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

811-7686

 

 

Western Asset Emerging Markets Income Fund II Inc.

(Exact name of registrant as specified in charter)

 

55 Water Street, New York, NY

 

10041

(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:

May 31

 

 

 

 

Date of reporting period:

February 29, 2008

 

 



 

ITEM 1.                                                     SCHEDULE OF INVESTMENTS

 



 

WESTERN ASSET

EMERGING MARKETS INCOME FUND II INC.
 

FORM N-Q

FEBRUARY 29, 2008

 



 

Western Asset Emerging Markets Income Fund II Inc.

 

Schedule of Investments (unaudited)

February 29, 2008

 

Face
Amount†

 

Security

 

Value

 

SOVEREIGN BONDS — 50.4%

 

 

 

Argentina — 4.2%

 

 

 

 

 

Republic of Argentina:

 

 

 

 

2,000,000

DEM

10.250% due 2/6/03 (a)

 

$

512,472

 

1,000,000

DEM

9.000% due 9/19/03 (a)

 

240,707

 

3,000,000

DEM

7.000% due 3/18/04 (a)(b)

 

738,659

 

3,875,000

DEM

8.500% due 2/23/05 (a)

 

973,357

 

5,400,000

DEM

11.250% due 4/10/06 (a)

 

1,362,710

 

1,000,000

DEM

11.750% due 5/20/11 (a)

 

252,354

 

8,800,000

DEM

12.000% due 9/19/16 (a)

 

2,121,634

 

3,501,022

ARS

5.830% due 12/31/33 (c)

 

1,118,333

 

2,710,079

ARS

Bonds, 2.000% due 1/3/10 (c)

 

1,893,207

 

591,000

 

Bonds, Series VII, 7.000% due 9/12/13

 

510,542

 

 

 

GDP Linked Securities:

 

 

 

3,200,000

EUR

1.262% due 12/15/35 (c)

 

554,003

 

2,705,000

 

1.318% due 12/15/35 (c)

 

361,117

 

57,059,503

ARS

1.383% due 12/15/35 (c)

 

1,813,081

 

 

 

Medium-Term Notes:

 

 

 

6,000,000,000

ITL

7.000% due 3/18/04 (a)(b)

 

1,493,166

 

3,000,000,000

ITL

5.002% due 7/13/05 (a)(b)

 

718,837

 

1,000,000,000

ITL

7.625% due 8/11/07 (a)(b)

 

243,136

 

625,000

DEM

8.000% due 10/30/09 (a)

 

147,530

 

 

 

Total Argentina

 

15,054,845

 

 

 

 

 

 

 

Brazil — 11.1%

 

 

 

 

 

Brazil Nota do Tesouro Nacional:

 

 

 

1,000

BRL

10.000% due 1/1/10

 

571

 

47,854,000

BRL

10.000% due 7/1/10

 

27,049,186

 

5,770,000

BRL

Series B, 6.000% due 5/15/17

 

5,434,905

 

7,616,000

BRL

Series F, 10.000% due 1/1/12

 

4,198,295

 

 

 

Federative Republic of Brazil:

 

 

 

2,718,000

 

7.125% due 1/20/37

 

2,939,517

 

1,000

 

Collective Action Securities, Notes, 8.000% due 1/15/18

 

1,133

 

 

 

Total Brazil

 

39,623,607

 

 

 

 

 

 

 

Colombia — 2.8%

 

 

 

 

 

Republic of Colombia:

 

 

 

1,632,000

 

7.375% due 1/27/17

 

1,797,648

 

7,711,000

 

7.375% due 9/18/37

 

8,231,493

 

 

 

Total Colombia

 

10,029,141

 

 

 

 

 

 

 

Ecuador — 1.3%

 

 

 

4,840,000

 

Republic of Ecuador, 10.000% due 8/15/30 (d)

 

4,755,300

 

 

 

 

 

 

 

Egypt — 0.6%

 

 

 

11,070,000

EGP

Arab Republic of Egypt, 8.750% due 7/18/12 (d)

 

2,093,438

 

 

 

 

 

 

 

Gabon — 0.5%

 

 

 

1,843,000

 

Gabonese Republic, 8.200% due 12/12/17 (d)

 

1,942,061

 

 

 

 

 

Indonesia — 2.6%

 

 

 

 

 

Republic of Indonesia:

 

 

 

21,153,000,000

IDR

Series FR40, 11.000% due 9/15/25

 

2,349,964

 

17,914,000,000

IDR

Series FR42, 10.250% due 7/15/27

 

1,863,155

 

28,181,000,000

IDR

Series FR43, 10.250% due 7/15/22

 

2,973,601

 

21,312,000,000

IDR

Series FR45, 9.750% due 5/15/37

 

2,086,575

 

 

 

Total Indonesia

 

9,273,295

 

 

See Notes to Schedule of Investments.

 

1



 

Western Asset Emerging Markets Income Fund II Inc.

 

Schedule of Investments (unaudited)(continued)

February 29, 2008

 

Face
Amount†

 

Security

 

Value

 

Mexico — 7.1%

 

 

 

 

 

United Mexican States, Medium-Term Notes:

 

 

 

 

2,395,000

 

8.300% due 8/15/31

 

$

3,101,525

 

7,940,000

 

6.050% due 1/11/40

 

7,880,450

 

11,490,000

 

Series A, 8.000% due 9/24/22

 

14,462,750

 

 

 

Total Mexico

 

25,444,725

 

 

 

 

 

 

 

Panama — 4.2%

 

 

 

 

 

Republic of Panama:

 

 

 

2,225,000

 

9.375% due 4/1/29

 

2,948,125

 

11,793,000

 

6.700% due 1/26/36

 

11,940,413

 

 

 

Total Panama

 

14,888,538

 

 

 

 

 

 

 

Peru — 0.4%

 

 

 

 

 

Republic of Peru:

 

 

 

169,000

 

8.750% due 11/21/33

 

219,700

 

1,073,000

 

Bonds, 6.550% due 3/14/37

 

1,107,873

 

 

 

Total Peru

 

1,327,573

 

 

 

 

 

 

 

Russia — 0.7%

 

 

 

1,350,000

 

Russian Federation, 12.750% due 6/24/28 (d)

 

2,435,063

 

 

 

 

 

 

 

Turkey — 8.5%

 

 

 

 

 

Republic of Turkey:

 

 

 

5,206,000

TRY

14.000% due 1/19/11

 

4,061,320

 

3,519,000

 

11.875% due 1/15/30 (g)

 

5,332,099

 

22,449,000

 

Notes, 6.875% due 3/17/36 (e)

 

20,793,386

 

 

 

Total Turkey

 

30,186,805

 

 

 

 

 

 

 

Venezuela — 6.4%

 

 

 

 

 

Bolivarian Republic of Venezuela:

 

 

 

7,751,000

 

8.500% due 10/8/14

 

7,557,225

 

5,713,000

 

5.750% due 2/26/16

 

4,713,225

 

716,000

 

7.650% due 4/21/25

 

613,970

 

 

 

Collective Action Securities:

 

 

 

6,395,000

 

9.375% due 1/13/34

 

6,283,087

 

3,500,000

 

Notes, 10.750% due 9/19/13

 

3,745,000

 

 

 

Total Venezuela

 

22,912,507

 

 

 

 

 

 

 

 

 

TOTAL SOVEREIGN BONDS
(Cost — $172,186,557)

 

179,966,898

 

 

 

 

 

 

 

CORPORATE BONDS & NOTES — 39.7%

 

 

 

Brazil — 5.5%

 

 

 

2,136,000

 

Globo Communicacoes e Participacoes SA, Bonds, 7.250% due 4/26/22 (d)

 

2,114,640

 

 

 

GTL Trade Finance Inc.:

 

 

 

930,000

 

7.250% due 10/20/17 (d)

 

966,080

 

1,784,000

 

7.250% due 10/20/17 (d)

 

1,871,284

 

890,000

 

Odebrecht Finance Ltd., 7.500% due 10/18/17 (d)

 

892,225

 

 

 

Vale Overseas Ltd., Notes:

 

 

 

2,635,000

 

8.250% due 1/17/34

 

2,907,182

 

11,333,000

 

6.875% due 11/21/36

 

11,008,763

 

 

 

Total Brazil

 

19,760,174

 

 

 

 

 

 

 

Chile — 0.7%

 

 

 

2,374,000

 

Enersis SA, Notes, 7.375% due 1/15/14

 

2,587,408

 

 

See Notes to Schedule of Investments.

 

2



 

Western Asset Emerging Markets Income Fund II Inc.

 

Schedule of Investments (unaudited)(continued)

February 29, 2008

 

Face
Amount†

 

Security

 

Value

 

Colombia — 0.3%

 

 

 

 

1,010,000

 

EEB International Ltd., Senior Bonds, 8.750% due 10/31/14 (d)

 

$

1,064,338

 

 

 

 

 

 

 

India — 0.2%

 

 

 

 

 

ICICI Bank Ltd., Subordinated Bonds:

 

 

 

570,000

 

6.375% due 4/30/22 (c)(d)

 

490,941

 

340,000

 

6.375% due 4/30/22 (c)(d)

 

292,205

 

 

 

Total India

 

783,146

 

 

 

 

 

 

 

Kazakhstan — 1.5%

 

 

 

2,270,000

 

ATF Capital BV, Senior Notes, 9.250% due 2/21/14 (d)

 

2,304,050

 

1,720,000

 

HSBK Europe BV, 7.250% due 5/3/17 (d)

 

1,513,600

 

 

 

TuranAlem Finance BV, Bonds:

 

 

 

1,610,000

 

8.250% due 1/22/37 (d)

 

1,348,375

 

383,000

 

8.250% due 1/22/37 (d)

 

324,593

 

 

 

Total Kazakhstan

 

5,490,618

 

 

 

 

 

 

 

Mexico — 6.9%

 

 

 

680,000

 

America Movil SAB de CV, 5.625% due 11/15/17

 

677,086

 

 

 

Axtel SAB de CV:

 

 

 

190,000

 

11.000% due 12/15/13

 

209,000

 

7,150,000

 

7.625% due 2/1/17 (d)

 

7,293,000

 

1,410,000

 

Senior Notes, 7.625% due 2/1/17 (d)

 

1,434,675

 

220,000

 

Grupo Transportacion Ferroviaria Mexicana SA de CV, Senior Notes, 9.375% due 5/1/12

 

229,900

 

 

 

Pemex Project Funding Master Trust:

 

 

 

6,720,000

 

6.625% due 6/15/35 (d)

 

7,061,705

 

7,233,000

 

Senior Bonds, 6.625% due 6/15/35

 

7,600,791

 

 

 

Total Mexico

 

24,506,157

 

 

 

 

 

 

 

Russia — 14.4%

 

 

 

11,090,000

 

Gaz Capital SA, Notes, 8.625% due 4/28/34 (d)(g)

 

12,998,589

 

 

 

Gazprom:

 

 

 

 

 

Bonds:

 

 

 

217,870,000

RUB

6.790% due 10/29/09

 

8,981,784

 

72,620,000

RUB

7.000% due 10/27/11

 

2,954,479

 

 

 

Loan Participation Notes:

 

 

 

1,140,000

 

6.212% due 11/22/16 (d)

 

1,073,082

 

2,861,000

 

Senior Notes, 6.510% due 3/7/22 (d)

 

2,659,543

 

96,030,000

RUB

Gazprom OAO, 6.950% due 8/6/09

 

3,985,903

 

 

 

LUKOIL International Finance BV:

 

 

 

680,000

 

6.356% due 6/7/17 (d)

 

644,300

 

1,920,000

 

6.656% due 6/7/22 (d)

 

1,742,400

 

 

 

Russian Agricultural Bank, Loan Participation Notes:

 

 

 

3,936,000

 

7.175% due 5/16/13 (d)

 

4,029,677

 

4,062,000

 

6.299% due 5/15/17 (d)

 

3,797,970

 

 

 

TNK-BP Finance SA:

 

 

 

3,340,000

 

7.500% due 7/18/16 (d)

 

3,210,742

 

2,091,000

 

6.625% due 3/20/17 (d)

 

1,876,672

 

1,200,000

 

Senior Notes, 7.875% due 3/13/18 (d)

 

1,171,560

 

2,180,000

 

UBS Luxembourg SA for OJSC Vimpel Communications, Loan Participation Notes, 8.250% due 5/23/16 (d)

 

2,166,484

 

 

 

Total Russia

 

51,293,185

 

 

 

 

 

 

 

Thailand — 1.8%

 

 

 

 

 

True Move Co., Ltd.:

 

 

 

4,230,000

 

10.750% due 12/16/13 (d)

 

3,997,350

 

 

See Notes to Schedule of Investments.

 

3



 

Western Asset Emerging Markets Income Fund II Inc.

 

Schedule of Investments (unaudited)(continued)

February 29, 2008

 

Face
Amount†

 

Security

 

Value

 

Thailand — 1.8% (continued)

 

 

 

 

2,590,000

 

10.375% due 8/1/14 (d)

 

$

2,473,450

 

 

 

Total Thailand

 

6,470,800

 

 

 

 

 

 

 

United Kingdom — 3.0%

 

 

 

50,194,000

RUB

HSBC Bank PLC, 8.900% due 12/20/10 (c)

 

2,033,737

 

209,880,000

RUB

JPMorgan Chase Bank, 9.500% due 2/11/11 (c)

 

8,766,711

 

 

 

Total United Kingdom

 

10,800,448

 

 

 

 

 

 

 

United States — 2.0%

 

 

 

3,536,248

 

Credit Suisse First Boston, 8.000% due 8/7/21 (c)

 

3,544,558

 

3,330,000

 

Freeport-McMoRan Copper & Gold Inc., Senior Notes, 8.375% due 4/1/17

 

3,538,125

 

 

 

Total United States

 

7,082,683

 

 

 

 

 

 

 

Venezuela — 3.4%

 

 

 

 

 

Petrozuata Finance Inc.:

 

 

 

11,315,000

 

8.220% due 4/1/17 (d)

 

11,682,737

 

271,000

 

8.220% due 4/1/17 (d)

 

272,355

 

 

 

Total Venezuela

 

11,955,092

 

 

 

 

 

 

 

 

 

TOTAL CORPORATE BONDS & NOTES
(Cost — $142,105,954)

 

141,794,049

 

 

 

 

 

 

 

COLLATERALIZED SENIOR LOANS — 0.2%

 

 

 

Oil, Gas & Consumable Fuels — 0.2%

 

 

 

 

 

Ashmore Energy International:

 

 

 

107,901

 

Synthetic Revolving Credit Facility, 5.098% due 3/30/14 (c)

 

93,873

 

804,507

 

Term Loan, 7.830% due 3/30/14 (c)

 

699,921

 

 

 

 

 

 

 

 

 

TOTAL COLLATERALIZED SENIOR LOANS
(Cost — $910,351)

 

793,794

 

 

Warrants

 

 

 

 

 

WARRANT — 0.1%

 

 

 

10,000

 

Bolivarian Republic of Venezuela, Oil-linked payment obligations, Expires 4/15/20*
(Cost - $310,000)

 

367,500

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENTS
(Cost — $315,512,862)

 

322,922,241

 

 

Face
Amount†

 

 

 

 

 

SHORT-TERM INVESTMENTS — 10.6%

 

 

 

Sovereign Bonds — 8.5%

 

 

 

 

 

Egypt Treasury Bills:

 

 

 

75,200,000

EGP

Zero coupon bond to yield 7.080% due 10/28/08

 

13,164,198

 

17,050,000

EGP

Zero coupon bond to yield 6.800% due 11/11/08

 

2,976,466

 

7,171,000

BRL

Brazil Letras Tesouro Nacional, zero coupon bond to yield 3.320% due 1/1/09

 

3,874,519

 

 

 

Bank Negara Malaysia Monetary Notes:

 

 

 

2,769,000

MYR

Zero coupon bond to yield 3.310% due 5/29/08

 

859,783

 

14,123,000

MYR

Zero coupon bond to yield 3.320% due 6/17/08

 

4,377,754

 

2,610,000

MYR

Zero coupon bond to yield 3.310% due 7/17/08

 

806,620

 

10,632,000

MYR

Series 4207, zero coupon bond to yield 3.400% due 4/22/08

 

3,312,901

 

3,730,000

MYR

Bank Negara Malaysia Islamic Notes, zero coupon bond to yield 3.310% due 7/24/08

 

1,152,372

 

 

 

 

 

 

 

 

 

Total Sovereign Bonds
(Cost — $29,877,664)

 

30,524,613

 

 

See Notes to Schedule of Investments.

 

4



 

Western Asset Emerging Markets Income Fund II Inc.

 

Schedule of Investments (unaudited)(continued)

February 29, 2008

 

Face
Amount†

 

Security

 

Value

 

U.S. Government Agency — 0.4%

 

 

 

$

1,250,000

 

Federal National Mortgage Association (FNMA), Discount Notes, 5.203% due 3/17/08 (f)
(Cost - $1,247,565)

 

$

1,247,565

 

 

 

 

 

 

 

Repurchase Agreement — 1.7%

 

 

 

5,915,000

 

Morgan Stanley tri-party repurchase agreement dated 2/29/08, 3.000% due 3/3/08; Proceeds at maturity - $5,916,479; (Fully collateralized by U.S. government agency obligation, 5.200% due 3/5/19; Market value - $6,185,358)
(Cost - $5,915,000)

 

5,915,000

 

 

 

 

 

 

 

 

 

TOTAL SHORT-TERM INVESTMENTS
(Cost — $37,040,229)

 

37,687,178

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENTS — 101.0% (Cost — $352,553,091#)

 

360,609,419

 

 

 

Liabilities in Excess of Other Assets — (1.0)%

 

(3,396,647

)

 

 

 

 

 

 

 

 

TOTAL NET ASSETS — 100.0%

 

$

357,212,772

 

 


*

Non-income producing security.

Face amount denominated in U.S. dollars, unless otherwise noted.

(a)

Security is currently in default.

(b)

Illiquid security.

(c)

Variable rate security.  Interest rate disclosed is that which is in effect at February 29, 2008.

(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, unless otherwise noted.

(e)

All or a portion of this security is segregated for extended settlements and foreign currency contracts.

(f)

Rate shown represents yield-to-maturity.

(g)

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

#

Aggregate cost for federal income tax purposes is substantially the same.

 

 

 

Abbreviations used in this schedule:

 

ARS

-

Argentine Peso

 

BRL

-

Brazilian Dollar

 

DEM

-

German Mark

 

EGP

-

Egyptian Pound

 

EUR

-

Euro

 

GDP

-

Gross Domestic Product

 

IDR

-

Indonesian Rupiah

 

ITL

-

Italian Lira

 

MYR

-

Malaysian Ringgit

 

OJSC

-

Open Joint Stock Company

 

RUB

-

Russian Ruble

 

TRY

-

Turkish Lira

 

See Notes to Schedule of Investments.

 

5



 

Notes to Schedule of Investments (unaudited)

 

1. Organization and Significant Accounting Policies

 

Western Asset Emerging Markets Income Fund II Inc. (the “Fund”) was incorporated in Maryland 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 seek high current income. As a secondary objective, the Fund seeks capital appreciation. In pursuit of these objectives, the Fund under normal conditions invests at least 80% of its net assets, plus any borrowings for investment purposes, in debt securities of government and government related issuers located in emerging market countries (including participations in loans between governments and financial institutions), and of entities organized to restructure the outstanding debt of such issuers, and in debt securities of corporate issuers located in emerging market countries.

 

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 last quoted 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 last quoted 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 securities 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 fair 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 all times, 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) Reverse Repurchase Agreements.  The Fund may enter into a reverse repurchase agreement in which the Fund sells a portfolio security at a specified price with an agreement to purchase the same or substantially the same security from the same counterparty at a fixed or determinable price at a future date. When entering into reverse repurchase agreements, the Fund’s custodian delivers to the counterparty liquid assets, the market value of which, at the inception of the transaction, at least equals the repurchase price (including accrued interest). The Fund pays interest on amounts obtained pursuant to reverse repurchase agreements. Reverse repurchase agreements are considered to be borrowings, which may create leverage risk to the Fund.

 

(d) Credit Default Swaps.  The Fund may enter into credit default swap (“CDS”) contracts for investment purposes, to manage its credit risk or to add leverage.  CDS agreements involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically corporate issuers or sovereign issuers of an emerging country, on a specified obligation. The Fund may use a CDS to provide a measure of protection against defaults of the issuers (i.e., to reduce risk where a Fund  has exposure to the sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular issuer’s default. As a seller of protection, the Fund generally receives an upfront payment or a fixed rate of income throughout the term of the swap provided that there is no credit event. If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will pay to the buyer of the protection an amount up to the notional value of the swap, and in certain instances take delivery of the security. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Fund generally receives an amount up to the notional value of the swap if a credit event occurs.

 

Entering into a CDS agreement involves, to varying degrees, elements of credit, market and documentation risk in excess of the related amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility

 



 

Notes to Schedule of Investments (unaudited) (continued)

 

that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreement, and that there will be unfavorable changes in net interest rates.

 

(e) Forward Foreign Currency Contracts.  The Fund may enter into a forward foreign currency contract to hedge against foreign currency exchange rate risk on its non-U.S. dollar denominated securities or to facilitate settlement of a foreign currency denominated portfolio transaction.  A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was closed.

 

Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.

 

(f) 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 at the date of valuation.  Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.

 

Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.

 

(g) 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 involves 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.

 

(h) Security Transactions.  Security transactions are accounted for on a trade date basis.

 

2.  Investments

 

At February 29, 2008, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:

 

Gross unrealized appreciation

 

$

16,862,067

 

Gross unrealized depreciation

 

(8,805,739

)

Net unrealized appreciation

 

$

8,056,328

 

 

At February 29, 2008, the Fund had the following open reverse repurchase agreements:

 

Face

 

 

 

 

 

Amount

 

Security

 

Value

 

$

4,914,987

 

Reverse Repurchase Agreement with Credit Suisse First Boston,

 

 

 

 

 

dated 2/19/08 bearing 3.250% to be repurchased at a date and amount to be

 

 

 

 

 

determined, collateralized by: $3,519,000 Republic of Turkey 11.875% due 1/15/30;

 

 

 

 

 

Market value (including accrued interest) $5,387,204

 

$

4,914,987

 

11,035,560

 

Reverse Repurchase Agreement with JP Morgan,

 

 

 

 

 

dated 1/31/08 bearing 2.750% to be repurchased at a date and amount to be

 

 

 

 

 

determined, collateralized by: $9,840,000 Gaz Capital SA,

 

 

 

 

 

Notes, 8.625% due 4/28/34; Market value (including accrued interest) $11,827,958

 

11,035,560

 

 

 

 

 

 

 

 

 

Total Reverse Repurchase Agreements

 

 

 

 

 

(Proceeds — $15,950,547)

 

$

15,950,547

 

 



 

Notes to Schedule of Investments (unaudited) (continued)

 

At February 29, 2008, the Fund had the following open forward foreign currency contracts:

 

Foreign Currency

 

Local
Currency

 

Market
Value

 

Settlement
Date

 

Unrealized
Loss

 

Contracts to Buy:

 

 

 

 

 

 

 

 

 

Indian Rupee

 

79,965,150

 

$

1,999,903

 

3/14/08

 

$

(27,097

)

Indian Rupee

 

26,702,000

 

667,809

 

3/14/08

 

(8,191

)

Indian Rupee

 

26,628,750

 

666,085

 

3/17/08

 

(8,915

)

Net Unrealized Loss on Open Forward Foreign Currency Contracts

 

 

 

 

 

$

(44,203

)

 

At February 29, 2008, the Fund held the following credit default swap contract:

 

Swap Counterparty:

 

Morgan Stanley Co., Inc.

Effective Date:

 

2/20/08

Reference Entity:

 

ATF Bank

Notional Amount:

 

$8,830,000

Payments received by Fund:

 

4.250%

Payments made by Fund:

 

Payment only if credit event occurs

Termination Date:

 

3/24/08

Unrealized Appreciation

 

$1,389

 

3. Recent accounting pronouncement

 

In March 2008, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund’s derivative and hedging activities, including how such activities are accounted for and their effect on the Fund’s financial position, performance and cash flows. Management is currently evaluating the impact the adoption of SFAS 161 will have on the Fund’s financial statements and related disclosures.

 



 

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 Emerging Markets Income Fund II Inc.

 

By

/s/ R. Jay Gerken

 

R. Jay Gerken

Chief Executive Officer

 

Date:  April 24, 2008

 

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:  April 24, 2008

 

By

/s/ Kaprel Ozsolak

 

Kaprel Ozsolak

Chief Financial Officer

 

Date:  April 24, 2008