B of A High Yield Large-Cap Index up 0.26% on Sprint, Williams financing

By Paul Deckelman

New York, August 6 - The Banc of America High Yield Large Cap Index rose 0.26% in the week ended Aug. 1, aided by rallies in key sectors sparked by news of new financing for Williams Companies and Sprint Corp. That represents a turnaround from the 3.40% plunge seen in the week ended July 25. Even with the latest week's modest gain, the index's performance has been predominantly negative since around mid-to-late June, including several weeks of sizable losses.

The index's year-to-date loss narrowed a bit to 10.85% from the yawning 11.08% deficit the week before, which was the biggest cumulative loss of the year. 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, with the slide really picking up steam in the latter part of June.

Even though the index rose for the week, its spread over Treasuries actually widened slightly to 1,047 basis points from 1,039 basis points the previous week, reflecting Treasury market gains in the face of further stock market declines. Its yield-to-worst likewise grew marginally, to 14.17% in the latest week from 14.13% previously.

Following its strong start at the beginning of the year, the index has now been brought down to levels even worse than those seen at the end of 2001. The year-to-date loss, of course, has for some weeks been far wider than the approximately 3% loss the index had posted for all of last year, while the current yield-to-worst and spread figures are now 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 narrowed, on the strength of sizable telecom gains in the weeks ended July 11 and 18, as well as by the recent spread of investor angst into sectors other than the hard-hit telecoms, including cable and utilities, including independent power generating companies such as AES Corp. and Calpine Corp.

However, in the latest week, the Ex-Telecom Subindex essentially matched the overall High Yield Large-Cap Index (after having lagged it for three straight weeks), posting a 0.24% return in the latest week, versus the 3.51% loss the week before. The non-telecom segment's year-to-date return - which had been strongly positive from the beginning of the year until the large slides in the Index seen from the middle of June on - improved a bit in the latest week to an 8.04% loss from minus 8.28% in the July 25 week.

However, the non-telecom component's yield-to-worst in the most recent week widened slightly to 12.92% from 12.87%, and its spread over Treasuries grew to 923 basis points from 914 basis points previously.

In the most recent week, the index tracked 343 issues having a total market value of $133.004 billion, down from 344 issues worth $134.006 billion the week before.

Two of the three credit tiers into which B of A divides its index were in the black in the most recent week (all three had been losers the previous week,) with the middle tier (issues rated BB-, B+ and B, comprising 56.91% of the index) turning in the best performance, with a 0.76% gain. That broke a three-week skid during which the middle tier had been the worst performer, including the 4.49% loss in the July 25 week. The top credit tier - issues rated BB+ and BB (19.05% of the index) - had a 0.40% gain, second-best in the index; the week before, it had posted the smallest loss, of 1.30%. The telecom-heavy lowest tier (bonds rated B- and below, comprising 24.04% of the index), had the weakest showing the Aug. 1 week, off 0.97%, although that was an improvement over the 2.47% loss the previous week, which had sandwiched it between the other two tiers.

In the most recent week, North American cable turned in the best showing, up 6.64%, as Charter Communications bonds traded up on the back of a New York Times article early in the week, which suggested that Paul Allen, who already owns 55% of the company, may either take the company private or consider buying some of its outstanding debt. Charter's 8 5/8% notes due 2009 advanced 7.5 points. In the previous week, the domestic cablers had tumbled 10.91%, the second-worst loss in the index. The steel issues had been the best performers in the July 25 week, when they rose 0.39%.

Domestic wireline operators had the second-best showing in the most recent week, up 3.10%, as the sector drew strength from favorable financing news from investment-grade phone giant Sprint Corp. Time Warner Telecom's 10 1/8% notes due 2011 firmed five points, while Level 3 Communications Inc.'s 9 1/8% notes due 2008 were two points better.

Utility issues rose 2.77%, as news that troubled Williams Companies had lined up $2 billion of new secured financing and would get another $1.8 billion from planned asset sales, as well as positive news about another fallen angel, Dynegy Inc. helped to push AES Corp's 9½% notes due 2009 up 5.5 points, while Calpine Corp's 8½% notes due 2011 gained 4.5 points. The previous week, the utilities had been the worst of all sectors in the Index, with a 13% loss, the fourth straight week it had been on the Bottom Five list of the week's worst-performing sectors.

Ironically, neither Williams' bonds nor those of Dynegy are actually yet included in the index, as both are very recent fallen angels; B of A imposes a 12-week "seasoning period" between the time an investment grade issue becomes a full-fledged junker and the time it goes into the index or into the Banc of America High Yield Broad Market Index (which sets a minimum issue size of $100 million, versus the $300 million minimum for the Large Cap Index). This quarantine allows for the fallen angels' full transition from the investment grade market to the high yield market, B of A says.

Business services (up 0.88%) and finance (up 0.86%) rounded out the Top Five list of the week's best performing sectors.

On the downside, international cable operators swooned 12.23%, as Telewest Communications plc reported weak second-quarter results, causing its 11% notes due 2007 to slide eight points on the week. It was the third consecutive week in the Bottom Five for the global cablers, who had lost 5.04% the previous week. As mentioned, the utility sector had been the single worst performer that week.

Consumer non-cyclical issues lost 2.93%, second-worst in the index, in the most recent week, as Fleming Companies' 10 5/8% notes due 2007, fell eight points after the company reported soft second quarter results with weak year-over-year retail sales. The week before, the group had lost 0.03%, which was a good enough performance (most other sectors were down far more) to land it on the Top Five.

Energy names lost 1.49% as Tesoro Petroleum Corp. reported second- quarter results that were roughly in line with estimates; Tesoro's 9% notes due 2008 dropped more than nine points on the week.

Healthcare (down 1.31%) and paper and packaging (off 1.21%) rounded out the Bottom Five for the latest week; healthcare had risen 0.02% the week before, its second week in the Top Five category.

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