B of A High Yield Large-Cap Index off 1.11%; 2002 loss widens to 9.21%

By Paul Deckelman

New York, Sept. 24 - The Banc of America High Yield Large Cap Index's four-week long winning streak came to an abrupt end in the week ended Thursday Sept. 19, as a steep downturn in technology issues, led by Lucent Technologies Inc., pulled the whole index down 1.11%, versus the 0.61% gain which had been recorded the week before. The loss at least temporarily stalls the positive momentum that had been seen in the B of A market measure since the latter part of August.

The index's year-to-date loss widened to 9.21% in the most recent week from 8.19% in the week ended Sept. 12. The cumulative loss had decreased over the previous four weeks ended Sept. 12 from the peak level of 12.87% reached in the week ended Aug. 15.

The Large Cap Index's spread over Treasuries grew to 1,084 basis points from 1,060 basis points the week before, while its yield-to-worst likewise increased marginally to 13.92% from 13.87%.

Banc of America analysts blamed the latest week's retreat on the disappointing earnings posted by Lucent and the other tech names, and added that "another round of sell-offs in the equity markets and mixed economic news did not lend much support." The decline came despite a fourth consecutive week of high-yield mutual fund inflows - seen as a key barometer of overall junk market liquidity trends; B of A had in part attributed the recent strength shown by the index to the return of investor liquidity to the junk market.

Even with the strong showing of the previous four weeks (including two weeks of gains of more than a point) , the index's cumulative performance is still far worse than where it ended 2001, when the index 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 0.78% in the most recent week, with a spread over Treasuries of 943 basis points and a yield to worst of 12.48%.

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 Sub-Index'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 350 issues with a total market value of $142.033 billion, down from 353 issues worth $144.696 billion the week before.

Of the three credit tiers into which B of A divides its index, the top credit tier (issues rated BB+ and BB, making up 16.61% of the index) was the only grouping turning in a positive performance, up 0.51%. The middle tier (issues rated BB-, B+ and B, comprising 52.61% of the index) lost 1.37%, while the bottom tier - bonds rated B- and below, making up 30.78% of the index, lost 1.50%.

In the most recent week, international cable operators were the strongest performers, with a 2.46% gain, driven by British Sky Broadcasting's 6 7/8% notes due 2009, which rose around 3.5 points, and Telewest Communications plc, whose 7.3% notes due 2006 gained half a point.

It was the second time in three weeks that the global cablers had been in the top spot; they had posted an index-best 7.52% gain in the week ended Sept. 5, but lost 1.84% in the week ended Sept. 12, to join the Bottom Five list of the worst-performing sectors that week. PCS/cellular operators had been the strongest performer in the Sept. 12 week, with a 4.72% gain.

In the most recent week, gaming issues held a winning hand, up 0.77% as the sector's bonds were firm across the board. Harrahs Operating Co.'s 7 7/8% notes due 2005 gained a point, while Isle of Capri Casinos' 8¾% notes due 2009 gained 1.75 points.

Publishing issues gained 0.70%, as Mail-Well's 8¾% notes due 2008 firmed 1.5 points. Rounding out the Top Five list of the best-finishing sectors for the most recent week were paper and packaging issues, up 0.69%, and non-ferrous metals and mining companies, up 0.59%. The paper and packaging issues had also been in the Top Five the week before, when they were up 1.63%.

On the downside, technology issues, as mentioned, were on the slide, plunging 11%. The main culprit was weakness in Lucent Technologies, which had announced that sales in its fiscal fourth quarter (ending Sept. 30) would drop by as much as 25% from the previous quarter, and that the fiscal fourth quarter per-share loss would be three times more than what the Street was expecting. That sour forecast caused Standard & Poor's to lower its ratings on Lucent, and sent its 6.45% notes due 2029 tumbling 15.5 points, while its 7¼% notes due 2006 lost 18 points. Other tech names traded down in sympathy, with Nortel Networks' 6 1/8% notes due 2006 losing 3.5 points on the week.

It was the second time in three weeks that the techs had been the worst of the bunch; in the week ended Sept. 5, they had lost 2.67%, although the group was in the Top Five in the week ended Sept. 12, with a 2.33% gain. That week, the domestic wireline telecommunications companies had done the worst, losing 3.58%.

Transportation was the second-worst grouping in the index in the Sept. 19 week, losing 7.41% as airlines continued to suffer from anemic demand, lack of visibility as to when a turnaround may occur for the industry and increased event risk. Northwest Airlines' 9 7/8% notes due 2007 fell eight points and Delta Air Lines' 8.3% notes due 2029 dropped seven points. The transportations had also been in the Bottom Five the week before, when they lost 0.48%, and the week before that, when they retreated 1.61%.

Domestic wireline credits lost 3.59% in the latest week with continued weakness in Qwest Capital Funding's notes; its 7¼% notes due 2011 fell 2.5 points during the week, while Level 3 Communications' 9 1/8% notes due 2008 lost five points. As already noted, the domestic wirelines had been the worst performers in the index in the week ended Sept. 12.

PCS/cellular (down 3.07%) and consumer non-cyclical issues (off 2.01%) rounded out the Bottom Five for the latest week; as already noted, the PCS/cellular grouping had been the best in the index in the Sept. 12 week.

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