B of A High Yield Large-Cap Index down 0.21% in week; YTD back to slightly negative

By Paul Deckelman

New York, June 3 - The Banc of America High Yield Large Cap Index eased 0.21% in the week ended May 30 - almost a mirror image of the 0.22% gain seen the previous week, and a return to the negative trend which has seen the index fall in four weeks out of the last five.

The latest week's erosion, however mild, put the index's year-to-date return back into the red, at negative 0.18%. The 0.22% gain seen in the week ended May 23 had steered the cumulative return back into slightly positive territory, at 0.03%. Since its most recent peak level of 1.62%, back on April 25, the year-to-date measure had headed steadily southward, before finally zigging back up in the May 23 week, and then zagging back downward last week.

The index's spread over Treasuries widened slightly to 736 basis points from 731 basis points the previous week, although its yield-to- worst was marginally tighter, at 11.80%, down from 11.87% the week before. Even with the latest retreat, however, the index remains significantly improved from where it stood at the end of 2001, when it lost about 3% overall for the year, posted a spread at year's end of over 900 basis points off Treasuries and a 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 around $600 billion.

As has been the case since the beginning of the year, while the telecommunications industry has kept flailing around, the index's non-telecom component has markedly outperformed the telcos, and thus, continues to also outperform the overall Large Cap Index, although by a lesser margin than its advantage over the beleaguered phone firms. The Banc of America Ex-Telecom sub-index suffered a 0.10% easing in the week ended May 30, although for the year-to-date, it remains solidly positive, with a 3.03% cumulative return. The sub-index had a spread over Treasuries of 621 basis points and a yield to worst of 10.63%.

In the most recent week, the index tracked 349 issues with a total market value of $150.688 billion, down from 353 issues valued at $151.706 billion the week before.

Only one of the three credit tiers into which B of A divides its index finished higher in the most recent week, as the top credit tier (issues rated BB+ and BB, 18.46% of the index) returned a respectable enough 0.63%. The middle tier (issues rated BB-, B+ and B, comprising 53.98% of the index) eased 0.09%, but the bottom tier (bonds rated B- and below, 27.56 % of the index) clearly lagged behind, with a 1.11% downturn in the May 30 week.

In that most recent week, technology issues were the best performers with a 0.70% return - the fourth consecutive week in which the tech names were on the Top Five list of strongest sectors (the techs had been up 0.68% in the prior week). They were carried by the firmness of Lucent Technologies Inc., whose 5½% notes due 2008 and its 7¼% notes due 2006 each advanced a point. In the week ended May 23, the utility issues had been the best performers, with the group up 2.03%.

Business services returned 0.47% in the most recent week, second-best in the index, as Xerox Corp.'s 9¾% senior notes due 2009 climbed a point-and-a-half. Non-ferrous metals and mining (up 0.35% as Glencore Nickel Pty.'s 9% notes due 2014 edged up half a point), finance (also up 0.35%) and steel companies (up 0.30%) rounded out the Top Five list in the most recent week; its was the fifth straight week in the Top Five for the steels, which had returned 0.48% in the week ended May 23.

On the downside, PCS/cellular providers were the worst performers, falling 1.47% on investors' continuing concerns about industry fundamentals; B of A's analysts said that rural carriers were hit the hardest, American Cellular Corp.'s 9½% notes due 2009 dipping five points. Meantime, sector bellwether Nextel Communications Inc.'s issues retreated one to two points, with its benchmark 9 3/8% senior notes due 2009 down two points. In the week ended May 23, domestic wireline telecom providers were the worst finishers, down 5.28%.

North American cable operators retreated 0.70% in the latest week on the continued troubles of Adelphia Communications Corp., whose 10¼% senior notes due 2011 traded down five points after the embattled Coudersport, Pa.-based cabler failed to complete its financial statements by May 30, which led to NASDAQ's announcement of the impending de-listing of its stock, which in turn gave bondholders the right to put $1.4 billion of convertible debt back to the company. The latest week's retreat was a sharp turnaround from the May 23 week, when the cable operators had risen 1.98%, good enough to get the group into the Top Five, on news that the ruling Rigas family had given up control of the company and had agreed to turn over at least a billion dollars of assets to the cash-strapped Adelphia.

Lodging (down 0.70% as Extended Stay America Inc.'s 9 7/8% notes due 2011 dipped two points and FelCor Lodging's 8½% notes due 2011 retreated one-and-a-half points), international cable (off 0.55%) and paper and packaging (0.38% lower) rounded out the Bottom Five list of the worst-finishing sectors in the latest week; in the May 23 week, the international cable operators had likewise been in the Bottom Five, with a 3.37% deficit for the week.

Banc of America noted that Moody's Investors Service had downgraded Qwest Communications International Inc.'s debt rating to junk levels on May 30 (which followed a similar downgrade a week earlier by Standard & Poor's). However, the Denver-based telecommunications operator's approximately $19.8 billion face amount/$15.9 billion market value of newly junked bonds will not immediately go into either the High Yield Large Cap Index or the broader BAS High Yield Broad Market Index (which consists more than 1,300 issues of $100 million or more versus the Large Cap Index's $300 million threshold). This is because B of A imposes a 12-week "seasoning period" between the time when both major ratings services drop a fallen-angel credit to junk status and the time it goes into the indices, giving the credit time to complete the transition from the high-grade universe to the junk world.

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