B of A High Yield Large-Cap Index up 0.06% in week; year-to-date loss trimmed to 3.19%

By Paul Deckelman

New York, June 24 - The Banc of America High Yield Large Cap Index firmed slightly in the week ended June 20, rising by 0.06%. The slight improvement followed the largest plunge this year to date, 2.37% in the week ended June 13, and broke a three-week skein of negative results. Even so, the index has still fallen in six weeks out of the last eight.

The latest week's firming slightly narrowed the index's year-to-date loss to 3.19% from 3.25% 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, but for a short-lived foray back upward in the week ended May 23; that year-to-date loss had deepened substantially in the June 13 week.

The index's spread over Treasuries widened out to 823 basis points in the week ended June 20 from 802 basis points the previous week, even as the return improved slightly, reflecting the tightening of Treasury yields in the face of the continuing stock market decline. Its yield-to-worst was 12.35%, up marginally from 12.32% the week before. The index remains somewhat improved from where it stood at the end of 2001, when it lost about 3% overall for the year, posted a spread at year's end of over 900 basis points off Treasuries and a 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 around $600 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, and thus, continues to also outperform the overall Large Cap Index, although by a lesser margin than its advantage over the beleaguered phone firms. In the latest week, the Ex-Telecom Sub-index was up 0.37%, versus the prior week's 2.26% plunge, bringing the year-to-date return back up to 0.66% from the 0.28% notched in the June 13 week. Prior to the big slide that week, the Ex-Telecom Sub-index had maintained a healthy year-to-date return. Its yield-to-worst in the most recent week was 11.09% and its spread over Treasuries 698 basis points, with the yield-to-worst improved slightly from the previous week's 11.12%. The spread widened out from the prior week's 683 basis points, in line with the tighter Treasury yields, as noted.

In the most recent week, the index tracked 349 issues, the same as the previous week, having a total market value of $146.164 billion, down from $146.828 billion the week before.

Two of the three credit tiers into which B of A divides its index were back in the black in the most recent week, after all three had lost ground in the June 13 week. The top credit tier, issues rated BB+ and BB (19.05% of the index), rose 0.33% versus its 0.03% easing the previous week; the middle tier (issues rated BB-, B+ and B, comprising 56.15% of the index) gained 0.23% after having slid 2.28% a week earlier. But the bottom tier, bonds rated B- and below (24.80% of the index) continued to struggle, relatively speaking. It lost 0.45% in the most recent week - its fourth straight week at the bottom - although that loss pales by comparison to the 4.15% swoon in the June 13 week.

In the most recent week, utility issues were up an index-best 3.16%, as AES Corp. bonds reacted positively to the news of the resignation of co-founder Dennis Bakke as CEO and his replacement by Paul Hanrahan, who stated on a conference call that de-levering was his top priority, with the results to be achieved via asset sales or the issuance of new equity. AES's 8½% notes due 2007 and 8 3/8% notes due 2007 both firmed 10 points over the week. Other utility names rallied as well, with CMS Corp.'s 9 7/8% notes due 2007 closing up 4.5 points, and Calpine Corp.'s 8½% notes due 2011 up 3.5 points. In the previous week, paper and packaging issues led all comers with a 1.04% return, while the utilities group lost 1.91% and was part of the Bottom Five list of the worst-finishing sectors.

North American cable operators turned in the second-best showing in the most recent week, firming 2.15%, as Adelphia Communications Corp. actually gained ground despite the company defaulting on $45 million of interest and deferred dividend payments after a 30-day grace period expired on Monday. Adelphia's 10¼% notes due 2011 and 10 7/8% notes due 2010 both firmed 2 points to close just above 50 cents on the dollar, while Adelphia rival Charter Communications' bonds were also better, with its 8 5/8% notes due 2009 up 1.5 points. The week before, the domestic cablers had suffered by far the worst showing of all industry groups, swooning 12.05% on Adelphia's deteriorating financial situation.

Consumer non-durables (up 1.27% on the continued strength of Gap Inc. bonds and those of Westpoint Stevens Inc., which firmed a point and three points, respectively), publishing (up 1.06%) and energy (up 0.45%) rounded out the Top Five list of the week's best performing industry groups. It was the second week in that select circle for the consumer non-durables, which had also been up 0.30% in the week ended June 13.

On the downside, PCS/cellular operators had the worst showing in the most recent week - the third week in the last four in which the wireless companies held that unenviable distinction, and the fourth week in which they were numbered among the Bottom Five weakest finishers. The group was down 3.80% in the week ended June 20, battered by investor concerns about slowing subscriber growth after investment-grade wireless giant Sprint PCS substantially reduced its net-add forecast, while concerns about a possible Standard & Poor's downgrade of another non-junk player, AT&T Wireless, exerted additional pressure on the sector following comments on a conference call by the agency. Even though S&P affirmed AT&T Wireless' ratings with a stable outlook on June 20 - including its long-term debt rating at BBB - issues of Triton PCS, a junk-rated AT&T affiliate, ended the week substantially lower, with its 9 3/8% notes due 2011 having dropped 14 points.

In the preceding week, North American cable, as already noted, was the worst of the cellar dwellers, with a 12.05% loss for the week. The PCS/cellular names, while not having done so badly as to be the worst in the index for a third straight week, still lost 3.08%, a poor enough showing to keep them among the Bottom Five for that week.

Technology issues were down 2.23% in the most recent week, falling back, Banc of America analysts said "as optimism on a strong business spending rebound waned after a slew of warnings from tech names. While Lucent Technologies issued its sales warning on June 13, industry bellwethers Advanced Micro Devices Inc. and Apple Computer Inc. also lowered their guidance last week." Lucent's 6.45% notes due 2029 fell 2.5 points, while Amkor Technology's 9¼% notes due 2008 lost 4.5 points. It was the third straight week among the worst finishers for the tech names, which had lost 3.05% in the June 13 week and 1.09% the week before that.

Domestic wireline carriers (down 1.11% on a four-point fall in AT&T Canada's 7.65% notes due 2006 after AT&T Canada said it planned to start talks with its bondholders on restructuring its public debt and S&P lowered its senior unsecured debt rating on June 14 to CC from BB), lodging (down 0.99%) and healthcare (off 0.58%) rounded out the Bottom Five list for the most recent week. The domestic wireline names had also been in the Bottom Five in the week ended June 13, when they dove 5.54%.

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