B of A High Yield Large-Cap Index up 0.40% on Nextel-linked telecom rebound

By Paul Deckelman

New York, July 23 - The Banc of America High Yield Large Cap Index rose 0.40% in the week ended July 18, with PCS/cellular and other telecommunications sectors given a boost by Nextel Communications Inc.'s report of better-than-expected second-quarter earnings and its raised full-year guidance.

It was the second week in a row that the telecoms were leading the whole index higher, following the 0.65% rise recorded in the week ended July 11, when the sector was given a boost by the news that Level 3 Communications Inc. would get a $500 million investment. The two-week rise in telecoms brought some relief to an area which had previously been reeling from the turmoil seen throughout the communications sphere arising from the WorldCom Inc. accounting debacle, which resulted in the latter company's weekend bankruptcy filing.

The index's year-to-date loss meantime narrowed to 7.96% from 8.32% in the July 11 week, but the cumulative measure still remains far from its most recent peak level of a 1.62% gain, seen, back on April 25. Since then, the year-to-date measure has pretty much headed steadily southward, with the slide accelerating in the latter part of June, when several large weekly losses were posted.

The index's spread over Treasuries narrowed to 939 basis points from 944 basis points in the week ended July 11, while its yield to worst came in slightly to 13.38% from 13.46% previously.

The index, following its strong start, has now been brought well into line with the negative results seen at the end of 2001 - the year-to-date loss is now actually far wider than the 3% loss the index had posted for all of last year, while the current yield-to-worst and spread figures are comparable to its year-ending spread of over 900 basis points off Treasuries and its 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.

Since the beginning of the year, while the telecommunications industry has sunk deeper into the doldrums, the index's non-telecom component had outperformed the telcos - but in the past two weeks, while the telcos sizzled, the rest of the index largely fizzled, as the Ex-Telecom Subindex lost 0.63% in the latest week, a deterioration from the virtually flat 0.01% increase the week before. The year-to-date return, which had been strongly positive from the beginning of the week until the large slides in the index seen from the middle of June on, moved deeper into the red in the latest week (minus 4.95%, versus minus 4.35% in the July 11 week).

The non-telecom component's yield-to-worst in the most recent week widened to 12.14% from 12.06% and its spread over Treasuries grew to 816 basis points from 804 basis points previously.

In the most recent week, the index tracked 344 issues having a market value of $138.874 billion, little changed from 343 worth $138.876 billion the week before.

Two out of the three credit tiers into which B of A divides its index were in the black in the most recent week, with the telecom-heavy lowest tier (bonds rated B- and below, comprising 24.17% of the index) handily leading the way for the second straight week. It was up 1.98%, on top of the previous week's 2.45% gain - a sharp contrast to the previous five weeks, in with the third tier had turned in the worst performance. The top credit tier - issues rated BB+ and BB, 18.81% of the index - firmed 0.43% in the latest week, on top of its 0.28%rise the week before. But the middle tier (issues rated BB-, B+ and B, comprising 57.02% of the index) which had inched up 0.04% in the July 11 week, eased 0.27% in the July 18 week.

In the most recent week, the PCS/cellular sector jumped 15.43%, pushed to the top, as mentioned, by the strong earnings News from Nextel, which unexpectedly notched its first-ever quarterly profit and which raised its full-year guidance. Nextel's bonds - which had also risen smartly the previous week - zoomed on the news, its 9 3/8% senior notes due 2009 rallying 12.5 points, while its zero-coupon/9.95% notes due 2008 advancing 12 points. It was the second straight week in which the wireless group landed on the Top Five list of the best-performing sectors for the week; in the week ended July 11, PCS/cellular had gained 3.61%, while the group with the strongest showing had been domestic wireline telecom carriers, up an astounding 29.70%.

It's difficult to top that kind of showing and the domestic wirelines couldn't sustain such gains for two straight weeks, but the sector did turn in a respectable 6.14% advance in the latest week, second-best in the index, on continued strength in Level 3 Communications bonds; Level 3's 9 1/8% notes due 2008 pushed up 5.5 points on the week as the company reported second-quarter results mostly in line with guidance.

Technology issues (up 2.04% as Lucent Technologies Inc.'s 5.5% notes due 2008 firmed 5 points), advertising-dependent media (up 1.43%) and up 0.93% rounded out the Top Five list in the latest week.

The techs had also been on the list the previous week, when they returned 3.26%, while health care had lost 1.32% to wind up on that week's Bottom Five list of the worst-performing sectors.

In the most recent week, the Bottom Five was headed by finance issues, which lost 9.06% as Conseco Inc.'s 10¾% notes due 2009 and its 8¾% notes due 2006 fell sharply after A.M. Best, an insurance industry ratings service, downgraded the Carmel, Ind.-based insurer's financial strength ratings to B++ (Very Good) from A- (Excellent). In the previous week, publishing had the biggest loss, down 6.32% in response to the troubles of Mail-Well Corp.

International cable operators lost 7.36% in the latest week, as Telewest Communications plc's 11¼% notes due 2008 fell 8 points (this after Liberty Media terminated its previously announced tender offer for Telewest's bonds). Weakness in United Pan-Europe Communication's zero-coupon/12½% notes due 2009, which lost three points, also pulled the global cablers down.

Utilities were down 5.21% as AES Corp's 9½% notes due 2009 lost 10 points on investor worries about its Latin American holdings and CMS Energy Corp.'s 7½% notes due 2009 ended down two points as Standard & Poor's downgraded CMS' senior unsecured debt to B+ from BB; it marked the third straight week the sector was among the worst losers, including the previous week's 5.21% decline.

Transportation (down 2.41%) and entertainment (down 0.62%) rounded out the Bottom Five list of the worst-finishing sectors for the most recent week; transportation had also been there the week before, when it had lost 3.81%.

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