Investment Commentary and Annual Report to ... - Western Asset

Annual Report to ShareholdersAnnual CertificationsIn May 2008, the Fund submitted its annual CEO certification to the NYSE in which the Fund’s principal executive officer certifiedthat he was not aware, as of the date of the certification, of any violation by the Fund of the NYSE’s Corporate Governancelisting standards. In addition, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules, the Fund’sprincipal executive and principal financial officers have made quarterly certifications, included in filings with the SEC on FormsN-CSR and N-Q, relating to, among other things, the Fund’s disclosure controls and procedures and internal control over financialreporting.Proxy VotingYou may request a free description of the policies and procedures that the Fund uses to determine how proxies relating tothe Fund’s portfolio securities are voted by writing to the Fund, or you may obtain a copy of these policies and procedures (andother information relating to the Fund) from the SEC’s web site (http://www.sec.gov). You may request a free report regardinghow the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 by writingto the Fund, or you may obtain a copy of this report (and other information relating to the Fund), from the SEC’s website(http://www.sec.gov).Quarterly Comparison of Market Price and Net Asset Value (“NAV”), Discount or Premium to NAV andAverage Daily Volume of Shares TradedMarketPriceNet AssetValuePremium/(Discount)AverageDaily Volume/(Shares)March 31, 2008 $12.43 $12.99 (4.31)% 20,549June 30, 2008 $12.24 $12.68 (3.47)% 18,877September 30, 2008 $ 9.20 $10.83 (15.05)% 24,108December 31, 2008 $ 8.90 $ 8.72 2.06% 43,032Notice to ShareholdersOn May 22, 2008, the Fund announced plans that, had they been consummated, would have allowed the Fund to restructureits leverage and provide liquidity to holders of its $72 million in auction rate preferred shares (“ARPS”) on terms and conditionsmanagement and the Board of the Fund believed were in the best interests of the Fund.Pursuant to that planned restructuring, the Fund intended to redeem all of its currently outstanding $72 million in ARPS usinga combination of borrowings under a new $68 million, 364-day credit facility to be entered into with a major domestic bank, reverserepurchase agreements, cash currently in the Fund’s portfolio, and/or the proceeds of sales of portfolio securities. Any use ofcash in the Fund’s portfolio or use of proceeds from the sale of portfolio securities could have resulted in a moderate decrease inthe Fund’s leverage. The ARPS would have been redeemed at the required liquidation preference of $25,000 per share plus accruedand unpaid dividends thereon.On September 29, 2008, the Fund announced that unprecedented turbulent conditions in the fixed-income market, and financialmarkets in general, had led it to re-evaluate the timing of the refinancing of the Fund’s ARPS. The Fund’s investment adviser continuesto monitor the financial markets and the Fund currently intends to move forward with the refinancing of the ARPS when and ifthe Board of the Fund believes that it would be in the best interests of the Fund and financing on acceptable terms is available.* * * * * * * *Effective February 3, 2009, Western Asset Management Company Pte. Ltd. in Singapore (“Western Singapore”) and WesternAsset Management Company Ltd in Japan (“Western Japan”) have been added as subadvisers to the Fund under portfolio managementagreements between Western Asset Management Company (“Western Asset”) and Western Singapore, and Western Assetand Western Japan. Western Asset, Western Singapore and Western Japan are wholly-owned subsidiaries of Legg Mason, Inc.5