B of A High Yield Large-Cap Index down 1.62% in week; YTD gain turns into 1.18% loss; analysts downplay mediocre January

By Paul Deckelman

New York, Feb. 11 - The Banc of America High Yield Large Cap Index suffered its second sizable decline in a row in the most recent week, falling 1.62% in the week ended Feb. 7. That loss followed a 1.22% loss the week before.

For the first time since the beginning of the year, the index is now in negative territory on a year-to-date basis, as the previous week's 0.45% cumulative return morphed into a 1.18% loss in the latest week. The index had started the year strongly, with three consecutive weeks of sizable gains swelling the year-to-date return, before the market gauge turned uncertain for several weeks and then, finally, negative.

In the most recent week, the index's spread over Treasuries widened to 853 basis points from 828 basis points the week before, while its yield-to-worst increased to 12.93% from 12.81% the week before.

Even so, the index continues to show an overall improvement from where it stood at the end of 2001, when it lost about 3% overall and posted a spread at year's end of over 900 basis points 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.

In the most recent week, the index tracked 345 issues with a total market valuation of $142.478 billion, down from 353 issues worth $147.798 billion in the week ended Jan. 31. The worst performer among the three credit tiers into which B of A divides its index was the middle tier (issues rated BB-, B+ and B, comprising 57.49% of the index), which was fell 1.86%. Next weakest was the lowest tier - bonds rated B- and below (23.33% of the index) had a negative 1.45% return. The smallest loss was seen in the top credit tier - issues rated BB+ and BB (19.19% of the index), which eased 1.15%.

Banc of America analysts noted that B of A's High Yield Broad Market Index returned 0.82% in the month of January. (The HY Broad Market Index, as the name implies, is a somewhat broader-based, and thus, in theory, more representative index than the HY Large Cap Index, since it includes nearly 1,300 issues of $100 million or more, with a total market value of nearly $290 million).

The 0.82% return is a relatively modest return for a month which, according to the conventional wisdom, usually exhibits the "January effect" of stronger performance than most other months of the year. Blending that result with several other widely quoted high yield indices for the purpose of comparison to previous years yields an even more modest total 0.56% return for the month, which the B of A report termed "lackluster" versus prior Januarys; in fact, on that basis, it's the third-worst showing since 1989.

Such a less-than-overwhelming performance in a month in which the market is normally supposed to do well "may rekindle questions and concerns about our total return expectations for 2002."

But the investment bank is "not necessarily" about to write off 2002 because of a relatively mediocre January; its investment report noted that in 1991, 1995 and 1997, January was not the clearly "superior" month, but the high yield market still achieved attractive total returns.

A more important factor than whether the market gets off to a roaring start in January appears to be the degree of month-to-month volatility in returns (i.e., sharp swings in month-to-month results), according to B of A's data - and this, rather than the lack of a strong January surge, may prove to be more problematic.

"We ascertain that the high yield universe has usually performed well in years with low volatility of monthly returns and in those (years) where monthly returns were relatively tightly packed in the -2% to 4% range," the B of A analysts wrote, citing such years as 1992-93 and 1996-97.

However, the bank cautioned, "volatility of returns has increased markedly since 1998, and our anecdotal evidence suggests that investors' sensitivity to headline risk and their increasingly cautious stance may prolong this volatility well into 2002," the report concluded.

For a second consecutive week, the worst-performing sector in the index was domestic wireline telecom operators, which had nosedived 15.96% in the week ended Jan. 31 and which plunged another 9.01% in the week ended Feb. 7, with weakness seen across the board rather than just concentrated in one or two names, although the slide was led by a five-point slide in Williams Communications Group Inc.'s 10 7/8% notes due 2009, on the assertion by the Tulsa, Okla.-based long-distance company's banks that Williams could be in default under its credit agreement. Level 3 Communications Inc.'s benchmark 9 1/8% senior notes due 2008 were down four points on the week, mostly in sympathy with Williams.

PCS/cellular operators were among the Bottom Five worst-performing industry groups for a second straight week, losing 6.89% as Centennial Cellular's 10¾% senior subordinated notes due 2008 swooned 15 points and Nextel Communications Inc. bonds lost about half as much. In the previous week, the wireless operators had been off 2.51%.

Utility names (down 6.38%, as AES Corp.'s 9 3/8% senior notes due 2010 plummeted 13 points on disappointing fourth-quarter results), technology credits (off 2.54%) and steel companies (down 2.04%) rounded out the Bottom Five worst-performing sectors in the most recent week.

On the upside, international cable operators led the parade with a 2.51% gain, as United Pan-Europe Communications NV debt rose four points. The week before, the global cablers had been in the Bottom Five, with a 4.30% loss, and finance issues had been on top, with a 2.54% gain.

Consumer non-cyclical issues had the second-biggest gain in the most recent week, up 0.70%, powered largely by a six-point rise in Rite Aid Corp. debt. Healthcare (up 0.60% as HCA Inc. bonds firmed on a Standard & Poor's upgrade to investment-grade). Consumer non-durable goods companies were up 0.50%, and gaming operators were close behind with a 0.49% gain to round out the Top Five list of the best performing sectors in the most recent week.

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