B of A High Yield Large-Cap Index off 2.08%; year-to-date loss widens to 12.48%

By Paul Deckelman

New York, Oct. 8 - The Banc of America High Yield Large Cap Index notched its third straight sizable loss in the week ended Thursday (Oct. 3), falling 2.08%. The week before (ended Sept. 26), it lost 1.56%, and it fell 1.11% in the week ended Sept. 19.

The three-week long skid has established a decidedly negative momentum for the index, all but erasing memory of the four weeks of positive results which had preceded it.

The retreat was broad-based, with only one of the 25 industry sectors into which B of A divides its index ending in the black; all of the others recorded losses, to a greater or lesser degree.

The index's year-to-date loss widened to 12.48% in the most recent week from 10.62% in the week ended Sept. 26. The cumulative loss had recently decreased as far down as 8.19%, in the week ended Sept. 12, from the year's peak loss level of 12.87%, which had been reached in the week ended Aug. 15. The three-week losing streak has brought the year-to-date tally back within hailing distance of the year's peak loss level.

The Large Cap Index's spread over Treasuries grew to 1,173 basis points in the most recent week from 1,127 basis points the week before, while its yield-to-worst likewise widened out to 14.71% from 14.35%.

The index's cumulative performance continues to deteriorate from the levels at which it ended 2001, when the B of A market measure suffered an approximate 3% loss for the full year. The spread at the end of 2001 was somewhat over 900 basis points off Treasuries and its year-end yield-to-worst was above 13.50%.

In the week ended Thursday, the index tracked 357 issues with a total market value of $140.103 billion, versus 353 issues worth $140.909 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 over $500 billion.

The index's Ex-Telecom Sub Index, comprising all of the industry sectors other than those in the volatile telecommunications cluster, lost 2.05% in the most recent week, with a spread over Treasuries of 1,040 basis points - the first time this year that spread has topped 1,000 basis points, the traditional high-yield market definition of a distressed issue or sector - while the yield to worst for Ex-Telecom was 13.34%.

In the first part of the year, the Ex-Telecom grouping had far outperformed the overall index, whose results have been dragged down by the continued weakness in the still-beleaguered telecom sector, and that strong showing by the non-telecom credits helped to pace the overall index's strong gains earlier in the year. However, in recent months, even as the overall index headed south, the Ex-Telecom Subindex's performance likewise eroded, and its weekly gains and losses are now generally in line with those of the overall High Yield Large Cap Index.

All three of the credit tiers into which B of A divides its index finished in the red in the week ended Thursday, although the bank's analysts declared that "Investors' preference for quality is clearly evident when comparing the performance of index's three credit tiers."

Just as it did in the previous week, the top credit tier (issues rated BB+ and BB, making up 16.42% of the index) had the smallest loss, easing BB+ just 0.15%. The middle tier (issues rated BB-, B+ and B, comprising 54.04% of the index) was a distant second, with a 1.70% loss, while the biggest loser was the bottom tier - bonds rated B- and below, making up 29.54% of the index, - which lost 3.72% on the week.

The worst-performing industry sector in the most recent week was the North American cable operators, which fell 8.07%, "weighed down heavily by Charter Communications' bonds after the company revised third- quarter guidance downward."

The St. Louis-based cabler's bonds finished down anywhere from four to 10.5 points over the week, with its benchmark 8 5/8% notes due 2009 dropping 10 points to close at 55, and its 10¾% notes due 2009 falling 10.5 points to end at 56.5.

The fall to worst-performing sector was quite pronounced for the cable names; the week before, they were on the Top Five list of best-performing sectors with a 0.40% gain; meantime, the transportation issues as a group had been the worst performer that week, off an index-worst 6% on continued airline weakness.

They came close to repeating in the week ended Thursday, as the sector lost 5.88%. The key factor was with Delta Air Lines' notes weakening after the Atlanta-based Number-Three U.S. air carrier announced that it would eliminate 1,500 flight attendant positions and warned of higher-than-expected third-quarter losses. It also announced that it would not be in compliance with certain credit agreement terms in the fourth quarter. That caused Delta's 7.9% notes due 2009 to fall eight points to end at 60. It was the fifth straight week that the transportation companies have found themselves as a group on the Bottom Five list of the worst performing industry sectors.

Domestic wireline telecom credits lost 3.64% as issues of Qwest Capital Funding pulled down the whole group; its 6 7/8% notes due 2028 fell 7 points to close at 40, while its 7¾% notes due 2006 dropped 7.5 points to end at 54.

Consumer non-cyclical companies (down 2.79%) and finance (off 2.19%) rounded out the Bottom Five list for the most recent week; the week before, the finance issues had been the strongest performers of all, up 0.87%).

On the upside, the strongest finisher for the Oct. 3 week (in fact, the only sector showing a positive return, was international cable, which firmed 0.48% as British Sky Broadcasting's 6 7/8% notes due 2009 ended up about half a point to close at around par.

All of the other four sectors in this week's Top Five actually had losses for the week, although they were far smaller than the average losses. Consumer non-durables dipped 0.24%, as Tricon Global Restaurant's 8 7/8% notes due 2011 gained 2.5 points to end at 109.5.

Entertainment issues (off 0.28%), gaming (0.30% easier) and paper and packaging (off 0.44%) rounded out the Top Five for the most recent week.

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