B of A High Yield Large-Cap Index jumps 2.85%; YTD loss narrows to 10.39%

By Paul Deckelman

New York, August 27 - After posting two straight weeks of large losses, the Banc of America High Yield Large Cap Index came roaring back with what its analysts called a "stellar" 2.89% gain in the week ended Aug. 22, buoyed by double-digit returns in the PCS/cellular and business services sectors. The big bounceback more than compensated for the 1.10% loss seen in the week ended Aug. 15 and the 1.18% downturn the week before that.

The index's year-to-date loss narrowed noticeably to 10.39% in the latest week from 12.87% the week before, pulling back from what had been the biggest cumulative loss to date this year. Even with that improvement, 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.

The index's spread over Treasuries narrowed to 1,096 basis points and its yield- to-worst likewise came in a bit to 14.57%, from 1,124 basis points and 14.75% respectively the previous week, both of which were the highest levels for the year to date.

With its strong start at the beginning of the year now just a faint and distant memory, the index has over the past two months been dragged down to levels far worse than those seen at the end of 2001. The year-to-date loss, of course, has for some 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 also now 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 in the last two months having either done no better than the overall index or actually lagging it, as was the case in the latest week, when the subindex returned 2.27% - very respectable but still no match for the main index's gain. In the previous week, the subindex, which as the name implies excludes all of the various telecom segments, lost 1.08%. 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 - improved markedly in the latest week from the 10%-plus loss seen in the Aug. 15th week. Its yield-to-worst in the most recent week also shrank to 13.12% from 13.44%, and its spread over Treasuries narrowed to 953 basis points from 993 bps previously.

In the most recent week, the index tracked 353 issues having a total market value of $138.416 billion, up from 342 worth $128.849 billion the week before.

As could be expected with the overall index up so strongly, all three of the credit tiers into which B of A divides its index were on the rise in the most recent week, a sharp turnaround from the prior two weeks, when all three credit divisions were in the red. The telecom-heavy lowest tier (bonds rated B- and below, comprising 26.95% of the index) was the biggest winner in the most recent week, up 4.56%; the week before, it had turned in the worst showing, losing 1.71%.

The middle tier (issues rated BB-, B+ and B, comprising 56.84% of the index) had the next largest gain in the week ended Aug. 22, rising 2.62%. The week before, it had the second-biggest loss, 1.02%. The top credit tier - issues rated BB+ and BB (16.21% of the index) - which in the previous two weeks had the smallest loss of the three groups, including a 0.53% deficit in the week ended Aug. 15, instead posted the smallest gain, 1.36%, in the most recent week.

PCS/cellular issues were clearly the best performers in the week ended Aug. 22, with the sector zooming 11.96% on news of a potential merger between VoiceStream and Cingular Wireless. Nextel Communications Inc.'s bonds, which had recently been strengthening anyway, continued trading up, its benchmark 9 3/8% notes due 2009 firming seven-and-a-half points and its zero-coupon/9.95% discount notes due 2008 having firmed eight-and-a-quarter points. The jump in the wireless credits also translated to a strengthening in some tower names, with American Tower Corp.'s 9 3/8% notes due 2009 advancing more than 10 points and Crown Castle International Corp.'s 10¾% notes due 2011 a hefty 13 points higher on the week. The previous week, utilities had been the best-performing sector, with a 1.85% gain.

Business services were also way up in the most recent week, gaining 10.16% as the sector "traded up on general market strength," B of A's analysts noted. Allied Waste's 10% notes due 2009 gained three-and-a-half points and its 8 ½% notes due 2008 rose two-and-a-half.

Transportation issues were up 6.66% ,as several major airlines unveiled plans to bring down operating costs and raise revenues, outlining steps that include laying off personnel, grounding more planes, implementing service cutbacks and increasing fees for lower-paying customers. Delta Air Lines' 7.7% notes due 2005 advanced 11 points, while its 7.9% notes due 2009 gained six points. In each of the prior two weeks, the transportation sector had been the worst finisher in the whole Index on airline industry weakness in the wake of US Airways Group's bankruptcy filing and United Airlines' warning that it might also have to file in the fall if its situation did not improve. It nosedived 6.78% in the week ended Aug. 8 and 14.68% in the week ended Aug. 15.

Utilities (up 6.18%) and satellite services (up 5.46%) rounded out the week's list of the Top Five best-finishing sectors; the utility issues, as noted, had been the best finisher (up 1.85%) the week before, while satellite services had lost 2.85% to wind up on the Bottom Five list of the worst-performing sectors for a second straight week.

On the downside, international cable operators fell 6.13% - the only significant sector loss in the most recent week - as the bonds of Telewest plc weakened after the U.K.-based cabler said that it had obtained the necessary waivers and consents from its bank group that would allow the company to start discussions with its bondholders regarding possible balance sheet restructuring. In the previous week, the international cable sector had risen 1.76% to land in the Top Five for a second consecutive week. As already noted, the transportations had swooned an index-worst 14.68% in the week ended Aug. 15.

The other laggard sectors in the most recent week had much smaller losses, consistent with the broad-based index rally. Consumer non-cyclical names were off 0.56% as Revlon Consumer Products fell sharply following rating downgrades by Moody's Investors Service on Aug. 15. The credit agency cited Revlon's continued weaknesses in revenue, operating margins and cash flow as the basis for cutting the troubled New York-based cosmetics company's unsecured ratings by one notch. Revlon's 8 5/8% senior subordinated notes due 2008 - chopped down to a C rating by Moody's, fell five points.

Steel issues softened 0.50% as WCI Steel's 10% notes due 2004 dropped three points and U.S. Steel's 10¾% notes due 2008 fell more than five points. Finance (off 0.38%) and publishing (0.17% easier) rounded out the Bottom Five list for the most recent week.

B of A's analysts said that the most recent week's rally "suggests that sentiment on the asset class may be improving and that the outflow of capital from our market may stabilize, or even reverse, shortly. Indeed, a modest outflow of $44.6 million [as reported Friday by AMG Data Services] and the fact that 226 funds reported positive/flat inflows versus 192 reporting outflows may be an early validation of this point."

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