B of A High Yield Large-Cap Index off 1.56%; year-to-date loss widens to 10.62%

By Paul Deckelman

New York, Oct. 1- The Banc of America High Yield Large Cap Index notched its second consecutive sizable loss in the week ended Thursday (Sept. 26), falling 1.56%. That retreat comes on top of the 1.11% loss seen in the week ended Sept. 19; the two-week losing streak seems to have set the index's zig-zagging momentum back on a decidedly negative track, all but erasing memory of the four weeks of positive results which had preceded it.

Besides notable weakness in the transportation, utility and - for a second straight week - technology issues, B of A analysts noted that "market technicals were significantly weakened as a result of the $1.4 billion of net outflow from high yield mutual funds, the largest weekly outflow on record." The weekly mutual fund flow numbers issued by AMG Data Services are seen by many in the junk market as a reliable indicator of overall liquidity trends.

The index's year-to-date loss widened to 10.62% in the most recent week from 9.21% in the week ended Sept. 19. The cumulative loss had recently decreased as far down to 8.19% in the week ended Sept. 12 from the year's peak level of 12.87%, which had been reached in the week ended Aug. 15.

The Large Cap Index's spread over Treasuries grew to 1,127 basis points in the most recent week from 1,084 basis points the week before, while its yield-to-worst likewise increased widened out to 14.35% from 13.92%.

Even with the four weeks of gains (including two weeks of gains of more than a point) that preceded the retreat of the last two weeks, the index's cumulative performance is still far worse than where it ended 2001, when the B of A market measure suffered an approximate 3% loss for the full year. The spread at the end of the year was over 900 basis points off Treasuries and its year-end yield-to-worst was over 13.50%. Banc of America sees the index, which tracks issues of $300 million and over, as a reliable barometer of trends in the overall high yield market of over $500 billion.

The index's Ex-Telecom Sub Index, comprising all of the industry sectors other than those in the volatile telecommunications cluster, lost 1.7% in the most recent week, with a spread over Treasuries of 988 basis points and a yield to worst of 12.93%.

In the early part of the year, the Ex-Telecom grouping had far outperformed the overall index, which includes the still-beleaguered telecom sector, and that helped to pace the overall index's strong gains earlier in the year. However, in recent months, even as the overall index headed south, the Ex-Telecom Subindex's performance likewise eroded, and its weekly gains and losses are now generally on a par with those of the overall index.

In the week ended Thursday, the index tracked 353 issues with a total market value of $140.909 billion, versus 350 issues worth $142.033 billion the week before.

All three credit tiers into which B of A divides its index finished in the red in the week ended Thursday, with the middle tier (issues rated BB-, B+ and B, comprising 52.41% of the index) the biggest loser, down 2.24%. The bottom tier - bonds rated B- and below, making up 30.85% of the index - followed with a 1.08% loss, while the top credit tier (issues rated BB+ and BB, making up 16.75% of the index) had the smallest loss, easing 0.32%.

In the most recent week, transportation issues took the worst beating, losing an even 6% as airlines continued to trade down across the board in response to the request by major air carriers for emergency financial aid from the federal government, accompanied with a warning that on top of falling demand and rising costs, a war with Iraq would likely result in bankruptcy filings across the industry.

B of A analysts opined that "[t]he prospect of additional government funds remains uncertain, however, as the aid package following last year's terrorist attacks received some scrutiny from conservatives." Industry leader AMR Corp.'s 9% notes due 2012 dropped 10.5 points on the week, while Delta Air Lines' 7.7% notes due 2005 fell six points. It was the fourth straight week that the airline-driven transportation group was among the Bottom Five worst-performing sectors; the group had fallen 7.41% in the week ended Sept. 19, second-worst in the index.

The worst sector of all that week was the technology companies, which had plunged an eye-opening 11% on the week.

In the latest week, the techs again were battered badly, although they were not the worst performers. The group slid 5.83% as the sector continued to suffer following a slew of negative news, including Nortel Networks Corp. cutting its third- quarter forecast, citing continued deterioration in demand from its buyers. That sent the Brampton, Ont.-based telecommunications equipment maker's 6 1/8% notes due 2006 8.5 points lower. Nortel's bad news followed Lucent Technologies Inc.'s recent announcement that its per-share loss in the fiscal fourth quarter that ended Monday (Sept. 30) would be three times more than expected. Lucent's 6.45% notes due 2029 dropped nearly three points on the week. And Solectron Corp. reported its sixth consecutive quarter of losses as demand for its electronic equipment remains under pressure. Its 9 5/8% notes due 2009 were 6.5 points lower on the week.

Utility issues declined 3.50%, B of A noted, "as most names were weaker in sympathy with nominally investment grade El Paso Corp. Following a FERC administrative judge's ruling that the company prevented a significant amount of natural gas from reaching California pipelines during the power crisis in late 2000/early 2001 in order to send prices higher, El Paso Corp. paper traded at high-yield-like levels."

That in turn caused other sector players to deteriorate, with Calpine Corp.'s 8½% notes due 2008 trading down close to four points on the week and AES Corp.'s 8 7/8% notes due 2007 losing 2.5 points. Chemicals (down 3%) and steelmakers (down 2.79%) rounded out the Bottom Five in the most recent week.

On the upside, finance issues led all sectors with a 0.87% gain, as Finova Group's 7½% notes due 2009 edged up a point. In the previous week, international cable had been the best performer, up 2.46%.

The global cablers were still among the best in the Sept. 26 week, firming 0.40% as British Sky Broadcasting's 6 7/8% notes due 2009 edged up to 99.3. Healthcare (up 0.39% as HealthSouth Corp.'s 10¾% notes due 2008 firmed three points despite a Moody's Investors Service downgrade), PCS/cellular companies (up 0.20%) and energy operators (up 0.14%) rounded out the Top Five list of best-performing sectors in the most recent week. That was a turnaround for the PCS/cellular grouping, which lost 3.07% the week before and landed in the Bottom Five.

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