B of A High Yield Large-Cap Index up 0.58%, 2nd straight gain; 2002 loss cut to 13.55%

By Paul Deckelman

New York, Oct. 29 - The Banc of America High Yield Large Cap Index posted its second consecutive gain in the week ended Thursday Oct. 24, rising 0.58%, as it continued to recover from a four-week long losing streak that ended the week before, when the index jumped 1.93%.

"Positive news in the telecommunications and technology sectors helped set a stronger tone in the high yield market last week," B of A's analysts. Those gains in telecom and tech names more than offset pronounced weakness among domestic and international cable operators, both of which were among the worst-performing industry groups for the week.

The analysts also noted the acceleration of inflows into high-yield mutual funds, whose gains and losses of cash flows are seen by many in the market as a reliable barometer of overall junk-market liquidity trends. In the week ended this past Wednesday (Oct. 23), $425 million more came into the funds than left them, according to statistics compiled by AMG Data Services. That followed a nearly $207 million inflow the week before.

The High Yield Large Cap Index's year-to-date loss narrowed to 13.55% in the most recent week from 14.05% in the week ended Oct. 17. While still huge in objective terms, the year-to-date loss for the Oct. 24 week is still considerably smaller than the 15.68% drop - the biggest weekly cumulative loss for the year - which had been recorded in the week ended Oct. 10.

Even as it improved for the week, the index's spread over Treasuries and yield-to-worst both widened out slightly, to 1,168 basis points over and 15.11% (versus 1,163 basis points and 15.09% in the previous week), as Treasury bonds firmed solidly while stocks gyrated between gains and losses.

Even with the sizable bounce seen in the past two weeks, the index's cumulative performance still remains badly below the relatively modest loss level at which 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 2001 was somewhat over 900 basis points off Treasuries and its year-end yield-to-worst was above 13.50%.

In the week ended Thursday, the index tracked 374 issues with a total market value of $142.193 million, up from 370 issues worth $141.631 million the week before. 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, underperformed the larger index and lost 0.16% in the most recent week, due to its heavy exposure to the sagging cable sector, unalloyed by the gains seen in two key telecom sectors. The Ex-Telecom grouping's spread widened out to 1,050 basis points over Treasuries, while its yield-to-worst also ballooned to 13.9%

In the first part of the year, the Ex-Telecom grouping had far outperformed the overall index, whose results have been dragged down by the continued weakness in the still-beleaguered telecom sector. That strong initial showing by the non-telecom credits helped to pace the overall index's hefty gains earlier in the year. However, in recent months, the Ex-Telecom Sub Index's performance eroded, dragged down especially by the embattled transportation and utility sectors, which in turn helped to push the Large Cap Index as a whole deeply into the red. Ex Telecom's weekly gains and losses are now generally not too far afield from those of the overall High Yield Large Cap Index, and it sometimes actually underperforms the main index, as happened this past week.

For a second straight week, all three of the credit tiers into which B of A divides its index showed positive returns. The big middle credit tier (issues rated BB-, B+ and B, comprising 53.26% of the index) had the best showing, gaining 0.87%. The bottom tier - bonds rated B- and below, making up 29.73% of the index, including many of the rebounding telecom and cable issues - gained 0.29% on the week, while the top credit tier (issues rated BB+ and BB, making up 17.01% of the Index, edged up 0.23%.

The best-performing industry sector in the most recent week was the technology group, up 6.52% as Lucent Technologies Inc. and Nortel Networks Corp. bonds advanced following news that both companies (along with Motorola Inc. and Ericsson AB) were awarded contracts to provide over $1 billion in equipment to China Unicom. Lucent bonds gained 5.6 points during the week, with its 6.45% notes due 2029 gaining 6 points to end at 37. Nortel 6 1.8% notes due 2006 advanced 8.5 points to end at 38. The tech issues had also been on the Top Five list of the week's best-performing sectors the week before, when they rose 4.84%, and the domestic wireline telecom operators turned in the best showing of all the sectors, up 6.43%.

The wirelines didn't have far to fall from that peak; they were still the second-best performers in the Oct. 24 week, ending up 5.40%, as Moody's Investors Service assigned its most favorable speculative grade liquidity rating to Level 3 Communications Inc., reflecting the rating agency's view that the company has sufficient capital to fund its operations for at least the next twelve months. That pushed Level 3's 9 1/8% notes due 2008 up 3.5 points to close at 56.5.

PCS/cellular companies were up 5.07% in the latest week, as Triton PCS Inc. and Nextel Communications Inc. both reported strong third-quarter results. Nextel posted improved subscriber numbers and its second consecutive quarter of profits, causing its 9 3/8% notes due 2009 to gain 2.75 points to end at 82.5. Triton PCS's third- quarter results showed improving profitability and continued progress toward reducing leverage, and its zero-coupon/11% notes due 2008 traded up 11.5 points to end at 73. Within the PCS/cellular sector, tower names were also strong, with American Tower Corp.'s 9 3/8% notes due 2009 up 4 points to 55.5, and SBA Communications Corp's 10¼% notes due 2009 up 3 points to end at 46. In the previous week, the PCS/cellular group had also been among the Top Five, with a 5.76% return.

Publishing (up 2.27%) and paper and packaging (up 1.90%) rounded out the Top Five list for the most recent week.

On the downside, North American cable - which the week before had also been in the Top Five with a 5.46% gain - turned in the worst showing of any sector in the most recent week, falling 7.77% as Charter Communications Holdings LLC's issues traded off sharply after the St. Louis-based cabler announced that its COO, David Barford, had been put on paid leave in connection with a federal grand jury investigation - an unexpected move that triggered a surge of anxiety among investors. And later in the week, Charter cut its third-quarter year-over-year EBITDA growth forecast and pointed to subscriber losses due to customer-service problems and competition from satellite-TV services. Having already fallen about 11 points on the Barford news, Charter's benchmark 8 5/8% notes due 2009, then lost another 4 points during the two subsequent trading sessions to close the week at around 38.5.

The week before, the non-ferrous metals and mining sector had been the absolute worst finisher, with a 4.91% loss.

Transportation issues had the second-worst showing in the week ended Oct. 24, retreating 1.43% as AMR Corp.'s 9% notes due 2012 skidded 11.5 points to close at 35, following the announcement that the Dallas-based Number-One U.S. airline carrier might face a pension-liability charge in excess of $1 billion if the pension plan's investment returns do not improve by year-end. It was the eighth straight week that the transportation group - dragged earthward by the sagging airline sector - found itself on the Bottom Five list of the worst-performing groups; in the week ended Oct. 17, the transportations had been down 2.59%.

Utilities lost 1.33% in the most recent week to wind up among the Bottom Five for a third consecutive time, as issues of AES Corp. continued to drift downward on liquidity concerns, with its 8½% senior subordinated notes due 2007 sliding 4 points to 13 and its 9 3/8% senior notes due 2010 falling 2 points to 33. On a conference call, AES indicated that fourth-quarter liquidity is going to be much tighter than previously forecast, and also said that it had to complete a $2.1 billion refinancing to avoid default. The week before, the utilities had lost 0.49%.

International cable operators (down 0/87%) and non-ferrous metals and mining (off 0.70%) rounded out the Bottom Five for the most recent week; in the week before, the global cablers had inched up 0.05% but were still among the week's weakest finishers, while the non-ferrous metals and mining group, as already mentioned, had been the worst performer of all.

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