B of A High Yield Large-Cap Index up 0.15%; year-to-date loss narrows to 8.75%

By Paul Deckelman

New York, Sept. 9 - The Banc of America High Yield Large Cap Index rose 0.15% in the week ended Thursday (Sept. 5), its third consecutive advance. That gain continued the momentum which had begun in the week ended Aug. 22, when the index had zoomed 2.89%, a performance which B of A analysts had described as "stellar," and which continued with a 1.68% return in the week ended Aug. 29.

The positive trend has coincided with a turnaround in high-yield mutual fund flows - seen by many as a reliable barometer of overall junk market liquidity trends. After 11 straight weeks in which more money flowed out of the funds than came in to them (during which time a total of over $2.5 billion had bled from the funds), the turnaround has been dramatic, consisting of a record $1.556 billion inflow two weeks ago and a still-considerable $286 million gain last week.

The index's year-to-date loss continued to narrow, falling to 8.75% from 8.89% in the August 29 week. The cumulative loss has decreased over the past three weeks from the peak level of 12.87% in the week ended Aug. 15.

Even with the three-week turnaround, however, the index remains deeply in the red; since its last recent peak level of a 1.62% gain, seen back on April 25, the year-to-date measure has pretty much headed steadily southward, especially after the slide really began picking up steam in the latter part of June.

Even though the Large Cap Index showed a modest gain in the most recent week, its spread over Treasuries actually widened out a bit, to 1,104 basis points, from 1,074 basis points the week before, reflecting the strength of the Treasury bond market in the face of continued stock market problems. The yield to worst likewise increased slightly, to 14.22% in the latest week from 14.19%. They are still improved from the spread of 1,124 basis points and the yield to worst of 14.75% which prevailed in the week ended Aug. 15, the worst levels of the year for both.

Sixteen of the broad industry sectors into which B of A divides its index showed improvement in the most recent week and 10 lost ground, versus a 23-3 positive split the week before.

With its strong start at the beginning of the year now pretty much just a faint and distant memory, the index has since mid-June been dragged down to levels far worse than those seen at the end of 2001, although it has bounced partially back in an impressive manner over the past three weeks. Still, the year-to-date loss has for a number of weeks been much, much wider than the approximately 3% loss the index had posted for all of last year, while the current spread and yield-to-worst figures are still considerably wider than its year-ending spread of over 900 basis points off Treasuries and its year-end 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.

For most of the weeks since the beginning of the year, while the telecommunications industry was sinking deeper into the doldrums, the index's non-telecom component had strongly outperformed the telcos, but that gap has now largely been eradicated, with the Ex-Telecom Subindex since mid-June having either done no better than the overall index or actually having lagged it. In the week ended Thursday, the Subindex was up 0.15%, comparable to the gain in the overall index, with a spread over Treasuries of 959 basis points and a yield to worst of 12.74%, versus a 1.71% gain, a spread of 928 basis points a yield to worst of 12.07%, the sharply lessened spread again reflecting Treasury market gains.

In the week ended Thursday, the index tracked 355 issues, the same as the week before; their total market value in the latest week was $142.402 billion, up from $142.153 billion the week before.

Of the three credit tiers into which B of A divides its index, the top credit tier - issues rated BB+ and BB (15.97% of the index) had the largest gain in the most recent week, of 0.74%. Bringing up the rear were the middle tier (issues rated BB-, B+ and B, comprising 52.34% of the index), with a 0.13% gain, and the lowest tier (bonds rated B- and below, comprising 32.02% of the index), up 0.12%. In the week ended Aug. 29, the middle tier had been the biggest winner, with a 2.71% advance, followed by the top tier (up 1.30%) and the bottom tier (down 0.39%).

In the most recent week, international cable operators went from worst to first, up 7.52%, on a bounce in Telewest Communications plc. B of A noted that the UK-based cable company is in the process of reducing debt and cutting capital spending, and a recent news report quoted managing director Charles Burdick as stating that he expects debt-cutting talks to "move swiftly." The company's 11% notes due 2007 firmed three points on the week.

The global cablers had been the worst performing sector of all in each of the previous two weeks, down 0.98% in the week ended Aug. 29 and 6.13% the week before that, mostly on Telewest weakness. The best of all sectors in the Aug. 29 week had been transportation, up 9.92% on renewed strength in the airline group as several major air carriers unveiled plans to reduce operating costs and streamline operations.

Chemical makers were the second-best performers in the most recent week, rising 1.35% as the sector firmed across the board, with Lyondell Chemical's 9 5/8% notes due 2007 gained 1.5 points and Equistar Chemical's 10 1/8% notes due 2008 edged up one point.

Consumer non-durables were up 1.32%, as beleaguered apparel marketer Gap Inc.'s 6.9% notes due 2007 gained two points, after the company reported comparable-store sales versus a year earlier; while it suffered the expected 28th consecutive month of declining comparable store sales in August, it was the smallest monthly sales decline in 16, months, a sign that the retailer appears to be on track at righting its business. Saks Inc.'s 8¼% notes due 2008 advanced 4 points on the week despite the company reporting a 3.3% decline in comparable August sales.

Finance (up 1.14%) and North American cable operators (up 1.12%) rounded out the week's Top Five list of best-performing sectors; the domestic cablers had also been in the Top Five the week before, with a 6.08% gain.

On the downside, technology issues lost an index-worst 2.67% in the latest week as telecom equipment maker Marconi plc announced a radical financial restructuring plan that involves handing control to its current creditors. Marconi's bonds, which enjoyed investment-grade ratings just a year ago, slid 6.9 points during the week to close down around 18. In the week ended Aug. 29, the tech names had gained 2.56% to land in the Top Five. The worst performer that week, as already noted, had been the international cable companies.

Utilities were off 2.38% as Calpine Corp's 8½% notes due 2011 and AES Corp's 9 3/8% notes due 2010 both slid two points on the week. The week before, the sector had made the Top Five for a third straight week, with a 4.22% gain.

Consumer non-cyclical companies - which had also been in the Top Five the week before, with a 2.32% gain, were among the laggards this time around, losing 1.82% as Fleming Cos. Inc.'s notes traded down throughout the week following announcements of shareholder lawsuits against the company. The Dallas based wholesale grocery supplier and supermarket operator's 10 1/8% notes due 2008 lost nine points on the week.

Transportation (down 1.61%) and domestic wireline telecom operators (off 0.50%) rounded out the Bottom Five list of the worst performers in the most recent week; the transportation segment, as already noted, had been the strongest sector of all the previous week, when it rose 9.29% as airline bonds gained altitude.

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