B of A High Yield Large-Cap Index off 0.21%; year-to-date gain eases to 3.09%

By Paul Deckelman

New York, Feb. 11- The Banc of America High Yield Large Cap Index eased 0.21% in the week ended last Thursday (Feb. 6) - the third week in a row in which the market gauge was modestly on the downside. In the previous week (ended Jan. 30), the index retreated 0.32%. The downturns follow five straight weeks of advances, stretching back into December.

The year-to-date return likewise declined in the latest week to 3.09% from 3.32% the week before. The cumulative return had been given a big boost by the 3.43% gain seen in the first full trading week of the year (ended Jan. 9).

In the latest week, the index's spread over comparable Treasury issues widened out to 912 basis points from 902 the week before, while its yield-to-worst moved up to 12.22% from 12.15%.

B of A's somewhat broader and more representative Banc of America High Yield Broad Market Index was also slightly on the downside in the most recent week, dipping 0.07%, versus its 0.20% loss in the week ended Jan. 30. The HY Broad Market Index's year-to-date return was 2.65%, down from 2.73% the prior week. Its spread over Treasuries was 916 basis points, unchanged from the week before, and its yield-to-worst was 12.11%, actually a touch better than the 12.12% seen the week before.

(The High Yield Large Cap Index, representing the most liquid portion of the high yield world, tracks approximately 400 issues of $300 million or more, having a total market value of about $180 billion. The High Yield Broad Market Index tracks approximately 1400 issues of $100 million or more, having a total market value of about $340 billion. B of A sees both as reliable proxies for the approximately $600 billion high yield universe.)

B of A analysts noted that the tone in the credit markets was "mixed" this past week; on the one hand, "investors flush with cash continued to buy smaller off-the-run and higher yielding bonds" - but this came against a backdrop of disappointing earnings announcements.

High yield investors, they said, continued to mostly focus on the primary market, which saw over $3 billion of notes price just between last Monday and last Thursday, including the billion-and-a-half-dollar deal from TRW Automotive Inc. In the secondary sphere, they said, the transportation, lodging and gaming sectors, pressured by soft earnings outlooks, continued to weigh on overall market performance.

For a second consecutive week, transportation and lodging finished 1-2 as the worst-performing industry groupings, and it was the third straight week that transportation issues were at the absolute bottom of the barrel.

In the latest week, the transportation names fell 1.90%, as Northwest Airlines' bonds lost between three and 4½ points, with its 9 7/8% notes due 2007 losing three points to close at 66. Delta Air Lines' 8.3% notes due 2029 lost 2½ points to end at 56 and Air Canada's 10.2% notes due 2011 swooned eight points to 47.

Lodging again was the second-worst performer, off 1.48%, as FelCor Lodging released fourth-quarter 2002 earnings and warned that around a 20% drop in 2003 first-quarter EBITDA and an approximate 7% drop in full-year 2003 EBITDA was likely. After Standard & Poor's put FelCor's BB- corporate credit rating on CreditWatch with negative implications following the earnings release, FelCor's 9½% notes due 2008 and its 8½% notes due 2011 both fell a point-and-a-half to close at 96.5 and 93, respectively. And Host Marriott's bonds came under pressure as well, with its 7 7/8% notes due 2008 down three points to close at 91.

Gaming (off 1.41% as New Jersey's plans for a rise in its casino revenue tax punished the bonds of Atlantic City gaming operators like Trump Hotel & Casino Resorts Inc. and Resorts International Hotel & Casino), North American cable (off 1.00%) and finance (0.49% weaker) rounded out the Bottom Five list of the week's worst-performing sectors.

On the upside, B of A analysts said, were such areas as technology, healthcare, publishing, advertising-dependent media and consumer non-durables, all of which posted gains of more than 0.5%.

The best performer in the week ended Thursday was international cable, up 1.94% as British Sky Broadcasting's 6 7/8% notes due 2009 firmed three points to close at around 105.5 after the company's outlook was raised to positive by S&P.

Technology was the second-strongest performer for a third consecutive week, up 1.64% as the bonds of Lucent Technologies Inc. and Nortel Networks Corp., traded up, with Lucent's 7¼% notes due 2006 gaining 5¼ points to end at 82 and its 6.45% notes due 2029 up two points to close at 56.5, while Nortel's 6 1/8% notes due 2006 firmed two-and-a-half points to end at 86.5.

International wireline telecommunications (up 1.32% on strength in Colt Telecom Group's 12% bonds), satellite services (1.25% better) and healthcare (up 0.69%) rounded out the Top Five list of the best- performing sectors in the most recent week.

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