UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number 811-21609
Western Asset Variable Rate Strategic Fund Inc.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: 1-800-451-2010
Date of fiscal year end: September 30
Date of reporting period: December 31, 2006
| ITEM 1. | SCHEDULE OF INVESTMENTS |
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
FORM N-Q
DECEMBER 31, 2006
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | |||
| CORPORATE BONDS & NOTES - 17.6% | |||||
| Aerospace & Defense - 0.2% | |||||
| 100,000 | DRS Technologies Inc., Senior Subordinated Notes, 6.875% due 11/1/13 | $ | 101,250 | ||
| 250,000 | L-3 Communications Corp., Senior Subordinated Notes, 7.625% due 6/15/12 | 260,000 | |||
| 20,000 | TransDigm Inc., 7.750% due 7/15/14 | 20,700 | |||
| Total Aerospace & Defense | 381,950 | ||||
| Auto Components - 0.1% | |||||
| 100,000 | Keystone Automotive Operations Inc., Senior Subordinated Notes, 9.750% due 11/1/13 | 99,500 | |||
| 55,000 | TRW Automotive Inc., Senior Notes, 9.375% due 2/15/13 | 59,263 | |||
| Visteon Corp., Senior Notes: | |||||
| 30,000 | 8.250% due 8/1/10 |
29,400 | |||
| 40,000 | 7.000% due 3/10/14 |
35,200 | |||
| Total Auto Components | 223,363 | ||||
| Automobiles - 0.8% | |||||
| Ford Motor Co.: | |||||
| Debentures: |
|||||
| 60,000 | 8.875% due 1/15/22 |
52,500 | |||
| 50,000 | 6.625% due 10/1/28 |
36,500 | |||
| 790,000 | Notes, 7.450% due 7/16/31 (a) |
624,100 | |||
| 425,000 | Senior Notes, 4.950% due 1/15/08 |
417,923 | |||
| General Motors Corp., Senior Debentures: |
|||||
| 50,000 | 8.250% due 7/15/23 |
46,750 | |||
| 410,000 | 8.375% due 7/15/33 |
381,300 | |||
| Total Automobiles | 1,559,073 | ||||
| Building Products - 0.2% | |||||
| 100,000 | Associated Materials Inc., Senior Subordinated Notes, 9.750% due 4/15/12 | 103,500 | |||
| 80,000 | Jacuzzi Brands Inc., Senior Secured Notes, 9.625% due 7/1/10 | 85,400 | |||
| 120,000 | NTK Holdings Inc., Senior Discount Notes, step bond to yield 10.465% due 3/1/14 | 84,600 | |||
| Total Building Products | 273,500 | ||||
| Capital Markets - 0.0% | |||||
| 40,000 | E*TRADE Financial Corp., Senior Notes, 7.375% due 9/15/13 | 41,800 | |||
| Commercial Services & Supplies - 0.5% | |||||
| 100,000 | Allied Security Escrow Corp., Senior Subordinated Notes, 11.375% due 7/15/11 | 103,000 | |||
| Allied Waste North America Inc., Senior Notes, Series B: | |||||
| 217,000 | 9.250% due 9/1/12 |
231,647 | |||
| 175,000 | 7.250% due 3/15/15 |
176,094 | |||
| 90,000 | DynCorp International LLC/DIV Capital Corporation, Senior Subordinated Notes, Series B, 9.500% due 2/15/13 |
95,850 | |||
| 125,000 | Interface Inc., Senior Notes, 10.375% due 2/1/10 | 138,750 | |||
| 190,000 | Windstream Corp., Senior Notes, 8.625% due 8/1/16 (b) | 209,000 | |||
| Total Commercial Services & Supplies | 954,341 | ||||
| Consumer Finance - 4.4% | |||||
| Ford Motor Credit Co.: | |||||
| Notes: |
|||||
| 115,000 | 6.625% due 6/16/08 |
114,961 | |||
| 3,000,000 | 6.944% due 1/15/10 (a)(c) |
2,936,217 | |||
| 220,000 | Senior Notes, 9.875% due 8/10/11 |
235,513 | |||
| General Motors Acceptance Corp., Notes: | |||||
| 25,000 | 7.250% due 3/2/11 |
26,022 | |||
See Notes to Schedule of Investments.
1
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | |||
| Consumer Finance - 4.4% (continued) | |||||
| 500,000 | 6.750% due 12/1/14 |
$ | 514,349 | ||
| 4,000,000 | 7.569% due 12/1/14 (a)(c) |
4,190,700 | |||
| 50,000 | 8.000% due 11/1/31 |
57,570 | |||
| Total Consumer Finance | 8,075,332 | ||||
| Containers & Packaging - 0.4% | |||||
| 35,000 | Graham Packaging Co. Inc., Senior Subordinated Notes, 9.875% due 10/15/14 |
35,525 | |||
| Graphic Packaging International Corp.: |
|||||
| 35,000 | Senior Notes, 8.500% due 8/15/11 |
36,400 | |||
| 190,000 | Senior Subordinated Notes, 9.500% due 8/15/13 |
201,400 | |||
| 225,000 | JSG Funding PLC, Senior Notes, 9.625% due 10/1/12 |
239,625 | |||
| 165,000 | Smurfit-Stone Container Enterprises Inc., Senior Notes, 8.375% due 7/1/12 |
162,525 | |||
| Total Containers & Packaging | 675,475 | ||||
| Diversified Consumer Services - 0.2% | |||||
| 360,000 | Hertz Corp., Senior Subordinated Notes, 10.500% due 1/1/16 (b) |
397,800 | |||
| 30,000 | Service Corp. International, Senior Notes, 7.625% due 10/1/18 |
31,950 | |||
| Total Diversified Consumer Services | 429,750 | ||||
| Diversified Financial Services - 2.2% | |||||
| 125,000 | Basell AF SCA, Senior Secured Subordinated Second Priority Notes, 8.375% due 8/15/15 (b) |
129,062 | |||
| 100,000 | CCM Merger Inc., Notes, 8.000% due 8/1/13 (b) |
98,250 | |||
| 250,000 | Chukchansi Economic Development Authority, Senior Notes, 8.877% due 11/15/12 (b)(c) |
258,125 | |||
| CitiSteel USA Inc., Senior Secured Notes: |
|||||
| 30,000 | 12.949% due 9/1/10 (c) |
31,200 | |||
| 40,000 | 15.000% due 10/1/10 (b)(d) |
45,400 | |||
| 81,000 | Global Cash Access LLC/Global Cash Finance Corp., Senior Subordinated Notes, 8.750% due 3/15/12 |
85,455 | |||
| 85,000 | Idearc Inc., Senior Notes, 8.000% due 11/15/16 (b) |
86,700 | |||
| 5,000 | Milacron Escrow Corp., Senior Secured Notes, 11.500% due 5/15/11 |
4,775 | |||
| 2,000,000 | Residential Capital Corp., Notes, 6.739% due 6/29/07 (a)(c) |
2,010,192 | |||
| 840,000 | TNK-BP Finance SA, 6.875% due 7/18/11 (b) |
870,450 | |||
| 50,000 | UCAR Finance Inc., Senior Notes, 10.250% due 2/15/12 |
52,938 | |||
| 30,000 | UGS Corp., Senior Subordinated Notes, 10.000% due 6/1/12 |
32,850 | |||
| 195,000 | Vanguard Health Holdings Co. I LLC, Senior Discount Notes, step bond to yield 10.000% due 10/1/15 |
151,125 | |||
| 125,000 | Vanguard Health Holdings Co. II LLC, Senior Subordinated Notes, 9.000% due 10/1/14 |
127,187 | |||
| Total Diversified Financial Services | 3,983,709 | ||||
| Diversified Telecommunication Services - 0.7% | |||||
| Cincinnati Bell Inc.: |
|||||
| 30,000 | Senior Notes, 7.000% due 2/15/15 |
30,188 | |||
| 95,000 | Senior Subordinated Notes, 8.375% due 1/15/14 |
98,088 | |||
| 45,000 | Cincinnati Bell Telephone Co., Senior Debentures, 6.300% due 12/1/28 |
40,725 | |||
| 10,000 | Citizens Communications Co., Senior Notes, 7.875% due 1/15/27 (b) |
10,150 | |||
| 110,000 | Hawaiian Telcom Communications Inc., Senior Subordinated Notes, Series B, 12.500% due 5/1/15 |
115,775 | |||
| Intelsat Bermuda Ltd., Senior Notes: |
|||||
| 125,000 | 9.250% due 6/15/16 (b) |
135,000 | |||
| 225,000 | 11.250% due 6/15/16 (b) |
248,062 | |||
| 30,000 | Level 3 Financing Inc., Senior Notes, 11.800% due 3/15/11 (c) |
31,875 | |||
| 75,000 | NTL Cable PLC, Senior Notes, 9.125% due 8/15/16 |
79,594 | |||
| 250,000 | Qwest Corp., Notes, 8.610% due 6/15/13 (c) |
271,875 | |||
See Notes to Schedule of Investments.
2
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | ||||
| Diversified Telecommunication Services - 0.7% (continued) | ||||||
| 2,000,000 | MXN | Telefonos de Mexico SA de CV, Senior Notes, 8.799% due 1/31/16 |
$ | 192,467 | ||
| Total Diversified Telecommunication Services | 1,253,799 | |||||
| Energy Equipment & Services - 0.2% | ||||||
| 198,000 | Dresser-Rand Group Inc., Senior Subordinated Notes, 7.375% due 11/1/14 |
200,475 | ||||
| 20,000 | GulfMark Offshore Inc., Senior Subordinated Notes, 7.750% due 7/15/14 |
20,500 | ||||
| 20,000 | Pride International Inc., Senior Notes, 7.375% due 7/15/14 |
20,750 | ||||
| 200,000 | Universal Compression Inc., Senior Notes, 7.250% due 5/15/10 |
202,000 | ||||
| Total Energy Equipment & Services | 443,725 | |||||
| Food & Staples Retailing - 0.3% | ||||||
| 504,138 | CVS Corp., Pass-through Certificates, 6.117% due 1/10/13 (b) |
508,179 | ||||
| Gas Utilities - 0.0% | ||||||
| 30,000 | Suburban Propane Partners LP/Suburban Energy Finance Corp., Senior Notes, 6.875% due 12/15/13 |
29,550 | ||||
| Health Care Providers & Services - 0.3% | ||||||
| 195,000 | HCA Inc., Notes, 6.375% due 1/15/15 |
165,750 | ||||
| 375,000 | Tenet Healthcare Corp., Senior Notes, 9.875% due 7/1/14 |
383,437 | ||||
| Total Health Care Providers & Services | 549,187 | |||||
| Hotels, Restaurants & Leisure - 1.1% | ||||||
| 175,000 | Boyd Gaming Corp., Senior Subordinated Notes, 7.750% due 12/15/12 |
181,781 | ||||
| 242,000 | Choctaw Resort Development Enterprise, Senior Notes, 7.250% due 11/15/19 (b) |
243,210 | ||||
| 125,000 | Herbst Gaming Inc., Senior Subordinated Notes, 7.000% due 11/15/14 |
120,000 | ||||
| 70,000 | Inn of the Mountain Gods Resort & Casino, Senior Notes, 12.000% due 11/15/10 |
75,950 | ||||
| 225,000 | Isle of Capri Casinos Inc., Senior Subordinated Notes, 7.000% due 3/1/14 |
225,000 | ||||
| 250,000 | Las Vegas Sands Corp., Senior Notes, 6.375% due 2/15/15 |
243,437 | ||||
| 260,000 | MGM MIRAGE Inc., Senior Notes, 7.625% due 1/15/17 |
261,950 | ||||
| 200,000 | Mohegan Tribal Gaming Authority, Senior Subordinated Notes, 6.875% due 2/15/15 |
201,500 | ||||
| 250,000 | Penn National Gaming Inc., Senior Subordinated Notes, 6.750% due 3/1/15 |
246,250 | ||||
| 200,000 | Pinnacle Entertainment Inc., Senior Subordinated Notes, 8.250% due 3/15/12 |
203,000 | ||||
| Station Casinos Inc.: |
||||||
| 60,000 | Senior Notes, 7.750% due 8/15/16 |
60,750 | ||||
| 15,000 | Senior Subordinated Notes, 6.875% due 3/1/16 |
13,538 | ||||
| Total Hotels, Restaurants & Leisure | 2,076,366 | |||||
| Household Durables - 0.3% | ||||||
| 200,000 | Beazer Homes USA Inc., Senior Notes, 8.125% due 6/15/16 |
213,000 | ||||
| 45,000 | Norcraft Cos. LP/Norcraft Finance Corp., Senior Subordinated Notes, 9.000% due 11/1/11 |
46,800 | ||||
| 220,000 | Norcraft Holdings LP/Norcraft Capital Corp., Senior Discount Notes, step bond to yield |
187,000 | ||||
| 125,000 | Sealy Mattress Co., Senior Subordinated Notes, 8.250% due 6/15/14 |
131,250 | ||||
| Total Household Durables | 578,050 | |||||
| Household Products - 0.0% | ||||||
| 65,000 | Nutro Products Inc., Senior Subordinated Notes, 10.750% due 4/15/14 (b) |
71,338 | ||||
| Independent Power Producers & Energy Traders - 0.8% | ||||||
| 40,000 | AES China Generating Co., Ltd., Class A, 8.250% due 6/26/10 |
40,024 | ||||
| AES Corp., Senior Notes: |
||||||
| 375,000 | 9.375% due 9/15/10 |
409,219 | ||||
| 25,000 | 8.875% due 2/15/11 |
26,937 | ||||
| 200,000 | Dynegy Holdings Inc., Senior Debentures, 7.625% due 10/15/26 |
195,000 | ||||
See Notes to Schedule of Investments.
3
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | |||
| Independent Power Producers & Energy Traders - 0.8% (continued) | |||||
| Edison Mission Energy, Senior Notes: |
|||||
| 125,000 | 7.730% due 6/15/09 |
$ | 130,000 | ||
| 80,000 | 7.750% due 6/15/16 |
85,200 | |||
| 130,000 | Mirant North America LLC, Senior Notes, 7.375% due 12/31/13 |
132,600 | |||
| NRG Energy Inc., Senior Notes: |
|||||
| 75,000 | 7.250% due 2/1/14 |
75,750 | |||
| 310,000 | 7.375% due 2/1/16 |
312,325 | |||
| Total Independent Power Producers & Energy Traders | 1,407,055 | ||||
| Internet & Catalog Retail - 0.1% | |||||
| 10,000 | Brookstone Co. Inc., Senior Secured Notes, 12.000% due 10/15/12 |
9,825 | |||
| 175,000 | FTD Inc., Senior Subordinated Notes, 7.750% due 2/15/14 |
176,094 | |||
| Total Internet & Catalog Retail | 185,919 | ||||
| IT Services - 0.1% | |||||
| SunGard Data Systems Inc.: |
|||||
| 50,000 | Senior Notes, 9.125% due 8/15/13 |
52,750 | |||
| 175,000 | Senior Subordinated Notes, 10.250% due 8/15/15 |
187,687 | |||
| Total IT Services | 240,437 | ||||
| Leisure Equipment & Products - 0.0% | |||||
| 70,000 | WMG Acquisition Corp., Senior Subordinated Notes, 7.375% due 4/15/14 |
69,650 | |||
| Media - 1.2% | |||||
| 120,000 | Affinion Group Inc., Senior Notes, 10.125% due 10/15/13 |
127,800 | |||
| 50,000 | AMC Entertainment Inc., Senior Subordinated Notes, 11.000% due 2/1/16 |
56,375 | |||
| 497,000 | CCH I LLC/CCH Capital Corp., Senior Secured Notes, 11.000% due 10/1/15 |
512,531 | |||
| 10,000 | Charter Communications Holdings LLC/Charter Communications Holdings Capital Corp., Senior Discount Notes, 11.750% due 5/15/11 |
9,650 | |||
| 225,000 | Charter Communications Operating LLC, Second Lien Senior Notes, 8.375% due 4/30/14 (b) |
235,969 | |||
| 30,000 | CMP Susquehanna Corp., Senior Subordinated Notes, 9.875% due 5/15/14 (b) |
30,000 | |||
| CSC Holdings Inc.: |
|||||
| 75,000 | Senior Debentures, Series B, 8.125% due 8/15/09 |
78,094 | |||
| 250,000 | Senior Notes, Series B, 8.125% due 7/15/09 |
260,313 | |||
| 81,000 | DIRECTV Holdings LLC/DIRECTV Financing Co. Inc., Senior Notes, 8.375% due 3/15/13 |
84,645 | |||
| 375,000 | EchoStar DBS Corp., Senior Notes, 6.625% due 10/1/14 |
366,562 | |||
| 325,000 | LodgeNet Entertainment Corp., Senior Subordinated Notes, 9.500% due 6/15/13 |
351,812 | |||
| 95,000 | Primedia Inc., Senior Notes, 8.875% due 5/15/11 |
97,375 | |||
| 50,000 | Quebecor Media Inc., Senior Notes, 7.750% due 3/15/16 |
51,313 | |||
| Total Media | 2,262,439 | ||||
| Metals & Mining - 0.3% | |||||
| 150,000 | Metals USA Inc., Senior Secured Notes, 11.125% due 12/1/15 |
165,562 | |||
| 80,000 | RathGibson Inc., Senior Notes, 11.250% due 2/15/14 |
85,200 | |||
| Vale Overseas Ltd., Notes: |
|||||
| 128,000 | 6.250% due 1/23/17 |
129,222 | |||
| 120,000 | 6.875% due 11/21/36 |
123,678 | |||
| Total Metals & Mining | 503,662 | ||||
| Multiline Retail - 0.0% | |||||
| 45,000 | Neiman Marcus Group Inc., Senior Subordinated Notes, 10.375% due 10/15/15 |
50,288 | |||
See Notes to Schedule of Investments.
4
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | |||
| Office Electronics - 0.1% | |||||
| 160,000 | Xerox Corp., Senior Notes, 6.750% due 2/1/17 |
$ | 168,000 | ||
| Oil, Gas & Consumable Fuels - 1.6% | |||||
| 170,000 | Belden & Blake Corp., Secured Notes, 8.750% due 7/15/12 |
175,100 | |||
| 50,000 | Chesapeake Energy Corp., Senior Notes, 6.375% due 6/15/15 |
49,750 | |||
| 40,000 | Compagnie Generale de Geophysique SA, Senior Notes, 7.500% due 5/15/15 |
40,400 | |||
| El Paso Corp., Medium-Term Notes: |
|||||
| 375,000 | 7.375% due 12/15/12 |
396,562 | |||
| 300,000 | 7.750% due 1/15/32 |
330,000 | |||
| 80,000 | Enterprise Products Operating LP, Junior Subordinated Notes, 8.375% due 8/1/66 |
86,801 | |||
| 250,000 | EXCO Resources Inc., Senior Notes, 7.250% due 1/15/11 |
255,000 | |||
| 510,000 | Gazprom, Loan Participation Notes, 6.212% due 11/22/16 (b) |
514,845 | |||
| 30,000 | International Coal Group Inc., Senior Notes, 10.250% due 7/15/14 |
30,150 | |||
| 20,000 | OMI Corp., Senior Notes, 7.625% due 12/1/13 |
20,550 | |||
| 95,000 | OPTI Canada Inc., Senior Secured Notes, 8.250% due 12/15/14 (b) |
98,088 | |||
| 75,000 | Peabody Energy Corp., Series B, 6.875% due 3/15/13 |
77,250 | |||
| 45,000 | SemGroup LP, Senior Notes, 8.750% due 11/15/15 (b) |
45,450 | |||
| 200,000 | Stone Energy Corp., Senior Subordinated Notes, 8.250% due 12/15/11 |
197,500 | |||
| 500,000 | Williams Cos. Inc., Notes, 8.750% due 3/15/32 (a) |
567,500 | |||
| Total Oil, Gas & Consumable Fuels | 2,884,946 | ||||
| Paper & Forest Products - 0.2% | |||||
| Appleton Papers Inc.: |
|||||
| 100,000 | Senior Notes, 8.125% due 6/15/11 |
102,500 | |||
| 125,000 | Senior Subordinated Notes, Series B, 9.750% due 6/15/14 |
129,375 | |||
| NewPage Corp., Senior Secured Notes: |
|||||
| 40,000 | 10.000% due 5/1/12 |
42,400 | |||
| 20,000 | 11.621% due 5/1/12 (c) |
21,700 | |||
| Total Paper & Forest Products | 295,975 | ||||
| Pharmaceuticals - 0.1% | |||||
| 145,000 | Leiner Health Products Inc., Senior Subordinated Notes, 11.000% due 6/1/12 |
150,800 | |||
| Real Estate Investment Trusts (REITs) - 0.2% | |||||
| 5,000 | Forest City Enterprises Inc., Senior Notes, 7.625% due 6/1/15 |
5,125 | |||
| 425,000 | iStar Financial Inc., Senior Notes, 5.150% due 3/1/12 |
413,788 | |||
| Ventas Realty LP/Ventas Capital Corp., Senior Notes: |
|||||
| 10,000 | 7.125% due 6/1/15 |
10,550 | |||
| 20,000 | 6.750% due 4/1/17 |
20,750 | |||
| Total Real Estate Investment Trusts (REITs) | 450,213 | ||||
| Road & Rail - 0.1% | |||||
| 140,000 | Grupo Transportacion Ferroviaria Mexicana SA de CV, Senior Notes, 9.375% due 5/1/12 |
150,150 | |||
| Software - 0.0% | |||||
| 20,000 | Activant Solutions Inc., Senior Subordinated Notes, 9.500% due 5/1/16 (b) |
18,700 | |||
| Specialty Retail - 0.1% | |||||
| 80,000 | Blockbuster Inc., Senior Subordinated Notes, 9.000% due 9/1/12 |
77,800 | |||
| 5,000 | Linens ‘n Things Inc., Senior Secured Notes, 10.999% due 1/15/14 (c) |
4,875 | |||
| 20,000 | Michaels Stores Inc., Subordinated Notes, step bond to yield 13.255% due 11/1/16 (b) |
10,950 | |||
| Total Specialty Retail | 93,625 | ||||
| Textiles, Apparel & Luxury Goods - 0.3% | |||||
| 300,000 | Levi Strauss & Co., Senior Notes, 9.750% due 1/15/15 |
324,750 | |||
See Notes to Schedule of Investments.
5
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | |||
| Textiles, Apparel & Luxury Goods - 0.3% (continued) | |||||
| 35,000 | Oxford Industries Inc., Senior Notes, 8.875% due 6/1/11 |
$ | 36,312 | ||
| 100,000 | Simmons Bedding Co., Senior Subordinated Notes, 7.875% due 1/15/14 |
101,750 | |||
| 50,000 | Simmons Co., Senior Discount Notes, step bond to yield 9.995% due 12/15/14 |
39,500 | |||
| Total Textiles, Apparel & Luxury Goods | 502,312 | ||||
| Tobacco - 0.0% | |||||
| 10,000 | Alliance One International Inc., Senior Notes, 11.000% due 5/15/12 |
10,700 | |||
| Trading Companies & Distributors - 0.1% | |||||
| 50,000 | Ashtead Capital Inc., Notes, 9.000% due 8/15/16 (b) |
53,750 | |||
| 55,000 | H&E Equipment Services Inc., Senior Notes, 8.375% due 7/15/16 |
57,888 | |||
| Total Trading Companies & Distributors |
111,638 | ||||
| Wireless Telecommunication Services - 0.4% | |||||
| 125,000 | IWO Holdings Inc., Senior Secured Notes, 9.124% due 1/15/12 (c) |
128,125 | |||
| 140,000 | Rural Cellular Corp., Senior Notes, 9.875% due 2/1/10 |
149,625 | |||
| 410,000 | True Move Co., Ltd., 10.750% due 12/16/13 (b) |
401,800 | |||
| 125,000 | UbiquiTel Operating Co., Senior Notes, 9.875% due 3/1/11 |
135,625 | |||
| Total Wireless Telecommunication Services | 815,175 | ||||
| TOTAL CORPORATE BONDS & NOTES (Cost - $31,683,234) |
32,480,171 | ||||
| ASSET-BACKED SECURITIES - 9.8% | |||||
| Home Equity - 9.8% | |||||
| 810,000 | Fremont Home Loan Trust, Series 2004-D, Class M5, 6.350% due 11/25/34 (a)(c) |
815,892 | |||
| 410,000 | GSAMP Trust, Series 2004-OPT, Class B1, 6.950% due 11/25/34 (c) |
412,533 | |||
| 4,023,441 | Lehman XS Trust, Series 2005-1, Class 2A2, 4.660% due 7/25/35 (a)(c) |
4,036,278 | |||
| 5,009 | Merrill Lynch Mortgage Investors Inc., Series 2005-WM1N, Class N1, 5.000% due 9/25/35 (b) |
4,989 | |||
| 2,400,000 | Novastar Home Equity Loan, Series 2004-03, Class A1B, 5.975% due 12/25/34 (a)(c) |
2,409,806 | |||
| RAAC: |
|||||
| 1,115,116 | Series 2006-RP2, Class A, 5.600% due 2/25/37 (b)(c) |
1,115,127 | |||
| 1,933,105 | Series 2006-RP4, Class A, 5.610% due 1/25/46 (a)(b)(c) |
1,934,339 | |||
| 2,165,888 | Residential Asset Mortgage Products Inc., Series 2004-RS6, Class A2B2, 5.650% due 6/25/34 (a)(c) |
2,167,415 | |||
| 1,000,000 | SACO I Trust, Series 2005-WM3, Class A3, 5.700% due 9/25/35 (a)(c) |
1,000,978 | |||
| 107,070 | Sail Net Interest Margin Notes, Series 2004-2A, Class A, 5.500% due 3/27/34 (b) |
38,769 | |||
| Structured Asset Investment Loan Trust: |
|||||
| 810,000 | Series 2004-9, Class M4, 6.650% due 10/25/34 (a)(c) |
815,456 | |||
| 1,703,745 | Series 2005-1, Class A4, 5.580% due 2/25/35 (b)(c) |
1,706,350 | |||
| 1,623,630 | Structured Asset Securities Corp., Series 2005-SC1, Class 1A1, 5.620% due 5/25/31 (b)(c) |
1,629,303 | |||
| TOTAL ASSET-BACKED SECURITIES (Cost - $18,082,625) |
18,087,235 | ||||
| COLLATERALIZED MORTGAGE OBLIGATIONS - 23.5% | |||||
| American Home Mortgage Investment Trust: |
|||||
| 662,357 | Series 2005-4, Class 5A, 5.350% due 11/25/45 (a)(c) |
663,214 | |||
| 410,000 | Series 2005-4, Class M3, 6.150% due 11/25/45 (c) |
410,328 | |||
| 1,457,055 | Banc of America Funding Corp., Series 2003-1, Class A1, 6.000% due 5/20/33 (a) |
1,458,422 | |||
| 1,882,313 | Downey Savings & Loan Association Mortgage Loan Trust, Series 2005-AR5, Class 2A1A, |
1,890,444 | |||
| Downey Savings and Loan Association Mortgage Loan Trust, Series 2006-AR1: |
|||||
See Notes to Schedule of Investments.
6
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | |||
| COLLATERALIZED MORTGAGE OBLIGATIONS - 23.5% (continued) | |||||
| 946,573 | Class 1A1A, 5.747% due 4/19/36 (a)(c) |
$ | 946,573 | ||
| 946,573 | Class 1A1B, 5.747% due 4/19/36 (a)(c) |
946,573 | |||
| Federal Home Loan Mortgage Corp. (FHLMC): |
|||||
| 6,363,151 | Series 2638, Class DI, PAC IO, 5.000% due 5/15/23 (j) |
1,077,811 | |||
| 6,873,032 | Series 2639, Class UI, PAC-1 IO, 5.000% due 3/15/22 (j) |
1,149,099 | |||
| 13,236,289 | Series 2645, Class IW, PAC IO, 5.000% due 7/15/26 (j) |
1,049,550 | |||
| 10,069,784 | Series 2684, Class PI, PAC, IO, 5.000% due 5/15/23 (j) |
331,473 | |||
| 8,623,906 | Series 2777, Class PI, PAC, IO, 5.000% due 5/15/24 (j) |
461,087 | |||
| 6,071,303 | Series 2839, Class TX, PAC, IO, 5.000% due 1/15/19 (j) |
868,196 | |||
| 7,543,000 | Series 2866, Class IC, PAC, IO, 5.000% due 1/15/24 (j) |
643,361 | |||
| 1,462,902 | Series 2927, Class 0Q, PAC-1, IO, 5.000% due 8/15/19 |
41,216 | |||
| Federal National Mortgage Association (FNMA): |
|||||
| 5,832,244 | Series 339, Class 30, IO, 5.500% due 7/1/18 (j) |
976,955 | |||
| 14,871,780 | Strip, Series 337, Class 2, IO, 5.000% due 6/1/33 (j) |
3,458,482 | |||
| 780,277 | Harborview Mortgage Loan Trust, Series 2004-11, Class 3A1A, 5.700% due 1/19/35 (a)(c) |
784,014 | |||
| 1,457,712 | Indymac Index Mortgage Loan Trust, Series 2005-AR21, Class 4A1, 5.409% due 10/25/35 (a)(c) |
1,446,512 | |||
| Lehman XS Trust: |
|||||
| 999,334 | Series 2005-5N, Class 3A1A, 5.650% due 11/25/35 (a)(c) |
1,000,837 | |||
| 918,155 | Series 2006-04N, Class A2A, 5.570% due 4/25/46 (a)(c) |
919,484 | |||
| 518,656 | Long Beach Mortgage Loan Trust, Series 2001-03, Class M1, 6.175% due 9/25/31 (a)(c) |
525,623 | |||
| 2,046,942 | Luminent Mortgage Trust, 5.550% due 2/25/46 (a)(c) |
2,045,867 | |||
| 1,944,617 | Morgan Stanley Mortgage Loan Trust, Series 2006-6AR, Class 2A, 5.643% due 5/25/36 (a)(c) |
1,947,436 | |||
| 3,200,000 | Residential Accredit Loans Inc., Series 2006-QO7, Class 3A2, 5.525% due 9/25/46 (a)(c) |
3,198,117 | |||
| 1,127,248 | Structured Asset Mortgage Investment Inc., Series 2006-AR3, Class 11A1, 5.560% due 4/25/36 (a)(c) |
1,130,106 | |||
| Structured Asset Securities Corp.: |
|||||
| 622,063 | Series 1998-2, Class M1, 6.450% due 2/25/28 (a)(c) |
624,374 | |||
| 229,420 | Series 1998-3, Class M1, 6.350% due 3/25/28 (c) |
229,665 | |||
| 520,600 | Series 1998-8, Class M1, 6.290% due 8/25/28 (c) |
521,134 | |||
| 9,227,041 | Series 2005-RF3, Class 2A, 5.948% due 6/25/35 (a)(b)(c) |
9,365,447 | |||
| 1,623,614 | Washington Mutual Inc., Series 2005-AR8, Class 2AB3, 5.710% due 7/25/45 (a)(c) |
1,631,883 | |||
| 1,540,543 | Wells Fargo Mortgage Backed Securities Trust, Series 2004-DD, Class 1A1, |
1,523,868 | |||
| TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost - $41,733,043) |
43,267,151 | ||||
| LOAN PARTICIPATIONS(c)(e) - 6.5% | |||||
| Auto Parts & Equipment - 0.5% | |||||
| 997,500 | Delphi Corp., Term Loan, Tranche B, 13.750% due 6/14/11 (JPMorgan Chase & Co.)(a) |
1,001,241 | |||
| Energy - 1.6% | |||||
| 992,500 | Key Energy Services Inc., Term Loans, Tranche B, 7.850% due 7/30/12 (Lehman Brothers)(a) |
996,842 | |||
| 1,000,000 | Sandbridge Energy, Term Loan, 11.000% due 11/30/11 (Bank of America)(a) |
1,010,000 | |||
| Targa Resources Inc., Term Loans: |
|||||
| 798,387 | 7.610% due 10/28/12 (C.S. First Boston Corp.)(a) |
802,878 | |||
| 193,548 | Tranche A, 5.374% due 10/28/12 (C.S. First Boston Corp.) |
194,637 | |||
| Total Energy | 3,004,357 | ||||
See Notes to Schedule of Investments.
7
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | |||
| Entertainment - 0.4% | |||||
| 750,000 | BLB Worldwide Holdings Inc., Term Loan, 9.700% due 7/18/12 (Merrill Lynch)(a) |
$ | 759,375 | ||
| Forest Products & Paper - 0.6% | |||||
| Bluegrass Container Co. LLC: |
|||||
| 757,576 | Second Lien, Tranche, 10.330% due 12/30/13 (JPMorgan Chase & Co.)(a) |
765,625 | |||
| 242,424 | Term Loans, 10.330% due 12/30/13 (JPMorgan Chase & Co.) |
245,485 | |||
| Total Forest Products & Paper | 1,011,110 | ||||
| Health Care-Services - 0.5% | |||||
| 825,833 | DaVita Inc., Term Loans, Tranche B 1, 7.510% due 10/5/12 (JPMorgan Chase & Co.)(a) |
831,511 | |||
| Media - 1.1% | |||||
| 1,000,000 | Charter Communications Term Loan, 8.125% due 5/1/13 (JPMorgan Chase & Co.)(a) |
1,007,687 | |||
| 994,962 | DIRECTV Holdings LLC, Term Loans, 6.850% due 12/27/15 (Bank of America)(a) |
997,336 | |||
| Total Media | 2,005,023 | ||||
| Metal Fabricate/Hardware - 0.4% | |||||
| 755,944 | Mueller Group Inc., Term Loans, 7.370% due 10/3/12 (Bank of America)(a) |
761,298 | |||
| Rail Industries - 0.4% | |||||
| 750,000 | UPC Finance Term Loan Facility K2, 7.640% due 3/15/15 (Toronto Dominion)(a) |
751,594 | |||
| Resorts/Casinos - 0.6% | |||||
| Venetian Casino Resort LLC, Term Loans: |
|||||
| 170,940 | Tranche B, 7.250% due 6/15/11 (Bank of Nova Scotia) |
171,786 | |||
| 829,060 | Tranche L, 7.250% due 6/15/11 (Bank of Nova Scotia)(a) |
833,166 | |||
| Total Resorts/Casinos | 1,004,952 | ||||
| Telecommunications - 0.4% | |||||
| 750,000 | UPC Broadband Holding B.V. Term Loan, 7.640% due 3/15/13 (Toronto Dominion)(a) |
751,594 | |||
| TOTAL LOAN PARTICIPATIONS (Cost - $11,832,425) |
11,882,055 | ||||
| MORTGAGE-BACKED SECURITIES - 17.3% | |||||
| FHLMC - 5.3% | |||||
| Federal Home Loan Mortgage Corp. (FHLMC), Gold: |
|||||
| 817,544 | 7.000% due 6/1/17 (a) |
840,367 | |||
| 6,217,608 | 6.500% due 8/1/29-11/1/34 (a) |
6,344,839 | |||
| 2,517,391 | 6.000% due 2/1/33 (a) |
2,542,763 | |||
| TOTAL FHLMC | 9,727,969 | ||||
| FNMA - 12.0% | |||||
| Federal National Mortgage Association (FNMA): |
|||||
| 385,270 | 5.500% due 1/1/14 |
387,038 | |||
| 1,654,713 | 7.000% due 3/15/15-6/1/32 (a) |
1,707,159 | |||
| 4,898,575 | 6.000% due 5/1/33 (a) |
4,941,407 | |||
| 3,026,247 | 5.500% due 4/1/35 (a) |
2,992,628 | |||
| 4,200,000 | 5.000% due 1/11/37 (f)(g) |
4,055,625 | |||
See Notes to Schedule of Investments.
8
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | ||||
| FNMA - 12.0% (continued) | ||||||
| 8,000,000 | 6.000% due 1/11/37 (f)(g) |
$ | 8,055,000 | |||
| TOTAL FNMA | 22,138,857 | |||||
| TOTAL MORTGAGE-BACKED SECURITIES (Cost - $32,314,101) |
31,866,826 | |||||
| SOVEREIGN BONDS - 6.1% | ||||||
| Argentina - 0.5% | ||||||
| Republic of Argentina: |
||||||
| 657,000 | 5.590% due 8/3/12 (a)(c) |
621,001 | ||||
| 422,618 | ARS | Bonds, 2.000% due 1/3/10 (c) |
283,768 | |||
| GDP Linked Securities: |
||||||
| 275,000 | EUR | 0.662% due 12/15/35 (c) |
47,466 | |||
| 270,000 | 0.624% due 12/15/35 (c) |
36,990 | ||||
| 50,385 | ARS | 0.649% due 12/15/35 (c) |
1,997 | |||
| Total Argentina | 991,222 | |||||
| Brazil - 1.3% | ||||||
| Federative Republic of Brazil: |
||||||
| 360,000 | 11.000% due 8/17/40 |
477,630 | ||||
| Collective Action Securities: |
||||||
| 675,000 | 8.750% due 2/4/25 (a) |
837,000 | ||||
| 940,000 | Notes, 8.000% due 1/15/18 (a) |
1,046,455 | ||||
| Total Brazil | 2,361,085 | |||||
| Colombia - 0.5% | ||||||
| Republic of Colombia: |
||||||
| 715,000 | 10.750% due 1/15/13 (a) |
887,494 | ||||
| 2,000 | 11.750% due 2/25/20 |
2,915 | ||||
| 100,000 | 7.375% due 9/18/37 |
107,600 | ||||
| Total Colombia | 998,009 | |||||
| Ecuador - 0.1% | ||||||
| 325,000 | Republic of Ecuador, 10.000% due 8/15/30 (b) |
242,125 | ||||
| El Salvador - 0.2% | ||||||
| Republic of El Salvador: |
||||||
| 200,000 | 7.750% due 1/24/23 (b) |
229,500 | ||||
| 90,000 | 8.250% due 4/10/32 (b) |
108,450 | ||||
| Total El Salvador | 337,950 | |||||
| Mexico - 0.9% | ||||||
| 1,320,000 | United Mexican States, 8.125% due 12/30/19 (a) |
1,616,340 | ||||
| Panama - 0.4% | ||||||
| Republic of Panama: |
||||||
| 521,000 | 9.375% due 4/1/29 (a) |
696,837 | ||||
| 2,000 | 6.700% due 1/26/36 |
2,090 | ||||
| Total Panama | 698,927 | |||||
| Peru - 0.4% | ||||||
| Republic of Peru: |
||||||
| 185,000 | 8.750% due 11/21/33 |
244,200 | ||||
| 278,400 | FLIRB, 5.000% due 3/7/17 (c) |
276,771 | ||||
| 25,000 | Global Bonds, 7.350% due 7/21/25 |
28,313 | ||||
| PDI: |
||||||
| 129,200 | 5.000% due 3/7/17 (c) |
128,441 | ||||
| 6,840 | 5.000% due 3/7/17 (b)(c) |
6,823 | ||||
| Total Peru | 684,548 | |||||
See Notes to Schedule of Investments.
9
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | |||
| Russia - 1.1% | |||||
| Russian Federation: |
|||||
| 280,002 | 8.250% due 3/31/10 (b) |
$ | 292,742 | ||
| 765,000 | 12.750% due 6/24/28 (b) |
1,386,563 | |||
| 215,000 | 5.000% due 3/31/30 (b) |
243,084 | |||
| Total Russia | 1,922,389 | ||||
| Venezuela - 0.7% | |||||
| Bolivarian Republic of Venezuela: |
|||||
| 332,000 | 5.750% due 2/26/16 |
314,985 | |||
| Collective Action Securities: |
|||||
| 324,000 | 9.375% due 1/13/34 |
430,272 | |||
| 500,000 | Notes, 10.750% due 9/19/13 (a) |
620,000 | |||
| Total Venezuela | 1,365,257 | ||||
| TOTAL SOVEREIGN BONDS (Cost - $10,444,068) |
11,217,852 | ||||
| U.S. GOVERNMENT & AGENCY OBLIGATIONS - 12.1% | |||||
| U.S. Government Agencies - 12.1% | |||||
| 11,000,000 | Federal Farm Credit Bank (FFCB), Bonds, 5.280% due 2/12/09 (a)(c) |
11,007,997 | |||
| 11,000,000 | Federal Home Loan Bank (FHLB), Bonds, 5.191% due 6/18/08 (a)(c) |
10,988,703 | |||
| 320,000 | Federal National Mortgage Association (FNMA), Notes, 5.000% due 9/15/08 |
319,773 | |||
| TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost - $22,321,498) |
22,316,473 | ||||
| U.S. TREASURY INFLATION PROTECTED SECURITIES - 3.1% | |||||
| U.S. Treasury Notes, Inflation Indexed: |
|||||
| 4,168,224 | 2.375% due 4/15/11 (a) |
4,152,922 | |||
| 207,486 | 1.875% due 7/15/15 |
198,903 | |||
| 1,298,960 | 2.500% due 7/15/16 (a) |
1,309,210 | |||
| TOTAL U.S. TREASURY INFLATION PROTECTED SECURITIES (Cost - $5,637,863) |
5,661,035 | ||||
| SHARES | |||||
| PREFERRED STOCKS - 0.0% | |||||
| CONSUMER DISCRETIONARY - 0.0% | |||||
| Automobiles - 0.0% | |||||
| 100 | Ford Motor Co., Series F, 7.550% |
1,704 | |||
| FINANCIALS - 0.0% | |||||
| Diversified Financial Services - 0.0% | |||||
| 600 | Preferred Plus, Series FRD-1, 7.400% |
10,200 | |||
| 1,700 | Saturns, Series F 2003-5, 8.125% |
33,830 | |||
| TOTAL FINANCIALS | 44,030 | ||||
| TOTAL PREFERRED STOCKS (Cost - $42,106) |
45,734 | ||||
| CONTRACTS | |||||
| PURCHASED OPTIONS - 0.0% | |||||
| 234 | U.S. Treasury Notes 10 year Futures, Put @ $103, expires 2/23/07 |
4,826 | |||
| 60 | U.S. Treasury Notes 10 year Futures, Put @ $104, expires 2/23/07 |
938 | |||
| TOTAL PURCHASED OPTIONS (Cost - $6,064) |
5,764 | ||||
| TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENTS (Cost - $174,097,027) |
176,830,296 | ||||
See Notes to Schedule of Investments.
10
WESTERN ASSET VARIABLE RATE STRATEGIC FUND INC.
| Schedule of Investments (unaudited) (continued) | December 31, 2006 |
| FACE AMOUNT† |
SECURITY |
VALUE | |||
| SHORT-TERM INVESTMENTS(a) - 4.0% | |||||
| U.S. Government Agency - 0.2% | |||||
| 500,000 | Federal National Mortgage Association (FNMA), Discount Notes, 5.197% due 6/25/07 (Cost - $487,986) (h)(i) |
$ | 487,878 | ||
| Repurchase Agreement - 3.8% | |||||
| 6,967,000 | Nomura Securities International Inc. repurchase agreement dated 12/29/06; 5.270% due 1/2/07; Proceeds at maturity - $6,971,080 (Fully collateralized by U.S. government agency obligation 5.000% due 3/13/16; Market value - $7,106,997) (Cost - $6,967,000) |
6,967,000 | |||
| TOTAL SHORT-TERM INVESTMENTS (Cost - $7,454,986) |
7,454,878 | ||||
| TOTAL INVESTMENTS - 100.0% (Cost - $181,552,013#) |
184,285,174 | ||||
| † | Face amount denominated in U.S. dollars, unless otherwise noted. |
| (a) | All or a portion of this security is segregated for open futures contracts, extended settlements, swap contracts and written options. |
| (b) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors, unless otherwise noted. |
| (c) | Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2006. |
| (d) | Payment-in-kind security for which part of the income earned may be paid as additional principal. |
| (e) | Participation interest was acquired through the financial institution indicated parenthetically. |
| (f) | This security is traded on a to-be-announced (“TBA”) basis (See Note 1). |
| (g) | All or a portion of this security is acquired under a mortgage dollar roll agreement. |
| (h) | Rate shown represents yield-to-maturity. |
| (i) | All or a portion of this security is held at the broker as collateral for open futures contracts. |
| (j) | Illiquid security |
| # | Aggregate cost for federal income tax purposes is substantially the same. |
| Abbreviations used in this schedule: | ||
| ARS | — Argentine Peso | |
| EUR | — Euro | |
| FLIRB | — Front-Loaded Interest Reduction Bonds | |
| GDP | — Gross Domestic Product | |
| IO | — Interest Only | |
| MXN | — Mexican Peso | |
| PAC | — Planned Amortization Class | |
| PDI | — Past Due Interest | |
Schedule of Options Written
| Contracts | Security |
Expiration Date |
Strike Price |
Value | ||||||
| 120 | U.S. Treasury Notes 10 Year Futures, Call |
2/23/07 | $ | 110.00 | $ | 7,500 | ||||
| 214 | U.S. Treasury Notes 10 Year Futures, Put |
2/23/07 | 107.00 | 103,656 | ||||||
| 60 | U.S. Treasury Notes 10 Year Futures, Put |
2/23/07 | 108.00 | 60,937 | ||||||
| TOTAL OPTIONS WRITTEN |
$ | 172,093 | ||||||||
| (Premiums received - $129,061) |
||||||||||
See Notes to Schedule of Investments.
11
Notes to Schedule of Investments (unaudited)
1. Organization and Significant Accounting Policies
Western Asset Variable Rate Strategic Fund Inc. (formerly known as Salomon Brothers Variable Rate Strategic Fund Inc.) (the “Fund”) was incorporated in Maryland on August 3, 2004 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, (the “1940 Act”). The Board of Directors authorized 100 million shares of $0.001 par value common stock. The Fund’s primary investment objective is to maintain a high level of current income.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”).
(a) Investment Valuation. Debt securities are valued at the mean between the bid and asked prices provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. Equity securities for which market quotations are available are valued at the last sale price or official closing price on the primary market or exchange on which they trade. Publicly traded foreign government debt securities are typically traded internationally in the over-the-counter market, and are valued at the mean between the bid and asked prices as of the close of business of that market. When prices are not readily available, or are determined not to reflect fair value, 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 may value these investments at fair value as determined in accordance with the procedures approved by the Fund’s Board of Directors. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates market value.
(b) Repurchase Agreements. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian take possession of the underlying collateral securities, the market value of which at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults, and the market value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(c) Financial Futures Contracts. The Fund may enter into financial futures contracts typically to hedge a portion of the portfolio. Upon entering into a financial futures contract, the Fund is required to deposit cash or securities as initial margin. Additional securities are also segregated up to the current market value of the financial futures contracts. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the value of the underlying financial instruments. The Fund recognizes an unrealized gain or loss equal to the daily variation margin. When the financial futures contracts are closed, a realized gain or loss is recognized equal to the difference between the proceeds from (or cost of) the closing transactions and the Fund’s basis in the contracts.
The risks associated with entering into financial futures contracts include the possibility that a change in the value of the contract may not correlate with the changes in the value of the underlying instruments. In addition, investing in financial futures contracts involves the risk that the Fund could lose more than the original margin deposit and subsequent payments required for a futures transaction. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
(d) 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 Fund realizes a gain from investments equal to the amount of the premium received. When a written call option is exercised, the difference between the premium and the amount for effecting a closing purchase transaction, including brokerage commission, is also treated as a realized gain or loss. When a written put option is exercised, the amount of the premium received reduces the cost of the security purchased by the Fund.
A 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 a 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.
12
Notes to Schedule of Investments (unaudited) (continued)
(e) Swap Contracts. Swaps involve the exchange by the Fund with another party of the respective amounts payable with respect to a notional principal amount related to one or more indices. The Fund may enter into these transactions to preserve a return or spread on a particular investment or portion of its assets, as a duration management technique or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. The Fund may also use these transactions for speculative purposes, such as to obtain the price performance of a security without actually purchasing the security in circumstances where, for example, the subject security is illiquid, is unavailable for direct investment or available only on less attractive terms.
Swaps are marked-to-market daily based upon quotations from market makers and the change, if any, is recorded as an unrealized gain or loss. Net receipts or payments of interest are recorded as realized gains or losses, respectively.
Swaps have risks associated with them, including possible default by the counterparty to the transaction, illiquidity and, where swaps are used as hedges, the risk that the use of a swap could result in losses greater than if the swap had not been employed.
(f) Loan Participations. The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.
The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower.
(g) Mortgage Dollar Rolls. The Fund enters into dollar rolls in which the Fund sells mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities to settle on a specified future date. During the roll period, the Fund forgoes principal and interest paid on the securities. The Fund is compensated by a fee paid by the counterparty, often in the form of a drop in the repurchase price of the securities. Dollar rolls are accounted for as financing arrangements; the fee is accrued into interest income ratably over the term of the dollar roll and any gain or loss on the roll is deferred and realized upon disposition of the rolled security.
The risk of entering into a mortgage dollar roll is that the market value of the securities the Fund is obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securites under a mortgage dollar roll files bankruptcy or becomes insolvent, the Fund’s use of proceeds of the dollar roll may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities.
(h) Credit and Market Risk. The Fund invests in high yield and emerging market instruments that are subject to certain credit and market risks. The yields of high yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The Fund’s investment in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Fund’s investment in non-dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations.
(i) Foreign Currency Translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on
13
Notes to Schedule of Investments (unaudited) (continued)
forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities, at the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(j) Securities Traded on a To-Be-Announced Basis. The Fund may trade securities on a to-be-announced (“TBA”) basis. In a TBA transaction, the Fund commit to purchasing or selling securities which have not yet been issued by the issuer and for which specific information is not known, such as the face amount and maturity date and the underlying pool of investments in U.S. government agency mortgage pass-through transactions. Securities purchased on a TBA basis are not settled until they are delivered to the Fund, normally 15 to 45 days later. Beginning on the date the Fund enters into a TBA transaction, cash, U.S. government securities or other liquid high-grade debt obligations are segregated in an amount equal in value to the purchase price of the TBA security. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other securities.
(k) Stripped Securities. The Fund invests in ‘‘Stripped Securities,’’ a term used collectively for stripped fixed income securities. Stripped securities can be principal only securities (“PO”), which are debt obligations that have been stripped of unmatured interest coupons or, interest only securities (“IO”), which are unmatured interest coupons that have been stripped from debt obligations. As is the case with all securities, the market value of Stripped Securities will fluctuate in response to changes in economic conditions, interest rates and the market’s perception of the securities. However, fluctuations in response to interest rates may be greater in Stripped Securities than for debt obligations of comparable maturities that pay interest currently. The amount of fluctuation increases with a longer period of maturity.
The yield to maturity on IO’s is sensitive to the rate of principal repayments (including prepayments) on the related underlying debt obligation and principal payments may have a material effect on yield to maturity. If the underlying debt obligation experiences greater than anticipated prepayments of principal, the Fund may not fully recoup its initial investment in IO’s.
(l) Security Transactions. Security transactions are accounted for on a trade date basis.
2. Investments
At December 31, 2006, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:
| Gross unrealized appreciation |
$ | 3,689,757 | ||
| Gross unrealized depreciation |
(956,596 | ) | ||
| Net unrealized appreciation |
$ | 2,733,161 | ||
At December 31, 2006, the Fund had the following open futures contracts:
| Number of Contracts |
Expiration Date |
Basis Value | Market Value |
Unrealized Gain (Loss) |
||||||||||
| Contracts to Buy: |
||||||||||||||
| Federal Republic of Germany 10 Year Bonds |
55 | 03/07 | $ | 8,476,435 | $ | 8,421,230 | $ | (55,205 | ) | |||||
| U.S. Treasury 2 Year Notes |
583 | 03/07 | 119,260,572 | 118,950,219 | (310,353 | ) | ||||||||
| $ | (365,558 | ) | ||||||||||||
| Contracts to Sell: |
||||||||||||||
| U.S. Treasury 5 Year Notes |
22 | 03/07 | $ | 2,324,562 | $ | 2,311,375 | $ | 13,187 | ||||||
| U.S. Treasury 10 Year Notes |
60 | 03/07 | 6,500,950 | 6,448,125 | 52,825 | |||||||||
| $ | 66,012 | |||||||||||||
| Net Unrealized Loss on Open Futures Contracts |
$ | (299,546 | ) | |||||||||||
During the period ended December 31, 2006, written option transactions for the Fund were as follows:
| Number of Contracts |
Premiums | ||||
| Options written, outstanding September 30, 2006 |
— | — | |||
| Options written |
394 | $ | 129,061 | ||
| Options written, outstanding December 31, 2006 |
394 | $ | 129,061 | ||
14
Notes to Schedule of Investments (unaudited) (continued)
At December 31, 2006, the Fund had outstanding mortgage dollar rolls with a total cost of $12,108,656. The average monthly balance of dollar rolls outstanding for the Fund during the period ended December 31, 2006 was approximately $8,037,987. There were no counterparties with mortgage dollar rolls outstanding in excess of 10% of total net assets at December 31, 2006. At December 31, 2006, the Fund held TBA securities with a total cost of $12,108,656.
At December 31, 2006, the Fund held the following interest rate swap contracts:
| Swap Counterparty: | JPMorgan Chase Bank | |
| Effective Date: | 1/7/05 | |
| Notional Amount: | $20,000,000 | |
| Payments Made by Fund: | Fixed Rate 3.559% | |
| Payments Received by Fund: | Floating Rate (6 month LIBOR) | |
| Termination Date: | 1/7/07 | |
| Unrealized Appreciation | $12,954 | |
| Swap Counterparty: | JPMorgan Chase Bank | |
| Effective Date: | 1/7/05 | |
| Notional Amount: | $10,000,000 | |
| Payments Made by Fund: | Fixed Rate 4.665% | |
| Payments Received by Fund: | Floating Rate (6 month LIBOR) | |
| Termination Date: | 1/7/15 | |
| Unrealized Appreciation | $314,435 | |
| Swap Counterparty: | JPMorgan Chase Bank | |
| Effective Date: | 12/7/04 | |
| Notional Amount: | $18,000,000 | |
| Payments Made by Fund: | Fixed Rate 4.655% | |
| Payments Received by Fund: | Floating Rate (6 month LIBOR) | |
| Termination Date: | 12/7/14 | |
| Unrealized Appreciation | $563,011 | |
At December 31, 2006, the Fund had total net unrealized appreciation of $890,400, from swap contracts.
At December 31, 2006, the Fund held loan participations with a total cost of $11,832,425 and a total market value of $11,882,055.
15
| ITEM 2. | CONTROLS AND PROCEDURES. |
| (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal quarter that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
| ITEM 3. | EXHIBITS. |
Certifications pursuant to Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Western Asset Variable Rate Strategic Fund Inc.
| By | /s/ R. JAY GERKEN | |
| R. Jay Gerken | ||
| Chief Executive Officer |
Date: February 28, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By | /s/ R. JAY GERKEN | |
| R. Jay Gerken | ||
| Chief Executive Officer |
Date: February 28, 2007
| By | /s/ FRANCES M. GUGGINO | |
| Frances M. Guggino | ||
| Chief Financial Officer |
Date: February 28, 2007