Rate Mortgage Trust, 2005-12 5A1 (1 mo. USD LIBOR + 0.500%)

    0.592     3/25/36       219,775       108,677  (b)  

Aegis Asset Backed Securities Trust, 2005-3 M3 (1 mo. USD LIBOR + 0.735%)

    0.827     8/25/35       3,460,000       3,211,513  (b)(c) 

AFC Trust, 2000-3 1A (1 mo. USD LIBOR + 0.750%)

    0.842     10/25/30       735,989       705,975  (b)(d) 

Alternative Loan Trust, 2005-11CB 3A3, IO (-1.000 x 1 mo. USD LIBOR + 5.000%)

    4.909     6/25/35       1,240,418       170,340  (b)  

Alternative Loan Trust, 2005-14 3A1

    2.484     5/25/35       148,107       112,669  (b)  

Alternative Loan Trust, 2005-36 4A1

    2.768     8/25/35       217,860       214,229  (b)  

Alternative Loan Trust, 2005-J10 1A1 (1 mo. USD LIBOR + 0.500%)

    0.592     10/25/35       608,284       435,975  (b)  

Alternative Loan Trust, 2006-HY10 1A1

    2.580     5/25/36       185,377       175,817  (b)  

Alternative Loan Trust, 2006-J8 A5

    6.000     2/25/37       85,124       55,490  

Alternative Loan Trust, 2007-3T1 2A1

    6.000     3/25/27       27,931       28,000  

Alternative Loan Trust, 2007-23CB A8 (-4.000 x 1 mo. USD LIBOR + 28.400%)

    28.034     9/25/37       437,097       566,276  (b)  

Alternative Loan Trust, 2007-OA8 1A1 (1 mo. USD LIBOR + 0.180%)

    0.272     6/25/47       991,947       875,442  (b)(c) 

American Home Mortgage Assets Trust, 2005-2 2A1A

    2.811     1/25/36       741,166       604,831  (b)  

American Home Mortgage Investment Trust, 2007-2 2A (1 mo. USD LIBOR + 0.800%)

    0.892     3/25/47       12,735,445       460,766  (b)  

American Home Mortgage Investment Trust, 2007-A 4A (1 mo. USD LIBOR + 0.900%)

    0.992     7/25/46       1,778,432       742,087  (b)(d) 

Banc of America Funding Corp., 2015-R3 2A2

    0.222     2/27/37       2,630,685       2,278,328  (b)(c)(d) 

Banc of America Funding Trust, 2004-C 3A1

    2.968     12/20/34       261,494       260,331  (b)  

Banc of America Funding Trust, 2006-D 2A1

    3.499     5/20/36       33,963       33,504  (b)  

Banc of America Funding Trust, 2006-F 1A1

    2.603     7/20/36       108,740       112,133  (b)  

Banc of America Funding Trust, 2014-R5 1A2 (6 mo. USD LIBOR + 1.500%)

    1.679     9/26/45       3,750,000       3,249,220  (b)(c)(d) 

Banc of America Funding Trust, 2015-R2 9A2

    0.351     3/27/36       4,324,588       4,299,008  (b)(c)(d) 

Banc of America Funding Trust, 2015-R4 4A3

    8.469     1/27/30       13,126,025       5,545,076  (b)(d) 

Bayview Financial Asset Trust, 2007-SR1A M1 (1 mo. USD LIBOR + 0.800%)

    0.892     3/25/37       1,793,965       1,723,729  (b)(d) 

Bayview Financial Asset Trust, 2007-SR1A M2 (1 mo. USD LIBOR + 0.900%)

    0.992     3/25/37       2,184,081       2,108,020  (b)(d) 

 

See Notes to Financial Statements.

 

 

2

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Western Asset Mortgage Opportunity Fund Inc.

 

Security‡    Rate      Maturity
Date
     Face
Amount
     Value  
Residential Mortgage-Backed Securities (a) — continued

 

                 

Bayview Financial Asset Trust, 2007-SR1A M3 (1 mo. USD LIBOR + 1.150%)

     1.242      3/25/37      $ 989,528      $ 965,770  (b)(d) 

BCAP LLC Trust, 2011-RR2 1A4

     2.928      7/26/36        2,813,096        1,698,685  (b)(c)(d) 

Bear Stearns ALT-A Trust, 2005-9 25A1

     2.820      11/25/35        237,163        195,750  (b)  

Bear Stearns Asset Backed Securities I Trust, 2005-CL1 A1 (1 mo. USD LIBOR + 0.500%)

     0.500      9/25/34        43,123        41,657  (b)  

Bellemeade Re Ltd., 2017-1 B1 (1 mo. USD LIBOR + 4.750%)

     4.842      10/25/27        1,070,000        1,113,197  (b)(d) 

Bellemeade Re Ltd., 2018-1A M2 (1 mo. USD LIBOR + 2.900%)

     2.992      4/25/28        510,000        516,775  (b)(d) 

Chase Mortgage Finance Trust, 2006-S3 2A1

     5.500      11/25/21        139,684        88,349  

ChaseFlex Trust, 2005-2 3A3, IO (-1.000 x 1 mo. USD LIBOR + 5.500%)

     5.409      6/25/35        6,446,957        1,305,746  (b)(c) 

Chevy Chase Funding LLC Mortgage-Backed Certificates, 2006-2A A1 (1 mo. USD LIBOR + 0.130%)

     0.222      4/25/47        78,011        84,340  (b)(d)  

CHL Mortgage Pass-Through Trust, 2005-2 2A1 (1 mo. USD LIBOR + 0.640%)

     0.732      3/25/35        55,096        54,741  (b)  

CHL Mortgage Pass-Through Trust, 2005-9 1A1 (1 mo. USD LIBOR + 0.600%)

     0.692      5/25/35        68,633        58,367  (b)  

CHL Mortgage Pass-Through Trust, 2005-11 3A3

     2.575      4/25/35        276,305        227,153  (b)  

CHL Mortgage Pass-Through Trust, 2005-11 6A1 (1 mo. USD LIBOR + 0.600%)

     0.692      3/25/35        45,983        37,765  (b)  

CHL Mortgage Pass-Through Trust, 2005-18 A7 (-2.750 x 1 mo. USD LIBOR +19.525%)

     19.273      10/25/35        11,332        13,171  (b)  

CHL Mortgage Pass-Through Trust, 2005- HY10 1A1

     3.035      2/20/36        38,873        34,082  (b)  

CHL Mortgage Pass-Through Trust, 2005- HYB9 1A1 (12 mo. USD LIBOR + 1.750%)

     2.207      2/20/36        101,560        97,442  (b)  

Citicorp Mortgage Securities Trust, 2007-8 B1

     5.980      9/25/37        2,750,083        1,824,028  (b)(c) 

Citigroup Mortgage Loan Trust, 2006-AR5 2A1A

     2.695      7/25/36        178,668        121,087  (b)  

Citigroup Mortgage Loan Trust, 2008-3 A3

     6.100      4/25/37        5,500,094        2,685,834  (d) 

Citigroup Mortgage Loan Trust Inc., 2004- HYB3 1A

     2.896      9/25/34        29,157        29,043  (b)  

Citigroup Mortgage Loan Trust Inc., 2004- UST1 A2

     1.281      8/25/34        19,884        19,829  (b)  

Citigroup Mortgage Loan Trust Inc., 2005-5 1A5

     2.194      8/25/35        129,650        121,883  (b)  

 

See Notes to Financial Statements.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

3


Table of Contents

Schedule of investments (unaudited) (cont’d)

June 30, 2021

 

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
   

Face

Amount

    Value  
Residential Mortgage-Backed Securities (a) — continued

 

                       

Countrywide Asset-Backed Certificates Trust, 2006-SD3 A1 (1 mo. USD LIBOR + 0.660%)

    0.752     7/25/36     $ 302,659     $ 295,401  (b)(d) 

Countrywide Asset-Backed Certificates Trust, 2007-SEA1 1A1 (1 mo. USD LIBOR + 0.550%)

    0.642     5/25/47       359,906       317,258  (b)(d) 

Credit-Based Asset Servicing & Securitization LLC, 2006-SL1 A3 (1 mo. USD LIBOR + 0.440%)

    0.532     9/25/36       3,628,741       262,621  (b)(d) 

CSFB Mortgage-Backed Pass-Through Certificates, 2005-10 3A3

    5.500     11/25/35       265,676       206,903  

CSMC Resecuritization Trust, 2006-1R 1A2 (-2.750 x 1 mo. USD LIBOR + 19.525%)

    19.264     7/27/36       282,019       390,542  (b)(d) 

CSMC Trust, 2010-18R 6A5

    3.222     9/28/36       325,443       342,184  (b)(d) 

CSMC Trust, 2014-11R 9A2 (1 mo. USD LIBOR + 0.140%)

    0.372     10/27/36       3,944,219       3,443,311  (b)(c)(d) 

CSMC Trust, 2017-RPL1 B1

    3.015     7/25/57       3,052,442       2,328,363  (b)(c)(d) 

CSMC Trust, 2017-RPL1 B2

    3.015     7/25/57       3,501,991       2,453,645  (b)(c)(d) 

CSMC Trust, 2017-RPL1 B3

    3.015     7/25/57       2,977,486       1,687,737  (b)(d) 

CSMC Trust, 2017-RPL1 B4

    3.015     7/25/57       3,204,918       561,306  (b)(d) 

CSMC Trust, 2015-2R 7A2

    2.546     8/27/36       3,439,572       3,041,651  (b)(c)(d) 

CWABS Revolving Home Equity Loan Trust, 2004-L 2A (1 mo. USD LIBOR + 0.280%)

    0.353     2/15/34       42,346       40,464  (b)  

Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 2PO, PO

    0.000     4/15/36       21,274       16,961  (d)  

Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 4AS1, IO

    9.078     4/15/36       175,100       32,319  (b)(d)  

Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 4AS2, IO

    15.791     4/15/36       167,000       51,818  (b)(d)  

Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 5AS1, IO

    10.739     4/15/36       65,764       19,208  (b)(d)  

Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 5AS3, IO

    7.423     4/15/36       237,334       49,983  (b)(d)  

Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2016-1 B, PO

    0.000     9/25/55       12,125,811       1,829,636  (c)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2016-1 BIO, IO

    0.310     9/25/55       25,865,304       3,541,542  (b)(c)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2016-1 XSIO, IO

    0.075     9/25/55       173,831,789       670,122  (b)(d) 

 

See Notes to Financial Statements.

 

 

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Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
   

Face

Amount

    Value  
Residential Mortgage-Backed Securities (a) — continued

 

                       

Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2017-2 B, PO

    0.000     8/25/56     $ 11,287,980     $ 2,122,275  (d) 

Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2017-2 BIO, IO

    0.000     8/25/56       19,301,937       3,153,211  (b)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2017-2 XSIO, IO

    0.075     8/25/56       434,643,975       1,910,695  (b)(c)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2019-2 M

    4.750     8/25/58       681,000       723,567  (b)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2020-1 BXS

    3.203     8/25/59       4,076,904       2,657,474  (b)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2016-DNA2 B (1 mo. USD LIBOR + 10.500%)

    10.592     10/25/28       494,384       578,315  (b)  

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2016-DNA3 B (1 mo. USD LIBOR + 11.250%)

    11.342     12/25/28       1,029,334       1,213,234  (b)(c) 

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2016-DNA4 B (1 mo. USD LIBOR + 8.600%)

    8.692     3/25/29       1,575,761       1,653,173  (b) 

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2017-DNA2 B2 (1 mo. USD LIBOR + 11.250%)

    11.342     10/25/29       1,772,487       1,991,614  (b)(c) 

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2017-SPI1 B

    4.036     9/25/47       818,081       793,278  (b)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-HQA2 B2 (1 mo. USD LIBOR + 11.000%)

    11.092     10/25/48       3,000,000       3,597,166  (b)(c)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-HRP1 B2 (1 mo. USD LIBOR + 11.750%)

    11.842     5/25/43       5,531,727       6,346,188  (b)(c)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-HRP2 B2 (1 mo. USD LIBOR + 10.500%)

    10.592     2/25/47       3,530,000       4,060,937  (b)(c)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-SPI2 B

    3.815     5/25/48       1,798,778       1,743,395  (b)(d) 

 

See Notes to Financial Statements.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

5


Table of Contents

Schedule of investments (unaudited) (cont’d)

June 30, 2021

 

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
    Face
Amount
    Value  
Residential Mortgage-Backed Securities (a) — continued

 

                       

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-SPI4 B

    4.489     11/25/48     $ 4,729,163     $ 4,699,697  (b)(d) 

Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2019-DNA1 B2 (1 mo. USD LIBOR + 10.750%)

    10.842     1/25/49       1,500,000       1,727,915  (b)(c)(d) 

Federal National Mortgage Association (FNMA), 2012-134 LS, IO (-1.000 x 1 mo. USD LIBOR + 6.150%)

    6.059     12/25/42       2,096,285       412,976   (b)  

Federal National Mortgage Association (FNMA) — CAS, 2016-C01 1B (1 mo. USD LIBOR + 11.750%)

    11.842     8/25/28       1,866,152       2,270,924  (b)(c)(d) 

Federal National Mortgage Association (FNMA) — CAS, 2016-C02 1B (1 mo. USD LIBOR + 12.250%)

    12.342     9/25/28       2,339,378       2,921,367  (b)(c)(d) 

Federal National Mortgage Association (FNMA) — CAS, 2016-C03 1B (1 mo. USD LIBOR + 11.750%)

    11.842     10/25/28       1,654,423       2,021,501  (b)(c)(d) 

Federal National Mortgage Association (FNMA) — CAS, 2016-C04 1B (1 mo. USD LIBOR + 10.250%)

    10.342     1/25/29       2,617,315       3,066,205  (b)(c)(d) 

Federal National Mortgage Association (FNMA) — CAS, 2016-C06 1B (1 mo. USD LIBOR + 9.250%)

    9.342     4/25/29       3,516,110       3,952,575  (b)(c)(d) 

Federal National Mortgage Association (FNMA) — CAS, 2020-R01 1B1 (1 mo. USD LIBOR + 3.250%)

    3.342     1/25/40       1,500,000       1,504,960  (b)(d) 

First Horizon Alternative Mortgage Securities Trust, 2005-AA6 3A1

    2.749     8/25/35       390,516       364,682  (b)  

First Horizon Alternative Mortgage Securities Trust, 2006-FA6 2A1, PAC

    6.250     11/25/36       79,233       44,806  

GS Mortgage Securities Corp. II, 2000-1A A (1 mo. USD LIBOR + 0.350%)

    0.449     3/20/23       17,660       17,660  (b)(d)  

GSAA Resecuritization Mortgage Trust, 2005-R1 1A2, IO (-1.000 x 1 mo. USD LIBOR + 5.000%)

    4.909     4/25/35       1,809,428       331,511  (b)(d) 

GSMPS Mortgage Loan Trust, 2005-RP1 1A4

    8.500     1/25/35       48,001       54,981  (d)  

GSMPS Mortgage Loan Trust, 2006-RP1 1A2

    7.500     1/25/36       331,643       345,443  (d)  

HarborView Mortgage Loan Trust, 2006-2 1A

    2.622     2/25/36       14,916       6,689  (b)  

Home Equity Mortgage Trust, 2006-1 A3 (1 mo. USD LIBOR + 0.500%)

    0.592     5/25/36       3,500,000       1,373,028  (b)  

 

 

See Notes to Financial Statements.

 

 

6

   Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report


Table of Contents

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
    Face
Amount
    Value  
Residential Mortgage-Backed Securities (a) — continued

 

                       

HSI Asset Loan Obligation Trust, 2007-AR1 4A1

    4.054     1/25/37     $ 98,501     $ 82,437  (b) 

Impac CMB Trust, 2004-8 1A (1 mo. USD LIBOR + 0.720%)

    0.812     10/25/34       137,963       135,341  (b)  

IndyMac INDA Mortgage Loan Trust, 2005- AR2 1A1

    2.860     1/25/36       66,034       58,437  (b)  

IndyMac INDX Mortgage Loan Trust, 2004- AR13 1A1

    2.350     1/25/35       34,326       33,791  (b)  

IndyMac INDX Mortgage Loan Trust, 2005- AR15 A2

    2.979     9/25/35       48,317       46,247  (b)  

IndyMac INDX Mortgage Loan Trust, 2006- AR7 5A1

    3.145     5/25/36       184,227       157,286  (b)  

IndyMac INDX Mortgage Loan Trust, 2006- AR9 3A3

    2.969     6/25/36       246,523       246,233  (b)  

IndyMac INDX Mortgage Loan Trust, 2006- AR11 1A1

    2.851     6/25/36       330,600       305,769  (b) 

JPMorgan Alternative Loan Trust, 2007-A1 3A1

    3.254     3/25/37       239,993       246,043  (b)  

JPMorgan Mortgage Trust, 2005-S3 1A1

    6.500     1/25/36       677,007       520,689  

JPMorgan Mortgage Trust, 2007-S2 3A2

    6.000     6/25/37       39,780       41,778  

JPMorgan Mortgage Trust, 2007-S2 3A3

    6.500     6/25/37       14,262       14,913  

JPMorgan Mortgage Trust, 2007-S3 1A18 (1 mo. USD LIBOR + 0.500%)

    0.592     8/25/37       2,133,961       697,189  (b)  

Legacy Mortgage Asset Trust, 2019-GS2 A2, Step bond

    4.250     1/25/59       4,520,000       4,524,357  (c)(d)  

Legacy Mortgage Asset Trust, 2021-GS3 A2, Step Bond

    3.250     7/25/61       1,640,000       1,636,439  (d)  

Lehman Mortgage Trust, 2006-3 1A7, IO (-1.000 x 1 mo. USD LIBOR + 5.400%)

    5.309     7/25/36       4,655,164       1,149,315  (b)(c)  

Lehman Mortgage Trust, 2006-7 1A3, IO (-1.000 x 1 mo. USD LIBOR + 5.350%)

    5.259     11/25/36       4,139,401       851,836  (b)  

Lehman Mortgage Trust, 2006-7 1A8 (1 mo. USD LIBOR + 0.180%)

    0.272     11/25/36       3,034,356       1,653,089  (b)(c) 

Lehman Mortgage Trust, 2006-7 3A2, IO (-1.000 x 1 mo. USD LIBOR + 7.150%)

    7.059     11/25/36       5,072,361       1,551,823  (b) 

Lehman Mortgage Trust, 2007-5 2A3 (1 mo. USD LIBOR + 0.330%)

    0.422     6/25/37       2,627,098       235,105  (b)  

Lehman XS Trust, 2006-19 A4 (1 mo. USD LIBOR + 0.340%)

    0.432     12/25/36       486,159       443,622  (b)  

MASTR Adjustable Rate Mortgages Trust, 2004-12 5A1

    2.894     10/25/34       43,643       45,347  (b)  

 

 

See Notes to Financial Statements.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

7


Table of Contents

Schedule of investments (unaudited) (cont’d)

June 30, 2021

 

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
    Face
Amount
    Value  
Residential Mortgage-Backed Securities (a) — continued

 

                       

MASTR Adjustable Rate Mortgages Trust, 2006-OA1 1A1 (1 mo. USD LIBOR + 0.210%)

    0.302     4/25/46     $ 144,357     $ 133,241  (b)  

MASTR Reperforming Loan Trust, 2005-1 1A4

    7.500     8/25/34       51,128       46,701  (d)  

Merrill Lynch Mortgage Investors Trust, 2006-A1 2A1

    2.756     3/25/36       432,235       279,387  (b)  

Morgan Stanley Mortgage Loan Trust, 2006-8AR 1A2 (1 mo. USD LIBOR + 0.140%)

    0.232     6/25/36       215,653       66,497  (b)  

Morgan Stanley Mortgage Loan Trust, 2007-5AX 2A3 (1 mo. USD LIBOR + 0.460%)

    0.552     2/25/37       1,636,621       630,962  (b)  

Morgan Stanley Mortgage Loan Trust, 2007-15AR 4A1

    2.877     11/25/37       419,701       396,030  (b)  

Morgan Stanley Re-REMIC Trust, 2015-R2 1B (Federal Reserve U.S. 12 mo. Cumulative Avg 1 Year CMT + 0.710%)

    0.838     12/27/46       907,413       816,404  (b)(d)  

New Century Home Equity Loan Trust, 2004-3 M3 (1 mo. USD LIBOR + 1.065%)

    1.157     11/25/34       443,226       446,265  (b)  

New Residential Mortgage Loan Trust, 2019-6A A1IB, IO

    0.500     9/25/59       33,656,437       552,639  (b)(d)  

NewRez Warehouse Securitization Trust, 2021-1 F (1 mo. USD LIBOR + 5.250%)

    5.342     5/25/55       2,460,000       2,465,329  (b)(d)  

Nomura Resecuritization Trust, 2014-5R 1A9

    6.251     6/26/35       1,753,917       1,765,799  (b)(c)(d) 

PMT Credit Risk Transfer Trust, 2019-2R A (1 mo. USD LIBOR + 2.750%)

    2.846     5/27/23       1,552,277       1,538,779  (b)(c)(d)  

Popular ABS Mortgage Pass-Through Trust, 2005-5 MV2 (1 mo. USD LIBOR + 0.630%)

    0.722     11/25/35       2,114,658       1,933,880  (b)(c)  

Provident Home Equity Loan Trust, 2000-2 A1

                               

(1 mo. USD LIBOR + 0.540%)

    0.632     8/25/31       687,025       625,682  (b)  

Radnor RE Ltd., 2021-1 M1C (30 Day Average SOFR + 2.700%)

    2.710     12/27/33       1,225,000       1,228,057  (b)(d)  

Radnor RE Ltd., 2020-1 M2B (1 mo. USD LIBOR + 2.250%)

    2.342     1/25/30       2,345,000       2,306,585  (b)(d)  

RALI Trust, 2005-QA3 CB4

    3.576     3/25/35       966,652       500,637  (b)  

RALI Trust, 2006-QA1 A11

    3.981     1/25/36       286,244       243,423  (b)  

RALI Trust, 2006-QA4 A (1 mo. USD LIBOR + 0.360%)

    0.452     5/25/36       189,915       177,699  (b)  

RALI Trust, 2006-QO2 A1 (1 mo. USD LIBOR + 0.440%)

    0.532     2/25/46       176,442       53,436  (b)  

RALI Trust, 2007-QA2 A1 (1 mo. USD LIBOR + 0.260%)

    0.352     2/25/37       80,559       87,215  (b)  

RAMP Trust, 2004-RS4 MII2 (1 mo. USD LIBOR + 1.350%)

    2.117     4/25/34       926,503       877,335  (b)(c)  

 

 

See Notes to Financial Statements.

 

 

8

   Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report


Table of Contents

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
    Face
Amount
    Value  
Residential Mortgage-Backed Securities (a) — continued

 

                       

RAMP Trust, 2004-SL3 A3

    7.500     12/25/31     $ 159,332     $ 156,032  

RAMP Trust, 2005-SL2 A5

    8.000     10/25/31       323,709       226,080  

RBSGC Mortgage Loan Trust, 2007-A 3A1 (1 mo. USD LIBOR + 0.350%)

    0.442     1/25/37       2,733,256       440,195  (b)  

Redwood Funding Trust, 2019-1 PT, Step bond

    4.213     9/27/24       2,585,021       2,615,230  (d)  

Renaissance Home Equity Loan Trust, 2006-1 AF5, Step bond

    6.166     5/25/36       530,119       387,450  

Renaissance Home Equity Loan Trust, 2007-2 AF2, Step bond

    5.675     6/25/37       445,054       171,909  

Renaissance Home Equity Loan Trust, 2007-3 AF3, Step bond

    7.238     9/25/37       1,631,810       922,591  (c)  

Residential Asset Securitization Trust, 2005-A7 A2, IO (-1.000 x 1 mo. USD LIBOR + 7.250%)

    7.159     6/25/35       1,521,242       462,161  (b)  

Residential Asset Securitization Trust, 2005- A13 1A3 (1 mo. USD LIBOR + 0.470%)

    0.562     10/25/35       83,605       58,716  (b)  

Residential Asset Securitization Trust, 2006-A1 1A6 (1 mo. USD LIBOR + 0.500%)

    0.592     4/25/36       1,376,002       431,432  (b)  

Residential Asset Securitization Trust, 2006-A1 1A7, IO (-1.000 x 1 mo. USD LIBOR + 5.500%)

    5.409     4/25/36       2,851,818       747,870  (b)  

Residential Asset Securitization Trust, 2007-A2 1A1

    6.000     4/25/37       203,242       164,750  

RFMSI Trust, 2006-S8 A12, IO (-1.000 x 1 mo. USD LIBOR + 5.400%)

    5.309     9/25/36       2,727,052       368,508  (b)  

RFMSI Trust, 2006-SA2 4A1

    5.196     8/25/36       54,614       45,025  (b)  

RFMSI Trust, 2007-S6 1A6 (1 mo. USD LIBOR + 0.500%)

    0.592     6/25/37       1,296,640       1,039,045  (b)(c)  

RFMSI Trust, 2007-S6 1A13, IO (-1.000 x 1 mo. USD LIBOR + 5.500%)

    5.409     6/25/37       1,296,640       230,185  (b)  

Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2018-3 BX

    0.141     8/25/57       3,376,213       1,492,202  (b)(d) 

Structured Adjustable Rate Mortgage Loan Trust, 2004-18 1A2

    2.662     12/25/34       174,754       171,681  (b)  

Structured Adjustable Rate Mortgage Loan Trust, 2005-4 5A

    3.326     3/25/35       30,745       31,293  (b)  

Structured Adjustable Rate Mortgage Loan Trust, 2005-7 1A3

    2.987     4/25/35       52,292       53,442  (b)  

Structured Adjustable Rate Mortgage Loan Trust, 2005-4 1A1

    2.610     3/25/35       120,627       107,695  (b)  

 

See Notes to Financial Statements.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

9


Table of Contents

Schedule of investments (unaudited) (cont’d)

June 30, 2021

 

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
    Face
Amount
    Value  
Residential Mortgage-Backed Securities (a) — continued

 

               

Structured Asset Investment Loan Trust, 2004-8 M9 (1 mo. USD LIBOR + 3.750%)

    3.842     9/25/34     $ 297,405     $ 309,347  (b)  

Structured Asset Mortgage Investments II Trust, 2006-AR5 4A1 (1 mo. USD LIBOR + 0.440%)

    0.532     5/25/46       526,158       276,075  (b)  

Wachovia Mortgage Loan Trust LLC, 2005-B 2A2

    2.510     10/20/35       11,075       10,215  (b)  

WaMu Mortgage Pass-Through Certificates Trust, 2005-AR2 B1 (1 mo. USD LIBOR + 0.795%)

    0.887     1/25/45       1,479,018       1,240,606  (b)(c)  

WaMu Mortgage Pass-Through Certificates Trust, 2005-8 1A6 (-3.667 x 1 mo. USD LIBOR + 23.283%)

    22.948     10/25/35       142,160       186,112  (b)  

WaMu Mortgage Pass-Through Certificates Trust, 2005-9 5A4 (-7.333 x 1 mo. USD LIBOR + 35.933%)

    35.262     11/25/35       48,188       91,302  (b)  

WaMu Mortgage Pass-Through Certificates Trust, 2005-10 2A3 (1 mo. USD LIBOR + 0.900%)

    0.992     11/25/35       96,033       85,349  (b)  

WaMu Mortgage Pass-Through Certificates Trust, 2005-AR13 A1C3 (1 mo. USD LIBOR + 0.980%)

    1.072     10/25/45       132,492       131,615  (b)  

WaMu Mortgage Pass-Through Certificates Trust, 2005-AR15 A1C4 (1 mo. USD LIBOR + 0.800%)

    0.892     11/25/45       612,535       396,088  (b)  

WaMu Mortgage Pass-Through Certificates Trust, 2006-AR10 A1 (1 mo. USD LIBOR + 0.100%)

    0.192     12/25/36       314,672       208,453  (b)  

WaMu Mortgage Pass-Through Certificates Trust, 2006-AR16 2A2

    2.491     12/25/36       159,058       151,969  (b)  

Wells Fargo Alternative Loan Trust, 2007-PA1 A12, IO (-1.000 x 1 mo. USD LIBOR +5.460%)

    5.369     3/25/37       1,790,707       242,968  (b)  

Total Residential Mortgage-Backed Securities (Cost — $145,675,432)

 

    164,432,919  
Commercial Mortgage-Backed Securities (a) — 31.5%

 

               

BX Commercial Mortgage Trust, 2019-IMC F (1 mo. USD LIBOR + 2.900%)

    2.973     4/15/34       2,000,000       1,985,523  (b)(d)  

BX Commercial Mortgage Trust, 2020-VIVA E

    3.667     3/11/44       2,000,000       2,011,192  (b)(d)  

BX Trust, 2021-VIEW D (1 mo. USD LIBOR + 2.900%)

    3.050     6/15/23       880,000       882,916  (b)(d)  

BX Trust, 2021-VIEW E (1 mo. USD LIBOR + 3.600%)

    3.750     6/15/23       880,000       883,553  (b)(d)  

 

 

See Notes to Financial Statements.

 

 

10

   Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report


Table of Contents

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
    Face
Amount
    Value  
Commercial Mortgage-Backed Securities (a) — continued

 

                       

CSMC OA LLC, 2014-USA F

    4.373     9/15/37     $ 2,720,000     $ 2,115,544  (d) 

CSMC Trust, 2017-CHOP F (1 mo. USD LIBOR + 4.350%)

    4.673     7/15/32       1,620,000       1,464,210  (b)(d) 

CSMC Trust, 2019-RIO B (1 mo. USD LIBOR + 7.000%, 8.000% floor)

    8.000     12/15/21       3,000,000       2,873,631  (b)(d) 

CSMC Trust, 2020-LOTS A (1 mo. USD LIBOR + 3.975%, 4.725% floor)

    4.725     7/15/22       1,384,000       1,387,082  (b)(d) 

CSMC Trust, 2017-CHOP H (1 mo. USD LIBOR + 7.350%)

    7.673     7/15/32       3,300,000       2,183,909  (b)(d) 

DBUBS Mortgage Trust, 2011-LC3A G

    3.750     8/10/44       2,600,000       268,897  (d) 

Extended Stay America Trust, 2021-ESH E (1 mo. USD LIBOR + 2.850%)

    2.925     7/15/38       2,300,000       2,322,985  (b)(d)(e) 

Extended Stay America Trust, 2021-ESH F (1 mo. USD LIBOR + 3.700%)

    3.775     7/15/38       2,370,000       2,385,784  (b)(d)(e) 

Federal Home Loan Mortgage Corp. (FHLMC) Multifamily Structured Credit Risk, 2021-MN1 B1 (SOFR30A + 7.750%)

    7.768     1/25/51       950,000       1,136,860  (b)(d) 

FRESB Mortgage Trust, 2018-SB48 B

    3.782     2/25/38       3,853,233       2,999,301  (b)(d) 

GMAC Commercial Mortgage Securities Inc., 2006-C1 AJ

    5.349     11/10/45       12,025       11,704  (b) 

GS Mortgage Securities Trust, 2006-GG8 AJ

    5.622     11/10/39       81,012       27,428  

GS Mortgage Securities Trust, 2007-GG10 AJ

    6.024     8/10/45       2,291,363       1,057,795  (b) 

GS Mortgage Securities Trust, 2019-SMP G (1 mo. USD LIBOR + 4.250%)

    4.323     8/15/32       1,500,000       1,067,073  (b)(d) 

Hawaii Hotel Trust, 2019-MAUI F (1 mo. USD LIBOR + 2.750%)

    2.823     5/15/38       1,000,000       1,004,450  (b)(d) 

Hawaii Hotel Trust, 2019-MAUI G (1 mo. USD LIBOR + 3.150%)

    3.223     5/15/38       1,697,000       1,694,126  (b)(d) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2006-LDP7 AJ

    6.273     4/17/45       296,676       118,107  (b) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2007-CB19 AJ

    6.101     2/12/49       70,321       80,186  (b) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2007-LD12 AJ

    6.715     2/15/51       74,539       68,781  (b) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2018-PHMZ M (1 mo. USD LIBOR + 8.208%)

    8.431     6/15/35       3,000,000       1,195,191  (b)(d) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2019-BOLT C (1 mo. USD LIBOR + 3.800%)

    3.873     7/15/34       1,814,912       1,719,978  (b)(d) 

 

See Notes to Financial Statements.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

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Table of Contents

Schedule of investments (unaudited) (cont’d)

June 30, 2021

 

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
    Face
Amount
    Value  
Commercial Mortgage-Backed Securities (a) — continued

 

                       

JPMorgan Chase Commercial Mortgage Securities Trust, 2019-BOLT D (1 mo. USD LIBOR + 6.550%)

    6.623     7/15/34     $ 907,456     $ 812,557  (b)(d) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2019-BOLT XCP, IO

    2.052     7/15/34       13,611,838       11,592  (b)(d) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2020-MKST G (1 mo. USD LIBOR + 4.250%)

    4.323     12/15/36       1,520,000       1,344,393  (b)(d) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2020-MKST H (1 mo. USD LIBOR + 6.750%)

    6.823     12/15/36       1,520,000       1,283,055  (b)(d) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2020-NNN GFL (1 mo. USD LIBOR + 3.000%)

    3.075     1/16/37       646,000       617,266  (b)(d) 

JPMorgan Chase Commercial Mortgage Securities Trust, 2020-NNN HFL (1 mo. USD LIBOR + 4.000%)

    4.075     1/16/37       646,000       608,980  (b)(d) 

MBRT, 2019-MBR H1 (1 mo. USD LIBOR + 4.000%)

    4.073     11/15/36       2,000,000       1,996,835  (b)(d) 

ML-CFC Commercial Mortgage Trust, 2007-5 AJ

    5.450     8/12/48       45,080       22,416  (b) 

ML-CFC Commercial Mortgage Trust, 2007-9 AJ

    6.193     9/12/49       30,918       30,468  (b) 

ML-CFC Commercial Mortgage Trust, 2007-9 AJA

    6.222     9/12/49       7,204       7,099  (b) 

Morgan Stanley Capital I Trust, 2007-IQ13 AJ

    5.438     3/15/44       2,299       2,298  

Morgan Stanley Capital I Trust, 2007-IQ16 AJ

    6.470     12/12/49       133,990       77,580  (b) 

Motel 6 Trust, 2017-MTL6 F (1 mo. USD LIBOR + 4.250%)

    4.323     8/15/34       1,203,672       1,211,132  (b)(d) 

MRCD Mortgage Trust, 2019-PRKC A

    4.250     12/15/36       2,100,000       1,776,148  (b)(d) 

Multifamily CAS Trust, 2019-01 CE (1 mo. USD LIBOR + 8.750%)

    8.842     10/15/49       2,500,000       2,376,853  (b)(d) 

Multifamily CAS Trust, 2020-1 CE (1 mo. USD LIBOR + 7.500%)

    7.592     3/25/50       1,500,000       1,659,956  (b)(d) 

Natixis Commercial Mortgage Securities Trust, 2019-FAME D

    4.544     8/15/36       1,900,000       1,733,413  (b)(d) 

Natixis Commercial Mortgage Securities Trust, 2019-FAME E

    4.544     8/15/36       950,000       818,062  (b)(d) 

Natixis Commercial Mortgage Securities Trust, 2019-TRUE A (1 mo. USD LIBOR + 2.011%, 3.511% floor)

    3.511     4/18/24       1,280,000       1,267,091  (b)(d) 

 

See Notes to Financial Statements.

 

 

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Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
    Face
Amount
    Value  
Commercial Mortgage-Backed Securities (a) — continued

 

                       

Starwood Retail Property Trust, 2014-STAR D (1 mo. USD LIBOR + 3.500%)

    3.573     11/15/27     $ 1,000,000     $ 100,125  (b)(d) 

Starwood Retail Property Trust, 2014-STAR E (1 mo. USD LIBOR + 4.400%)

    4.473     11/15/27       1,600,000       80,200  (b)(d) 

Tharaldson Hotel Portfolio Trust, 2018-THL E (1 mo. USD LIBOR + 3.330%)

    3.410     11/11/34       1,012,600       998,509  (b)(d) 

Tharaldson Hotel Portfolio Trust, 2018-THL F (1 mo. USD LIBOR + 4.102%)

    4.182     11/11/34       769,576       738,348  (b)(d) 

UBS-Barclays Commercial Mortgage Trust, 2012-C2 G

    5.000     5/10/63       3,130,000       149,827  (b)(d) 

UBS-Barclays Commercial Mortgage Trust, 2012-C2 H

    5.000     5/10/63       3,149,979       72,324  (b)(d) 

Total Commercial Mortgage-Backed Securities (Cost — $65,457,347)

 

            52,742,733  
                  

Face

Amount/

Units

        
Asset-Backed Securities — 6.5%                                

AccessLex Institute, 2004-A B1 (28 day Auction Rate Security)

    1.364     7/1/39       800,000       813,321  (b) 

Applebee’s Funding LLC/IHOP Funding LLC, 2019-1A A2II

    4.723     6/7/49       1,985,000       2,105,067  (d) 

BankAmerica Manufactured Housing Contract Trust, 1996-1 B1

    7.875     10/10/26       7,866,000       801,333  

BCMSC Trust, 1998-B A

    6.530     10/15/28       341,489       354,767  (b) 

BCMSC Trust, 1999-A A3

    5.980     3/15/29       108,559       109,285  (b) 

Cascade MH Asset Trust, 2019-MH1 M

    5.985     11/25/44       1,150,000       1,196,826  (b)(d) 

College Avenue Student Loans LLC, 2021-B D

    3.780     6/25/52       1,501,000       1,506,516  (d) 

Firstfed Corp. Manufactured Housing Contract, 1997-2 B

    8.110     5/15/24       128,622       11,323  (d) 

RBS Acceptance Inc., 1995-BA1 B2

    9.000     8/10/20       2,191,561       877  

SMB Private Education Loan Trust, 2014-A R

    0.000     9/15/45       6,875       794,970  (d) 

SoFi Professional Loan Program LLC, 2017-F R1

    0.000     1/25/41       34,000       1,013,384  (d) 

Thrust Engine Leasing, 2021-1A A

    4.163     7/15/40       1,700,000       1,703,866  (d) 

VOYA CLO, 2017-2A D (3 mo. USD LIBOR + 6.020%)

    6.204     6/7/30       400,000       393,769  (b)(d) 

Total Asset-Backed Securities (Cost — $13,918,589)

 

                    10,805,304  

 

See Notes to Financial Statements.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

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Schedule of investments (unaudited) (cont’d)

June 30, 2021

 

Western Asset Mortgage Opportunity Fund Inc.

 

Security‡   Rate     Maturity
Date
    Face
Amount
    Value  
Corporate Bonds & Notes — 1.5%                                
Consumer Staples — 0.3%                                

Food & Staples Retailing — 0.3%

                               

CVS Pass-Through Trust

    9.350     1/10/23     $ 479,443     $ 509,235  (d)   
Financials — 1.2%                                

Mortgage Real Estate Investment Trusts (REITs) — 1.2%

 

                       

Ladder Capital Finance Holdings LLLP/Ladder

                               

Capital Finance Corp.

    4.750     6/15/29       2,000,000       2,002,500  (d)   

Total Corporate Bonds & Notes (Cost — $2,484,147)

 

                    2,511,735  

Total Investments before Short-Term Investments (Cost — $227,535,515)

 

    230,492,691  
                   Shares         
Short-Term Investments — 5.5%                                

Western Asset Premier Institutional Government Reserves, Premium Shares (Cost — $9,190,205)

    0.010             9,190,205       9,190,205  (f)   

Total Investments — 143.2% (Cost — $236,725,720)

 

                    239,682,896  

Liabilities in Excess of Other Assets — (43.2)%

                            (72,299,450

Total Net Assets — 100.0%

                          $ 167,383,446  

 

Securities held by the Fund are subject to a lien, granted to the lender, to the extent of the borrowing outstanding and any additional expenses.

 

(a) 

Collateralized mortgage obligations are secured by an underlying pool of mortgages or mortgage pass-through certificates that are structured to direct payments on underlying collateral to different series or classes of the obligations. The interest rate may change positively or inversely in relation to one or more interest rates, financial indices or other financial indicators and may be subject to an upper and/or lower limit.

 

(b) 

Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above.

 

(c) 

All or a portion of this security is held by the counterparty as collateral for open reverse repurchase agreements.

 

(d) 

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.

 

(e) 

Securities traded on a when-issued or delayed delivery basis.

 

(f) 

In this instance, as defined in the Investment Company Act of 1940, an “Affiliated Company” represents Fund ownership of at least 5% of the outstanding voting securities of an issuer, or a company which is under common ownership or control with the Fund. At June 30, 2021, the total market value of investments in Affiliated Companies was $9,190,205 and the cost was $9,190,205 (Note 9).

 

See Notes to Financial Statements.

 

 

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Western Asset Mortgage Opportunity Fund Inc.

 

Abbreviation(s) used in this schedule:

CAS   — Connecticut Avenue Securities
CLO   — Collateralized Loan Obligation
CMT   — Constant Maturity Treasury
IO   — Interest Only
LIBOR   — London Interbank Offered Rate
PAC   — Planned Amortization Class
PO   — Principal Only
REMIC   — Real Estate Mortgage Investment Conduit
Re-REMIC   — Resecuritization of Real Estate Mortgage Investment Conduit
SOFR   — Secured Overnight Financing Rate
USD   — United States Dollar

At June 30, 2021, the Fund had the following open reverse repurchase agreements:

 

Counterparty   Rate     Effective
Date
    Maturity
Date
  Face Amount
of Reverse
Repurchase
Agreements
    Asset Class of Collateral*   Collateral
Value**
 
Nomura Securities International Inc.     1.891     5/27/2021     5/22/2023   $ 65,427,000     Residential Mortgage-
Backed Securities
  $ 87,239,825  

 

*

Refer to the Schedule of Investments for positions held at the counterparty as collateral for reverse repurchase agreements.

 

**

Including accrued interest.

At June 30, 2021, the Fund had the following open futures contracts:

 

      Number of
Contracts
     Expiration
Date
     Notional
Amount
    

Market

Value

     Unrealized
Appreciation
 
Contracts to Buy:                                             
U.S. Treasury Ultra Long-Term Bonds      20        9/21      $ 3,675,782      $ 3,853,750      $ 177,968  
Contracts to Sell:                                             
U.S. Treasury 5-Year Notes      39        9/21        4,820,511        4,813,758        6,753  
Net unrealized appreciation on open futures contracts

 

                     $ 184,721  

At June 30, 2021, the Fund had the following open swap contracts:

 

CENTRALLY CLEARED INTEREST RATE SWAPS

Notional

Amount

  Termination
Date
  Payments
Made by
the Fund
  Payments
Received by
the  Fund
 

Upfront
Premiums

Paid
(Received)

  Unrealized
Appreciation
$17,500,000   4/29/26   3-Month LIBOR quarterly   0.964% semi-annually     $38,688

 

See Notes to Financial Statements.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

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Table of Contents

Schedule of investments (unaudited) (cont’d)

June 30, 2021

 

Western Asset Mortgage Opportunity Fund Inc.

 

OTC CREDIT DEFAULT SWAPS ON CREDIT INDICES — SELL PROTECTION1  

Swap Counterparty

(Reference Entity)

  Notional
Amount2
   

Termination

Date

    Periodic
Payments
Received by
the Fund
  Market
Value3
    Upfront
Premiums
Paid
(Received)
   

Unrealized

Depreciation

 
Morgan Stanley & Co. Inc. (Markit CMBX.NA.BBB-.8 Index)   $ 500,000       10/17/57     3.000% Monthly   $ (69,205)     $ (21,782)     $ (47,423)  
OTC CREDIT DEFAULT SWAPS ON CREDIT INDICES — BUY PROTECTION4  

Swap Counterparty

(Reference Entity)

  Notional
Amount2
   

Termination

Date

    Periodic
Payments
Made by the
Fund
  Market
Value3
    Upfront
Premiums
Paid
(Received)
   

Unrealized

Depreciation

 
Morgan Stanley & Co. Inc. (Markit CMBX.NA.BBB-.12 Index)   $ 500,000       8/17/61     3.000% Monthly   $ 18,133     $ 40,882     $ (22,749)  

 

1  

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay 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 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

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 loss (or profit) for the credit derivative had 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 entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

 

4

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.

 

Percentage shown is an annual percentage rate.

 

See Notes to Financial Statements.

 

 

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Statement of assets and liabilities (unaudited)

June 30, 2021

 

Assets:         

Investments in unaffiliated securities, at value (Cost — $227,535,515)

   $ 230,492,691  

Investments in affiliated securities, at value (Cost — $9,190,205)

     9,190,205  

Cash

     5,142,614  

Interest receivable

     656,153  

Deposits with brokers for centrally cleared swap contracts

     435,000  

Receivable for securities sold

     254,076  

Deposits with brokers for open futures contracts

     176,999  

Deposits with brokers for OTC derivatives

     50,000  

Receivable from broker — net variation margin on centrally cleared swap contracts

     27,460  

Receivable from broker — net variation margin on open futures contracts

     20,062  

OTC swaps, at value (premiums paid — $40,882)

     18,133  

Prepaid expenses

     35,396  

Total Assets

     246,498,789  
Liabilities:         

Payable for open reverse repurchase agreements (Note 3)

     65,427,000  

Payable for securities purchased

     11,566,501  

Distributions payable

     1,245,687  

Deposits from brokers for open reverse repurchase agreements

     350,000  

Investment management fee payable

     152,222  

Interest expense payable

     120,446  

OTC swaps, at value (premiums received — $21,782)

     69,205  

Directors’ fees payable

     6,547  

Accrued expenses

     177,735  

Total Liabilities

     79,115,343  
Total Net Assets    $ 167,383,446  
Net Assets:         

Par value ($0.001 par value; 11,099,493 shares issued and outstanding; 100,000,000 shares authorized)

   $ 11,099  

Paid-in capital in excess of par value

     195,515,960  

Total distributable earnings (loss)

     (28,143,613)  
Total Net Assets    $ 167,383,446  
Shares Outstanding      11,099,493  
Net Asset Value    $ 15.08  

 

See Notes to Financial Statements.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

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Table of Contents

Statement of operations (unaudited)

For the Six Months Ended June 30, 2021

 

Investment Income:         

Interest from unaffiliated investments

   $ 6,605,977  

Interest from affiliated investments

     158  

Total Investment Income

     6,606,135  
Expenses:         

Investment management fee (Note 2)

     1,094,388  

Interest expense (Notes 3 and 5)

     532,282  

Audit and tax fees

     62,020  

Legal fees

     53,019  

Transfer agent fees

     42,548  

Directors’ fees

     29,213  

Fund accounting fees

     12,315  

Commitment fees (Note 5)

     12,166  

Shareholder reports

     9,843  

Stock exchange listing fees

     7,864  

Custody fees

     2,098  

Insurance

     1,453  

Miscellaneous expenses

     2,842  

Total Expenses

     1,862,051  

Less: Fee waivers and/or expense reimbursements (Note 2)

     (219,078)  

Net Expenses

     1,642,973  
Net Investment Income      4,963,162  
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options and Swap Contracts (Notes 1, 3 and 4):         

Net Realized Gain (Loss) From:

        

Investment transactions in unaffiliated securities

     631,985  

Futures contracts

     (463,023)  

Written options

     17,625  

Swap contracts

     23,246  

Net Realized Gain

     209,833  

Change in Net Unrealized Appreciation (Depreciation) From:

        

Investments in unaffiliated securities

     3,369,148  

Futures contracts

     142,133  

Swap contracts

     27,619  

Change in Net Unrealized Appreciation (Depreciation)

     3,538,900  
Net Gain on Investments, Futures Contracts, Written Options and Swap Contracts      3,748,733  
Increase in Net Assets From Operations    $ 8,711,895  

 

See Notes to Financial Statements.

 

 

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Statements of changes in net assets

 

 

For the Six Months Ended June 30, 2021 (unaudited)
and the Year Ended December 31, 2020
   2021      2020  
Operations:                  

Net investment income

   $ 4,963,162      $ 13,280,812  

Net realized gain (loss)

     209,833        (19,594,143)  

Change in net unrealized appreciation (depreciation)

     3,538,900        (23,513,781)  

Increase (Decrease) in Net Assets From Operations

     8,711,895        (29,827,112)  
Distributions to Shareholders From (Note 1):                  

Total distributable earnings

     (7,448,837)        (12,229,661)  

Return of capital

            (4,519,753)  

Decrease in Net Assets From Distributions to Shareholders

     (7,448,837)        (16,749,414)  
Fund Share Transactions:                  

Net proceeds from sale of shares (65,232 and 479,339 shares issued, respectively) (Note 7)

      997,242 ,         6,292,173 ,  

Reinvestment of distributions (7,147 and 39,852 shares issued, respectively)

     107,239        590,370  

Increase in Net Assets From Fund Share Transactions

     1,104,481        6,882,543  

Increase (Decrease) in Net Assets

     2,367,539        (39,693,983)  
Net Assets:                  

Beginning of period

     165,015,907        204,709,890  

End of period

   $ 167,383,446      $ 165,015,907  

 

Net of sales charges of $10,147 and $64,918, respectively.

 

Net of shelf registration offering costs of $6,835 and $359,440, respectively (Note 8).

 

See Notes to Financial Statements.

 

Western Asset Mortgage Opportunity Fund Inc. 2021 Semi-Annual Report  

 

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Table of Contents

Statement of cash flows (unaudited)

For the Six Months Ended June 30, 2021

 

Increase (Decrease) in Cash:         
Cash Flows from Operating Activities:         

Net increase in net assets resulting from operations

   $ 8,711,895  

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating activities:

        

Purchases of portfolio securities

     (30,713,346)  

Sales of portfolio securities

     7,448,666  

Net purchases, sales and maturities of short-term investments

     3,436,572  

Net amortization of premium (accretion of discount)

     1,186,106  

Increase in receivable for securities sold

     (254,076)  

Decrease in interest receivable

     49,895  

Increase in receivable from broker — net variation margin on centrally cleared swap contracts

     (27,460)  

Increase in prepaid expenses

     (33,447)  

Decrease in receivable for open OTC swap contracts

     167  

Increase in receivable from broker — net variation margin on open futures contracts

     (5,062)  

Decrease in net premiums paid for OTC swap contracts

     207  

Increase in deposits from brokers for open reverse repurchase agreements

     350,000  

Increase in payable for securities purchased

     11,566,501  

Increase in investment management fee payable

     6,421  

Decrease in Directors’ fees payable

     (1,553)  

Increase in interest expense payable

     25,822  

Increase in accrued expenses

     63,970  

Decrease in payable for open OTC swap contracts

     (166)  

Net realized gain on investments

     (631,985)  

Change in net unrealized appreciation (depreciation) of investments and OTC swap contracts

     (3,358,079)  

Net Cash Used in Operating Activities*

     (2,178,952)  

Cash Flows from Financing Activities:

        

Distributions paid on common stock (net of distributions payable)

     (6,095,911)  

Decrease in loan facility borrowings

     (45,000,000)  

Increase in payable for open reverse repurchase agreements

     57,790,000  

Net proceeds from sale of shares

     997,242  
Net Cash Provided by Financing Activities      7,691,331  
Net Increase in Cash and Restricted Cash      5,512,379  
Cash and restricted cash at beginning of period      292,234  
Cash and restricted cash at end of period    $ 5,804,613  

 

*

Included in operating expenses is cash of $521,210 paid for interest and commitment fees on borrowings.

 

See Notes to Financial Statements.

 

 

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The following table provides a reconciliation of cash and restricted cash reported within the Statement of Assets and Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows.

 

      June 30, 2021  
Cash    $ 5,142,614  
Restricted cash      661,999  
Total cash and restricted cash shown in the Statement of Cash Flows    $ 5,804,613  

Restricted cash consists of cash that has been segregated to cover the Fund’s collateral or margin obligations under derivative contracts. It is separately reported on the Statement of Assets and Liabilities as Deposits with brokers.

 

Non-Cash Financing Activities:         

Proceeds from reinvestment of distributions

   $ 107,239  

 

See Notes to Financial Statements.

 

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Financial highlights

 

For a share of capital stock outstanding throughout each year ended December 31,
unless otherwise noted:
       
     20211,2     20201     20191     20181     20171     20161  
Net asset value, beginning of period     $14.96       $19.48       $19.28       $21.27       $20.70       $22.76  
Income (loss) from operations:            

Net investment income

    0.45       1.23       1.51       1.65       1.57       1.47  

Net realized and unrealized gain (loss)

    0.35       (4.20)       0.65       0.22       2.28       (0.53)  

Total income (loss) from operations

    0.80       (2.97)       2.16       1.87       3.85       0.94  
Less distributions from:            

Net investment income

    (0.68) 3       (1.13)       (1.45)       (3.03)       (2.69)       (2.95)  

Net realized gains

                      (0.83)       (0.59)       (0.05)  

Return of capital

          (0.42)       (0.51)                    

Total distributions

    (0.68)       (1.55)       (1.96)       (3.86)       (3.28)       (3.00)  
Net asset value, end of period     $15.08       $14.96       $19.48       $19.28       $21.27       $20.70  
Market price, end of period     $15.59       $14.18       $20.30       $20.39       $24.67       $22.79  

Total return, based on NAV4,5

    5.44     (14.67)     11.65     9.26     19.70     4.47

Total return, based on Market Price6

    15.06     (22.13)     9.71     (1.16)     24.20     10.80
Net assets, end of period (millions)     $167       $165       $205       $202       $222       $216  
Ratios to average net assets:            

Gross expenses

    2.27 %7       2.82     3.56     3.15     2.68     2.97

Net expenses

    2.00 7,8,9       2.53 9       3.56       3.15       2.68       2.97  

Net investment income

    6.05 7       8.18       7.73       7.78       7.29       6.78  
Portfolio turnover rate     4     11     17     33     35     23 %10  
Supplemental data:            

Loan Outstanding, End of Period (000s)

          $45,000       $98,000       $99,250       $101,750       $101,750  

Asset Coverage Ratio for Loan Outstanding11

          467     309     303     319     312

Asset Coverage, per $1,000 Principal Amount of Loan Outstanding11

          $4,667       $3,089       $3,035       $3,185       $3,124  

Weighted Average Loan (000s)

    $45,000       $62,369       $98,072       $101,743       $101,750       $90,984  

Weighted Average Interest Rate on Loan

    1.84     2.14     3.46     3.06     2.06     1.50

 

See Notes to Financial Statements.

 

 

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1  

Per share amounts have been calculated using the average shares method.

2 

For the six months ended June 30, 2021 (unaudited).

 

3 

The actual source of the Fund’s current fiscal year distributions may be from net investment income, return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year.

 

4 

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

5 

The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

6 

The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

 

7 

Annualized.

 

8 

The manager has agreed to waive the Fund’s management fee to an extent sufficient to offset the net management fee payable in connection with any investment in an affiliated money market fund.

 

9 

Reflects fee waivers and/or expense reimbursements.

 

10 

Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 24%.

 

11 

Represents value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the end of the period.

 

See Notes to Financial Statements.

 

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Notes to financial statements (unaudited)

 

1. Organization and significant accounting policies

Western Asset Mortgage Opportunity Fund Inc. (the “Fund”) was incorporated in Maryland on December 11, 2009 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s primary investment objective is to provide current income. As a secondary investment objective, the Fund will seek capital appreciation. The Fund seeks to achieve its investment objectives by investing primarily in a diverse portfolio of mortgage-backed securities (“MBS”) and mortgage whole loans. Investments in MBS consist primarily of non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”).

The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.

 

 

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The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Global Fund Valuation Committee (formerly known as Legg Mason North Atlantic Fund Valuation Committee prior to March 1, 2021) (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.

The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.

The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

 

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Notes to financial statements (unaudited) (cont’d)

 

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

 

 

Level 1 — quoted prices in active markets for identical investments

 

 

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

 

 

Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:

 

ASSETS  
Description   Quoted Prices
(Level 1)
    Other Significant
Observable Inputs
(Level 2)
   

Significant
Unobservable
Inputs

(Level 3)

    Total  
Long-Term Investments†:                                

Residential Mortgage-Backed

                               

Securities

        $ 164,432,919           $ 164,432,919  

Commercial Mortgage-Backed Securities

          52,742,733             52,742,733  

Asset-Backed Securities

          10,805,304             10,805,304  

Corporate Bonds & Notes

          2,511,735             2,511,735  
Total Long-Term Investments           230,492,691             230,492,691  
Short-Term Investments†   $ 9,190,205                   9,190,205  
Total Investments   $ 9,190,205     $ 230,492,691           $ 239,682,896  
Other Financial Instruments:                                

Futures Contracts††

  $ 184,721                 $ 184,721  

Centrally Cleared Interest Rate Swaps††

        $ 38,688             38,688  

OTC Credit Default Swaps on Credit Indices — Buy Protection‡

          18,133             18,133  
Total Other Financial Instruments   $ 184,721     $ 56,821           $ 241,542  
Total   $ 9,374,926     $ 230,549,512           $ 239,924,438  

 

 

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LIABILITIES  
Description  

Quoted Prices

(Level 1)

   

Other Significant

Observable Inputs

(Level 2)

   

Significant
Unobservable
Inputs

(Level 3)

    Total  
Other Financial Instruments:                                

OTC Credit Default Swaps on Credit Indices — Sell Protection‡

        $ 69,205           $ 69,205  

 

See Schedule of Investments for additional detailed categorizations.

 

††

Reflects the unrealized appreciation (depreciation) of the instruments.

 

Value includes any premium paid or received with respect to swap contracts.

(b) Purchased options. When the Fund purchases an option, an amount equal to the premium paid by the Fund is recorded as an investment on the Statement of Assets and Liabilities, the value of which is marked-to-market to reflect the current market value of the option purchased. If the purchased option expires, the Fund realizes a loss equal to the amount of premium paid. When an instrument is purchased or sold through the exercise of an option, the related premium paid is added to the basis of the instrument acquired or deducted from the proceeds of the instrument sold. The risk associated with purchasing put and call options is limited to the premium paid.

(c) Written options. When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded as a realized gain. When a written call option is exercised, the difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund from the exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.

The risk in writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing an uncovered call option is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

 

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Notes to financial statements (unaudited) (cont’d)

 

(d) Futures contracts. The Fund uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.

Upon entering into a futures contract, the Fund is required to deposit cash or securities with a broker in an amount equal to a certain percentage of the contract amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation margin’’) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The daily changes in contract value are recorded as unrealized appreciation or depreciation in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.

Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

(e) Swap agreements. The Fund invests in swaps for the purpose of managing its exposure to interest rate, credit or market risk, or for other purposes, including to increase the Fund’s return. The use of swaps involves risks that are different from those associated with other portfolio transactions. Swap agreements are privately negotiated in the over-the-counter market and may be entered into as a bilateral contract (“OTC Swaps”) or centrally cleared (“Centrally Cleared Swaps”). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.

In a Centrally Cleared Swap, immediately following execution of the swap, the swap agreement is submitted to a clearinghouse or central counterparty (the “CCP”) and the CCP becomes the ultimate counterparty of the swap agreement. The Fund is required to interface with the CCP through a broker, acting in an agency capacity. All payments are settled with the CCP through the broker. Upon entering into a Centrally Cleared Swap, the Fund is required to deposit initial margin with the broker in the form of cash or securities.

Swap contracts are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of Centrally Cleared Swaps, if any, is recorded as a net receivable or payable for variation margin on the Statement of Assets and Liabilities. Gains or losses are realized upon termination of the swap agreement. Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Fund’s custodian in compliance with the terms of the swap contracts. Securities posted as collateral for swap contracts are identified in the Schedule of Investments and restricted cash, if any, is identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in the Statement of Assets and Liabilities. These risks include changes in the returns of the underlying instruments, failure of the counterparties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.

 

 

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OTC Swap payments received or made at the beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as realized gain or loss in the Statement of Operations. Net periodic payments received or paid by the Fund are recognized as a realized gain or loss in the Statement of Operations.

The Fund’s maximum exposure in the event of a defined credit event on a credit default swap to sell protection is the notional amount. As of June 30, 2020, the total notional value of all credit default swaps to sell protection was $500,000. This amount would be offset by the value of the swap’s reference entity, upfront premiums received on the swap and any amounts received from the settlement of a credit default swap where the Fund bought protection for the same referenced security/entity.

For average notional amounts of swaps held during the six months ended June 30, 2021, see Note 4.

(f) Swaptions. The Fund may purchase or write swaption contracts to manage exposure to fluctuations in interest rates or to enhance yield. The Fund may also purchase and write swaption contracts to manage exposure to an underlying instrument. Swaption contracts written by the Fund represent an option that gives the purchaser the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date. Swaption contracts purchased by the Fund represent an option that gives the Fund the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date.

When the Fund writes a swaption, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the swaption written. If the swaption expires, the Fund realizes a gain equal to the amount of the premium received.

When the Fund purchases a swaption, an amount equal to the premium paid by the Fund is recorded as an investment on the Statement of Assets and Liabilities, the value of which is marked-to-market daily to reflect the current market value of the swaption purchased. If the swaption expires, the Fund realizes a loss equal to the amount of the premium paid.

Swaptions are marked-to-market daily based upon quotations from market makers. Changes in the value of the swaption are reported as unrealized gains or losses in the Statement of Operations.

(g) Stripped securities. The Fund may invest in ‘‘Stripped Securities,’’ a term used collectively for components, or strips, of fixed income securities. Stripped Securities can be principal only securities (“PO”), which are debt obligations that have been stripped of unmatured interest coupons, or interest only securities (“IO”), which are unmatured interest