B of A High Yield Large-Cap Index plunges 4.18% on WorldCom turmoil; YTD loss widens to 7.24%

By Paul Deckelman

New York, July 1 - The Banc of America High Yield Large Cap Index plummeted 4.18% in the week ended June 27, roiled by the ripple effects throughout the communication industry arising from the WorldCom, Inc. accounting debacle. The slide was the worst since the index's inception in 1999, and dwarfed the previous worst showing this year, the 2.37% loss seen in the week ended June 13. It merely deepens a negative trend which has taken hold of the high-yield market (and the Large Cap Index, as a market gauge) in recent weeks; even counting the slight 0.06% gain recorded in the week ended June 20, the Large Cap Index has fallen in four weeks out of the last five and seven weeks out of the last nine.

The latest week's decline opens the index's year-to-date loss to a yawning 7.24%, versus 3.19% the week before. Since its most recent peak level of 1.62%, back on April 25, the year-to-date measure had already pretty much headed steadily southward, with the slide accelerating in the latter part of June.

The index's spread over Treasuries widened out sharply to 870 basis points from 823 bps the previous week, while its yield-to-worst was 12.92%, a significant rise from the previous week's 12.35%. The latest loss brings the index the closest it has been all year to where it stood at the end of 2001 - the year-to-date loss is now actually far wider than the 3% loss the index had posted for all of last year, while the current yield-to-worst and spread figures are not far from its year-ending spread of over 900 basis points off Treasuries and its 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.

Since the beginning of the year, while the telecommunications industry has sunk deeper into the doldrums, the index's non-telecom component has outperformed the telcos - but in the latest week, even this usually positive component was deep in the red, down 3.52% in the week, versus the previous week's 0.37% gain, while the year-to-date return has turned strongly negative, at minus 2.88% - a turnaround from the previous week's 0.66% YTD return. Prior to the big slides seen in the past week and in the week ended June 13, the Ex-Telecom Subindex had maintained a healthy year-to-date return. The non-telecom component's yield-to-worst in the most recent week widened to 11.52% from 11.09% and its spread over Treasuries 731 bps, up from 698.

In the most recent week, the index tracked 349 issues, the same as the previous week, but total market value dwindled to $140.39 billion from $146.164 billion the week before.

All three of the three credit tiers into which B of A divides its index were in the red for the second time in three weeks in the June 27 week, after two out of the three had posted gains the week before. The top credit tier (issues rated BB+ and BB making up 19.58% of the index) lost the least ground in the latest week, but it was still a sizable 2.69% retreat, versus the 0.33% gain the week before. The middle tier (issues rated BB-, B+ and B, comprising 56.86% of the index) lost 5.27%, after having gained 0.23% a week earlier. But the bottom tier - bonds rated B- and below (23.56% of the index) - remained on the bottom for a fifth straight week, with a negative return of 6% for the week, a sharp deterioration from the relatively moderate 0.45% loss in the June 20 week.

In the most recent week, PCS/cellular operators had the worst showing for a second straight week - the fourth week in the last five in which the wireless companies held that unenviable distinction, and the fifth week in which they were on the Bottom Five list of the weakest-performing industry sectors. The sector was already reeling from ratings downgrades and investor concerns related to slowing subscriber growth, which had caused a number of companies to trim their forecasts; in the latest week, it was knocked completely for a loop-swooning 12.85% - as Moody's Investors Service lowered its outlook for the whole wireless industry to negative on concerns for future growth. Moody's also put a majority of high-yield names in the sector on review for possible downgrade, and changed the outlook for Nextel Communications Inc. to negative from stable, causing Nextel's benchmark 9 3/8% notes due 2009 to lose 11.5 points over the week, while the Reston, Va.-based business mobile communications operator's zero-coupon/9.95% notes due 2008 dropped 9 points. As noted, the PCS/cellular group had also been the worst performer the week before, when it lost 3.80%.

The North American cable segment was the index's second- worst performer in the most recent week, plunging 12.10% as the sector continued to weaken with Adelphia Communications Corp.'s widely expected bankruptcy filing late Tuesday. Adelphia's 10¼% notes due 2011 lost 9.5 points, while the rest

of the sector was likewise off on worries of accounting irregularities (which had led to Adelphia's problems) and financing needs, with Charter Communications' 8 5/8% notes due 2009 losing 9 points and Cablevision unit CSC Holdings' 7 5/8% notes due 2018 falling close to 12 points. In the previous week, the domestic cablers had been on the Top Five list of best-performing sectors, with a 2.15% return.

Domestic wireline telecom companies nosedived 11.35% in the latest week, as telecom names across the board took it on the chin in the wake of the WorldCom accounting fraud debacle. Level 3 Communications Inc.'s 9 1/8% notes due 2008 lost 5.5 points on the week, while Time Warner Telecom's 10 1/8% notes due 2011 fell 6 points (ironically, WorldCom's own debt - which plunged anywhere from 30 to 60 points in the week on revelations of massive allegedly fraudulent accounting practices and the need to restate five quarters of earnings - is not included in the B of A's Index because the bank imposes a 12-week long seasoning period - not yet completed, in WorldCom's case - on fallen angels before it adds their debt to its Large Cap and Broad Market high yield indices). It was the third straight week in the Bottom Five for the wirelines, which had fallen 1.11% the week before.

Utilities (down 9.11%) and technology issues (down 5.45%) rounded out the Bottom Five list for the latest week; in the week ended June 20, utility issues had actually been the best-performing sector, with a 3.16% gain, while the techs had lost 2.23. The technology sector has now been in the Bottom Five for four straight weeks.

On the upside - and there wasn't much of it - steel issues were the sole industry group turning in a positive performance in the latest week, up 1.72% as WCI Steel Inc.'s 10% senior notes due 2004 were quoted higher earlier in the week. As already noted, the utility issues had led all sectors in the week ended June 20.

The remaining sectors in the Top Five all showed losses, but their retreats were only nominal, compared to the much sharper slides seen in other sectors. Consumer non-cyclical issues lost just 0.10% on the week, as "strength in Rite Aid notes offset some of the general market weakness," B of A's analysts said. After the Camp Hill, Pa.-based drugstore chain reported a first-quarter net income of $2.6 million - its first profit in four years - Rite Aid's 7 1/8% notes due 2007 and its 7.7% notes due 2027 rose 3 and 2 points, respectively.

Paper and packaging (down just 0.25% as Owens-Brockway's 8 7/8% notes of due 2009 eased 1.5 points while Stone Container's 9¼% notes due 2008 edged up quarter of a point), lodging (down 0.27%) and finance (off 0.37%) rounded out the Top Five list in the latest week; the week before, lodging had been in the Bottom Five with an 0.99% loss.

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