B of A High Yield Large-Cap Index off 3.66%; 2002 loss widens to 15.68%

By Paul Deckelman

New York, Oct. 15- The Banc of America High Yield Large Cap Index notched its fourth straight sizable loss in the week ended Thursday (Oct. 10), plunging 3.66% - its second-worst weekly performance since B of A began compiling the index in 1999. The week before (ended Oct. 3) it lost 2.08%.

The four-week long skid has established a decidedly negative momentum for the index, all but erasing memory of the four weeks of positive results which had preceded it.

The latest week's retreat was broad-based; just as had been the case in the previous week only one of the 25 industry sectors into which B of A has divided its index managed to end in the black, with all of the others recording losses, to a greater or lesser degree.

The index's year-to-date loss widened markedly to a yawning 15.68% in the most recent week from 12.48% in the week ended Oct. 3, far eclipsing the previous peak loss level for the year (12.87% in the week ended Aug. 15). The cumulative loss had recently decreased as far down as 8.19%, in the week ended Sept. 12, before ballooning back up to the present level.

The Large Cap Index's spread over Treasuries grew to 1,248 basis points in the most recent week from 1,173 basis points the week before, while its yield-to-worst likewise widened out to 15.43% from 14.71%.

The index's cumulative performance continues to deteriorate badly from 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 359 issues with a total market value of $135.740 billion, versus 357 issues worth $140.103 billion 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, lost 3.27% in the most recent week, with a spread over Treasuries of 1,098 basis points - the second straight week this year that the Ex-Telecom spread has topped 1,000 basis points, the traditional high yield market definition of a distressed issue or sector - while the yield to worst for the grouping grew to 13.91%.

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, and that strong showing by the non-telecom credits helped to pace the overall index's strong gains earlier in the year. However, in recent months, even as the overall index headed south, the Ex-Telecom Subindex's performance likewise eroded, dragged down by the embattled transportation and utility sectors, and its weekly gains and losses are now generally not to far afield from those of the overall High Yield Large Cap Index.

B of A's analysts declared that "current high yield valuations, as measured by bond prices, are, on average, considerably lower than those measured on April 25, 2002, BAS High Yield Broad Market Index's post-Sept. 11 high. While high yield investors remain cautious about the prospects of the market in the near future, we believe that a combination of attractive valuations and improving sentiment in the equity markets could set the stage for a rebound in high yield over the next few weeks."

As had been the case the week before, all three of the credit tiers into which B of A divides its index finished in the red in the week ended Thursday although the bank's analysts declared that a "preference for quality was evidenced from the performance of index's three credit tiers."

For a third consecutive week, the top credit tier (issues rated BB+ and BB, making up 17.66% of the Index) had the smallest loss, easing a relatively benign 1.02%. The middle tier (issues rated BB-, B+ and B, comprising 53.47% of the index) was a distant second, with a 3.51% loss, while the biggest loser was the bottom tier - bonds rated B- and below, making up 28.87% of the index - which lost 5.41% on the week.

The worst-performing industry sector in the most recent week was the utility sector, down an astonishing 11.44%, as "softness across the sector was broad based, led by weakness in nominally investment grade-rated issuer TXU Corp.," the B of A report said.

It noted that certain TXU bonds "traded at high yield levels following a Moody's outlook change to negative from stable."

Things were little better for genuine high yielders such as AES Corp.; the Arlington, Va.-based independent international power producer's senior unsecured rating was downgraded to B+ from BB by Standard & Poor's in response to its plan to exchange cash and new securities for two existing issues. The rating agency sited continued deterioration in the company's Latin American businesses, and AES' 9 3/8% notes due 2010 lost 17 points to close at 35. Calpine Corp.'s 8½% notes due 2011 fell 4.25 points to end at 35.5.

In the previous week, North American cable had turned in the weakest showing, falling 8.07% on the week.

Domestic wireline telecom operators had the second-worst performance in the most recent week, losing 7.69%. It was the second consecutive week that sector was on the Bottom Five list of worst-performing sectors in the most recent week; the previous week, the sector had lost 3.64%.

Transportation names lost 6.24% as airlines continued their descent; Delta Air Lines' 8.3% notes due 2029 fell 5 points to end at 48 and Northwest Airlines' 8 7/8% notes due 2006 lost 3 points to close at 48. It was the sixth straight week that the transportation grouping was on the Bottom Five; in the week ended Oct. 3, the transportations dropped 5.88%.

North American cable (5.46%) and PCS/cellular issues (off 4.90%) rounded out the Bottom Five; the domestic cablers, as already mentioned, were the worst-performing of all the sectors in the week ended Oct. 3.

On the upside, there was not much happening for a second straight week. International cable was the only sector to finish with a positive return, gaining 0.43% as British Sky Broadcasting's 6 7/8% notes due 2009 edged up around a third of a point to 100.3, and United Pan-Europe Communications' zero-coupon/12½% notes due 2009 gained a quarter of a point to close at 4.25.

The international cable group had also been the only positive-finishing sector in the previous week, when it edged up 0.48%. The latest week marked the fourth straight week that the global cablers had been on the Top Five list of best-performing sectors.

All of the other four sectors in this week's Top Five actually had losses for the week, although they were smaller than the average losses. Paper and packaging issues were down 1.01%; the previous week, the group had lost 0.44% to make it to the Top Five.

Healthcare eased 1.26%; steel retreated 1.38% and advertising-dependent media was off 1.41% to round out the latest week's list.

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