B of A High Yield Large-Cap Index slides 3.40% in week as market negatives mount

By Paul Deckelman

New York, July 29 - The Banc of America High Yield Large Cap Index tumbled 3.40% in the week ended July 25, done in by a potent witches' brew of mutual fund redemptions, equity market weakness and volatility associated with the troubles of Williams Companies. Aggravating those clear-cut negatives, B of A's analysts noted, was a "general market hysteria, fueled by baseless rumors regarding a variety of companies."

The latest week's loss was sharp turnaround from the modest advances seen in the index over the previous two weeks - including the 0.40% rise in the week ended July 18 - and puts the index back on the same strongly negative track that it had been on since around mid-to-late June, when it had several weeks of sizeable losses.

The index's year-to-date loss meantime widened to a yawning 11.08%, the biggest it's been all year, from 7.96% in the July 18 week. Since its most recent peak level of a 1.62% gain, seen, back on April 25, the year-to-date measure has pretty much headed steadily southward, with the slide really picking up steam in the latter part of June.

The index's spread over Treasuries widened out to 1,039 basis points from 939 basis points the previous week, while its yield-to-worst likewise ballooned to 14.13% from 13.38% previously.

Following its strong start at the beginning of the year, the index has now been brought down to levels even worse than those seen at the end of 2001. The year-to-date loss, of course, has for some weeks been far wider than the approximately 3% loss the index had posted for all of last year, while the current yield-to- worst and spread figures are now 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 outperformed the telcos - but that gap has now largely been narrowed, on the strength of sizable telecom gains in the weeks ended July 11 and 18, as well as by the recent spread of investor angst into sectors other than the hard-hit telecoms, including cable and utilities, including independent power generating companies such as AES Corp. and Calpine Corp.

In the latest week, the Ex-Telecom Subindex lagged the overall High Yield Large-Cap Index for a third straight week, as its 3.51% loss was actually larger than the overall index's deficit. The non-telecom segment's year-to-date return - which had been strongly positive from the beginning of the year until the large slides in the Index seen from the middle of June on - moved deeper into the red in the latest week (minus 8.28%, versus minus 4.95% in the July 18 week).

The non-telecom component's yield-to-worst in the most recent week widened to 12.87% from 12.14%, and its spread over Treasuries grew to 914 basis points from 816 basis points previously.

In the most recent week, the index tracked 344 issues, same as the week before, having a market value of $134.006 billion, down from $138.874 billion the week before.

All three of the credit tiers into which B of A divides its index were in the red in the most recent week, with the middle tier (issues rated BB-, B+ and B, comprising 56.35% of the index) turning in the weakest showing for a third straight week, with a 4.49% loss. The week before, the tier had been the only loser among the three after having eased 0.27%. The telecom-heavy lowest tier (bonds rated B- and below, comprising 24.41% of the index), which had handily led the other tiers for the two previous weeks - including its 1.98% gain in the July 18 week, with the aid of the telecom sector's unlikely, short-lived burst of strength - lost 2.47% in the latest week. The top credit tier -issues rated BB+ and BB, 19.25% of the index - had the smallest loss in the most recent week, 1.30%, versus its modest 0.43% gain the week before.

In the most recent week, utilities suffered the largest loss of any of the individual industry sectors, swooning 13% with weakness "widespread across the sector," B of A analysts reported, adding that the downgrade of Williams Companies to a pure high yield rating put additional pressure on the sector. AES' 9 3/8% notes due 2010 weakened 13 points while Calpine's 8½% notes due 2011 - despite the company's reporting good second quarter results - lost 10 points on the week. It was the fourth straight week in which the utilities sector had been on the Bottom Five list of the worst-performing sectors; the group had lost 5.21% in the week ended July 18. The worst-performing sector of all that week had been finance, with a 9.06% loss.

Ironically, while Williams Cos. weakness' helped to grease the skids under the utilities sector, its own debt did not figure into the 13% loss, since it was only downgraded to junk status this past week - and B of A imposes a 12-week "seasoning period" between the time an investment grade issue becomes a full-fledged junker and the time it goes into the index or into the Banc of America High Yield Broad Market Index (which sets a minimum issue size of $100 million, versus the $300 million minimum for the Large Cap Index). This quarantine allows for the fallen angels' full transition from the investment grade market to the high yield market, B of A says.

The week's second-worst performer was North American cable operators, which lost 10.91% as Charter Communications Inc. bonds pulled the sector down, the St. Louis-based cable giant's 8 5/8% notes due 2009 losing 9.5 points on the week. First they weakened after a research report published by another investment bank cited possible accounting problems; the notes then deteriorated further later in the week on the back of news that the Securities and Exchange Commission was looking into the accounting methods employed by AOL Time Warner Inc, the corporate parent of Charter rival Time Warner Cable.

Transportation was down 6.76% as airline debt weakened - particularly United Airlines, whose 11.21% notes due 2014 fell seven points over the week after the company reported poor second-quarter results and expressed concerns about its liquidity position. It was the third straight week among the Bottom Five for the transportation names, which had lost 2.41% in the previous week.

Technology (down 5.52%) and international cable (down 5.04%) rounded out the Bottom Five for the latest week; in the previous week, the techs had been among the Top Five best-performing sectors, with a 2.04% return, and the global cablers had lost 7.36%, second-worst showing in the index.

On the upside, there was not very much good news to go around, as only two industry sectors actually finished in the black - and even those gains were extremely modest. Steel issues were the best performers, up 0.39% AK Steel Corp. reported second- quarter earnings that were bolstered, in part, by record automotive market shipments, and its 7¾% notes due 2012 edged up a point. In the week ended July 18, PCS/cellular operators had led all sectors, with a 15.43% return.

Health care issues managed to eke out a 0.02% gain, second-best in the index and the only other positive finish, as Magellan Health Services' 9% notes due 2008 gained two points. It was the second straight week that sector was among the better performers, after the previous week's 0.93% gain.

Consumer non-cyclical issues (down 0.03%), industrials (down 0.36%) and lodging (down 0.45%) - the three smallest actual losses in the index for the latest week - rounded out the Top Five.

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