B of A High Yield Large-Cap Index up 1.68%; 2002 loss narrows to 8.89%

By Paul Deckelman

New York, Sept. 3 - The Banc of America High Yield Large Cap Index rose 1.68% in the week ended Thursday Aug. 29, its second consecutive large rise. That gain continued the momentum which had begun in the week ended Aug. 22, when the index had zoomed 2.89%, a performance which B of A analysts had described as "stellar."

The analysts said the latest week's more modest but still-impressive performance came in tandem with the largest weekly high-yield mutual fund inflow on record ($1.556 billion), allowing the junk bond market to shrug off continued equity market weakness. They noted that the advance was a broad as it was high, with strength seen across almost all of the industry sectors into which B of A divides the high-yield universe. Advancing sectors overwhelmingly outnumbered decliners, 23-to-3.

The index's year-to-date loss continued to narrow noticeably to 8.89%, down from 10.39% in the Aug. 22 week and well down from 12.87% in the week ended Aug. 15, pulling back from what had been the biggest cumulative loss-to-date this year. Even with the two-week turnaround, however, the index remains deeply in the red; since its last recent peak level of a 1.62% gain, seen back on April 25, the year-to-date measure has pretty much headed steadily southward, especially after the slide really began picking up steam in the latter part of June.

The index's spread over Treasuries narrowed to 1,074 basis points in the most recent week and its yield-to-worst likewise came in a bit to 14.19%, versus 1,096 basis points and 14.57% respectively in the Aug. 22 week. The week before that, the spread had stood at 1,124 basis points and the yield to worst at 14.75%, - both of which were the highest levels for the year to date.

With its strong start at the beginning of the year now pretty much just a faint and distant memory, the index has over the past two-and-a-half months been dragged down to levels far worse than those seen at the end of 2001, although it has bounced partially back in an impressive manner over the past two weeks. Still, the year-to-date loss has for some weeks been much, much wider than the approximately 3% loss the index had posted for all of last year, while the current spread and yield-to-worst figures are still considerably wider than its year-ending spread of over 900 basis points off Treasuries and its year-end yield-to-worst of 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.

For most of the weeks since the beginning of the year, while the telecommunications industry was sinking deeper into the doldrums, the index's non-telecom component had strongly outperformed the telcos - but that gap has now largely been eradicated, with the Ex-Telecom Subindex since mid-June having either done no better than the overall index or actually having lagged it. In the week ended Thursday, the Subindex was up 1.71%, comparable to the gain in the overall index, with a spread over Treasuries of 928 basis points and a yield to worst of 12.07%, versus the previous week, when the group - which as the name implies excludes all of the various telecom segments - returned 2.27%, and had a spread of 953 basis points and a yield to worst of 13.12%.

In the week ended Thursday, the index tracked 355 issues having a total market value of $142.153 billion, up from 353 issues worth $138.416 billion the week before.

Even though the index was up strongly for a second straight week, not all of the three credit tiers into which B of A divides its index were gainers (all three had been in positive territory the week before). The middle credit tier (issues rated BB-, B+ and B, comprising 52.34% of the index) had the largest gain in the week ended Thursday, rising 2.71%. The week before, it had been the second-largest gainer, with a 2.62% advance. The top credit tier - issues rated BB+ and BB (15.90% of the index) - had the second-largest advance in the most recent week, of 1.30%; the week before, its 1.36% gain had been the smallest of the three credit segments.

But the telecom-heavy lowest tier (bonds rated B- and below, comprising 31.76% of the index), which had been the biggest winner in the Aug. 22 week with a 4.56% gain, was the only one of the three credit segments to end in the red this past week, when it eased 0.39%.

In the most recent week, nearly all industry sectors, as noted, ended in the black. Best among them was the transportation issues, up 9.92%, primarily driven by continued strength in airlines, whose bonds kept trading up after several major air carriers unveiled plans to reduce operating costs and streamline operations. Beleaguered United Airlines' 11.21% notes due 2014 advanced 9 points on the week, while Delta Air Lines' 7.9% notes due 2009 climbed 8 points. In the week ended Aug. 22, the transportation credits had registered a 6.66% gain and were on the Top Five list of the best-performing industry sectors for the week. The strongest sector of them all that week was PCS/cellular operators, who rung up an 11.96% advance.

North American cable credits (up 6.08%) were the second best performers in the week ended Thursday, as the sector continued to trade up on consolidation and acquisition talk, especially on news that RCN Corp. plans to sell its New Jersey cable assets for approximately $3,000 per subscriber. That helped improve the tone within the sector, as Charter Communications' 8 5/8% notes due 2009 gained 4.5 points and its 10¾% notes due 2009 gained six points on the week.

Utilities (up 4.22%, with sector strength "felt across the board," powering Calpine Corp.'s 8½% notes due 2008 4.5 points higher), technology (up 2.56%) and consumer non-cyclical companies (up 2.32%) rounded out the Top Five list in the week ended Thursday; it was the second straight week on that list for the utilities, which had been up 6.18% the week before, while the consumer non-cyclicals had eased 0.56% that week to wind up on the Bottom Five list of the worst-performing sectors.

On the downside, international cable repeated as the weakest sector of all, losing 0.98% as Telewest plc continued to lose ground; its bonds fell anywhere from one-to-four points. The week before, Telewest had also been the main culprit as the sector turned in an index-worst 6.13% loss after the U.K.-based cabler said that it had obtained the necessary waivers and consents from its bank group that would allow the company to start discussions with its bondholders regarding possible balance sheet restructuring.

Healthcare issues lost 0.67% in the latest week, as Healthsouth Corp. announced that outpatient therapy payment cuts from Medicare might significantly reduce its revenue and profits. The company also announced a possible spin-off of its surgery unit and withdrew its 2002 and 2003 earnings guidance. That caused an allergic reaction among bondholders, as its 10¾% senior subordinated notes due 2008 tumbled 18 points.

Non-ferrous metals and mining credits dipped 0.27% as Century Aluminum's 11¾% notes due 2008 lost 3.5 points. Rounding out the Bottom Five for the week ended Thursday were two sectors that merely turned in far smaller gains than most other sectors. Lodging was up 0.30%, while entertainment names were up 0.68%.

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