B of A High Yield Broad Market Index down 0.75%, year-to-date loss widens to 1.55%

By Paul Deckelman

New York, April 5 - The Banc of America Securities High Yield Broad Market Index lost 0.75% in the week ended March 31, its third consecutive weekly downturn. In the prior week ended March 24, the index had tumbled 1.15%, its biggest loss so far this year.

The index's year-to-date loss widened to 1.55% from 0.80% the week before. The three consecutive sizable weekly losses (including the 0.84% loss in the week ended March 17) would seem to have re-established the strongly negative trend seen in the index in the first few weeks of the year.

The index's spread over Treasuries rose sharply to 373 basis points in the most recent week, up from 343 bps the previous week and well up from the relatively trim 300 bps spread seen in the week ended March 10, the last time the index showed a positive reading. Its yield to worst meantime widened to 7.85% from 7.64% the week before.

Large Caps down 0.81%

The more narrowly focused High Yield Large Cap Index, which generally mirrors the patterns seen in the HY Broad Market Index, was down 0.81% in the latest week, on top of a 1.28% nosedive in the week ended March 24 and a 1.06% loss the week before that, and its year-to-date return plummeted to a 2.14% loss from the 1.33% cumulative loss the previous week. HY Large Cap's spread over Treasuries in the most recent week increased sharply to 364 bps from 332 bps the previous week, and its yield to worst rose to 7.81% from 7.58% previously.

In the latest week, the more inclusive HY Broad Market Index tracked 1,694 issues of $100 million or more, down from 1,698 the week before, while the overall market value of the issues slid to $533.9 billion from $541.2 billion the previous week. The HY Large Cap Index, representing the most liquid portion of the high-yield world, meantime tracked 613 issues of $300 million or more, down from 616 the week before, while total market value decreased to $326.8 billion from $332.3 billion. B of A sees both as reliable proxies for the $750 billion high-yield universe.

Middle credit tier outperforms

On a credit-quality basis, the middle of the three credit tiers into which B of A divides its index - those issues rated BB-, B+ and B, making up 45.02% of the index - had the smallest loss, at 0.68%. This was followed by the bottom tier (those issues rated B- and below, accounting for 36.98% of the index), which lost 0.75%. The top credit tier - those issues rated BB+ and BB, comprising an even 18% of the index - had the biggest loss, 0.91%.

It was a reversal of the previous week's order - in the week ended March 24, the middle tier lost 1.26%, the bottom tier lost 1.10%, and the top tier lost 0.96% - but a resumption of the index's recent trend, which has now seen the middle-credit tier having had the best showing and the top tier the worst, in five weeks out of the previous seven.

For a third consecutive week, all 23 of the industry sectors into which B of A divides its high-yield universe had negative returns this past week - a sharp turnaround from the trend which had been seen in most of the previous recent weeks from about mid-January through early March, when most, or in some cases, all of the industry sectors had positive returns.

Secondary market weaker

B of A analysts said that the high-yield secondary market "continued to suffer from broad-based weakness as well as LBO headline news in the retail space" - an obvious reference to the sharp decline last week in the bonds of J.C. Penney Co. Inc. on a fashion industry trade publication's report - apparently unfounded - that the Plano, Texas-based department store operator might be the target of a leveraged buyout, which would likely be largely debt-funded and which would push existing debt lower in the capital structure. Bonds of retailers Saks Inc. and Toys "R" Us Inc. also declined, the former on Penney-inspired buyout speculation and the latter - which actually is being bought out LBO-style by a Kohlberg Kravis Roberts & Co.-led syndicate - after it indicated that contrary to market hopes, there are no plans on the immediate horizon to tender for Toys' existing bonds.

While secondary was getting smacked around, the analysts said, the primary market "basically came to a standstill," with only one smallish deal - a $29.6 million add-on - having priced by Thursday, on top of two other deals pulled and no additions to the forward calendar.

Consumer non-durables worst for week

Consumer non-durables - the sector that includes retailing companies - was by far the biggest loser this past week, in free-fall with a whopping 2.72% loss in the most recent week. In the previous week, consumer durables - which includes the recently beleaguered bonds of automotive supplier companies like Collins & Aikman Products Co. and Dura Automotive Systems Inc. - had been the biggest loser, when it was down 1.85%.

Paper and packaging (down 1.16%), steel (down 1.08%), non-ferrous metals and mining (down 0.93%) and utilities (down 0.89%) rounded out the Bottom Five list of the worst-performing sectors in the most recent week.

It was the third straight week among the Bottom Five for utilities, which had lost 1.55% in the week ended March 24 and 1.10% the week before that, and the second straight week for paper and packaging, which was down 1.44% the week before. Steel had been on the Top Five list of best performers the previous week, with a 0.77% loss.

For a third consecutive week, there was no "upside" in the strictest sense of the word, with all sectors showing losses, but some sectors did have less red ink than most of the others.

Entertainment tops for week

Entertainment had the smallest loss of all, 0.31%, succeeding finance, which had an index-smallest 0.48% loss in the week ended March 24.

In the most recent week, cable/DBS operators (down 0.42%), chemicals (down 0.47%), advertising-dependent media (down 0.50%) and transportation (down 0.51%) rounded out the Top Five grouping. Cable/DBS and ad-dependent media had both been in the Bottom Five the previous week, with losses of 1.35% and 1.34%, respectively; that previous week had been cable/DBS's second straight week among the Bottom Five. Chemicals have now been the Top Five in two weeks out of the last three.

Transportation worst for year

On a year-to-date basis, transportation remains the single worst-performing sector, despite finishing in the Top Five this past week and now having two straight weeks in which it has not been among the Bottom Five - this after having been the worst performer in the whole index in four weeks out of the previous five, dating back to mid-February, dragged down by the volatile bonds of the fuel-price-challenged airline industry. However, its cumulative loss widened only modestly, to 7.50% from 7.02% the week before.

Consumer durables' year-to-date loss widened to 3.99% from 3.43%. Other sectors widening their year-to-date losses to notable proportions include consumer non-durables, whose index-worst performance in the most recent week dragged it down to a cumulative loss of 2.63% from a positive 0.09% return the week before; cable/DBS, whose loss grew to 2.19% from 1.77% despite its Top Five showing; and Bottom Fivers utilities, whose loss widened to 2.15% from 1.27%, and paper and packaging, which widened out to a 2.04% loss from a 0.89% loss the week before.

Finance tops year so far

On the upside, finance managed to hang onto undisputed possession of the top spot year to date, even as its return shrank to 2.01% from 2.55% the week before.

PCS/cellular's cumulative return fell to 0.41% from 1.06%, while business services' year-to-date return diminished to 0.01% from 0.53%. Not surprisingly, owing to the carnage over the past three week, no other individual sectors are still in the black on a year-to-date basis.

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