BofA High Yield Large-Cap Index up 0.19% in week; YTD loss trimmed to 5.36%

By Paul Deckelman

New York, Nov. 5 - The Banc of America High Yield Large Cap Index was up for a fourth consecutive week, returning 0.19% in the week ended Nov. 1. That came on the heels of a 0.44% gain the week before. The index's cumulative loss for the year so far narrowed to 5.36% in the latest week from 5.54% the week before.

In the most recent week, the index's spread over Treasuries widened out to 1,043 basis points from 1,015 the previous week, and its yield-to-worst likewise inched up to 14.17% from 14.14%.

In the most recent week, the index tracked 341 issues with a total market valuation of $132.316 billion, versus 340 issues worth $132.732 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 nearly $600 billion.

The best performer among the three credit tiers into which B of A divides its index was once again those bonds rated B- and below (24.22% of the Index), with a return of 0.49% in the most recent week. The top credit tier - issues rated BB+ and BB (23.86% of the Index) - was next with a 0.41% return, while the middle tier (issues rated BB-, B+ and B, comprising 51.92% of the Index), lagged with a 0.06% loss.

Banc of America's analysts noted that "fallen angel" credits - i.e., formerly investment-grade issues which are now junk-bond rated - have surged in volume over the last several years, and now account for "an increasingly large portion of the high yield market and (exert) a more notable influence on its performance and direction."

While there were 40 such issuers with $31 billion of debt in 1999 and 39 issuers with $35 billion in 2000, the number of issuers losing investment-grade ratings in 2001 already totaled 42 as of Oct. 16, with total volume of $59.4 billion, according to data from Standard & Poor's, which further said that 24 of them were U.S. issuers accounting for $48.8 billion. Using data from both S&P and from Moody's Investors Service on issuers on watch for possible future downgrades, B of A analysts estimate that the pool of fallen angel debt could increase by at least $22 billion over the near future.

"We believe that investors should particularly focus on this pool of prospective fallen angels because issuers in this category can potentially provide profitable trading opportunities as they enter the high yield market and ... outperform the market over time.

Indeed, the B of A report indicates that year-to-date, fallen angels, comprising 4.19% of the market value of the High Yield Large Cap Index, have returned a sterling 17.31%, versus the 5.21% cumulative loss for the index. Looking at B of A's larger High Yield Broad Market Index (including many issues below $300 million), fallen angels, accounting for 4.57% of the index's market value, have outperformed it year-to-date 23.32% versus 0.64%.

"We estimate that approximately $33 billion par amount of additional fallen angels could be added to the Broad Market Index within the next year. Considering this notable size, and the recent performance pattern of fallen angels, we believe that high yield investors will benefit from monitoring this segment of the market and allocating additional resources to evaluate potential investment opportunities," the Banc of America analysts concluded.

In the most recent week, international wireline telecommunications issuers turned in the best performance, an 8.49% gain, as KPNQwest debt, like its 8 1/8% senior notes due 2009, rose three points as the joint-venture slightly increased its 2001 sales forecast. In the previous week, domestic wireline telecom companies had been the best performers with a 6.19% return, on top of their index-leading 8.23% the week before that.

Satellite services, up 3.85% in the week ended Nov. 1, was the second-strongest sector, on the strength of Loral Space & Communications' announcement that its Loral CyberStar unit will exchange $927 million of existing debt for new debt and stock warrants, which boosted the Loral unit's bonds 10 points.

Domestic wireline (the top performer the two previous weeks, as already noted) was up another 2.35% in the most recent week, on Williams Communications Group Inc.'s announcement that it had reached agreement with its lenders on a key amendment to its bank credit facility, which gave its notes a seven-point boost. Technology (up 0.86%) and consumer durables (up 0.82%) rounded out the Top Five list of best performing sectors; it was the third straight week near the top for the techs, up 0.99% in the previous week and 3.45% the week before.

On the downside, finance issues fell 6.12% in the most recent week, as Conseco Inc.'s battered bonds fell a dozen points after the troubled Carmel, Ind.-based insurer announced $410 million third-quarter loss. In the previous week, transportation (down 3.91%) had been the worst performer, while the finance sector had been second-worst, with a 2.63% loss, again on Conseco weakness.

International wireless issues were the second-worst performer in the week ended Nov. 1, down 4.14% on weakness in Nextel International Inc. debt; in the previous week, the group had posted a 3.12% return, second-best in the Index, on a big gain in Microcell Telecommunications bonds.

Steelmakers (down 2.49% of a 15-point drop in WCI Steel 10% notes due 2004), business services (off 1.01%) and gaming (down 0.68%) rounded out the Bottom Five list of worst-performing issues this past week; gaming had also been among the worst laggards the week before, losing 0.42%.

End

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