B of A High Yield Large-Cap Index up 0.65% on Level 3-linked telecom rebound

By Paul Deckelman

New York, July 16 - The Banc of America High Yield Large Cap Index rose 0.65% in the week ended July 11, given a boost by a rise in telecommunications and cable names connected with the news that junk telecommer Level 3 Communications would get a $500 million investment, while investment-grade cabler AOL TimeWarner completed its $10 billion of financing, providing encouragement to high-yield names in the same sector.

The rise followed a 4.18% plunge in the week ended June 27, the last time the index had previously been compiled (Banc of America Securities did not publish the index during the week ended July 4).That downturn, linked to the turmoil throughout the communications industry arising from the WorldCom, Inc. accounting debacle, had been the worst single-week's showing since the index's inception in 1999. The latest week's gain provided some small degree of relief in an atmosphere which has seen the big gains posted by the Index early in the year evaporate, with negative results having been reported in four weeks out of the last six and seven weeks out of the last ten.

Despite the latest week's gain, the index's year-to-date loss widened to 8.32% from 7.24% in the June 27 week. Since its most recent peak level of 1.62%, back on April 25, the year-to-date measure had already pretty much headed steadily southward, with the slide accelerating in the latter part of June.

The index's spread over Treasuries widened out sharply to 944 basis points from 870 bps in the week ended June 27, while its yield-to- worst was 13.46%, a significant rise from the previous report's 12.92%, largely attributable to a notable decline in Treasury yields connected with the recent stock market slide. The index, following its strong start, has now been brought well into line with the negative results seen at the end of 2001 - the year-to-date loss is now actually far wider than the 3% loss the index had posted for all of last year, while the current yield-to- worst and spread figures are comparable to its year-ending spread of over 900 basis points off Treasuries its 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.

Since the beginning of the year, while the telecommunications industry has sunk deeper into the doldrums, the index's non-telecom component has outperformed the telcos - but in the latest week, while the telcos sizzled, the rest of the index largely fizzled, as the Ex-Telecom Subindex was virtually flat, with just a 0.01% increase - still a notable improvement over the 3.52% loss seen in the June 27 week. The year-to-date return, which had been strongly positive from the beginning of the week until the large slides in the index seen from the middle of June on, moved deeper into the red in the latest week (minus 4.35% versus minus 2.88% in the June 27 week).

The non-telecom component's yield-to-worst in the most recent week widened to 12.06% from 11.52% and its spread over Treasuries 804 bps, up from 731.

In the most recent week, the index tracked 343 issues, down from 349 the previous week, as total market value dwindled to $138.876 billion from $140.39 billion the week before.

All three of the three credit tiers into which B of A divides its Index were in the black in the most recent week, with the telecom-heavy lowest tier (bonds rated B- and below, 24% of the index) posting by far the largest gain, 2.45%. That's a sharp contrast to the negative 6% return seen in the week ended June 27, which had marked the fifth straight week in which the lowest tier had the worst loss. The top credit tier (issues rated BB+ and BB, 18.59% of the index), firmed 0.28% in the latest week, a notable improvement from the previous 2.69% loss. The middle tier (issues rated BB-, B+ and B, comprising 57.41% of the index) inched up 0.04%, versus the 5.27% loss in the June 27 week.

In the most recent week, the domestic wireline group was the best-performing sector, zooming 29.70% after the news emerged that an investment group including Warren Buffett's Berkshire Hathaway would invest $500 million in Level 3 Communications, whose 9 1/8% notes due 2008 shot up 20 points. In the previous week, the domestic wireline credits had plummeted 11.35%, to make it onto the Bottom Five list of the worst-performing sectors for a third consecutive week. The best-performing sector in the previous survey, meantime had been steel, up 1.72%, making it the only industry segment actually turning in a positive return that week.

The Banc of America analysts said that Level 3's news, as well as positive news from investment-grade cable operator AOL Time Warner helped make the North American cable group the second best performing sector in the most recent week, with a 4.46% gain. Charter Communications bonds benefited from AOL Time Warner's announcement that it had secured $10 billion of new financing. Charter's 8 5/8% notes due 2009 traded up 2.5 points over the week, while EchoStar DBS paper traded better, its 10 3/8% notes due 2007 gaining 5 points over the week. In the previous week, the sector had lost 12.10% to put it in the Bottom Five.

PCS/cellular, up 3.61% as issues from Nextel Communications Inc. - like its 9 3/8% notes, up 4.5 points - were also lifted by the Level 3 news, technology issues (a 3.26% gain) and business services (up 2.23%) rounded out the latest week's Top Five list of the best-performing sector; in the June 27 week, the PCS/cellular group had lost an index-worst 12.85% to land in the Bottom Five for a fifth straight week, while techs had also been down 5.45%, in their third straight week in the Bottom Five.

On the downside in the latest week, publishing (down 6.32%) was the worst performing industry sector, weighed down by Mail-Well Corp., which warned that its 2Q EBITDA numbers will be in the $16-17 million range, substantially below its previous guidance of $26-30 million. That caused Mail-Well's 9 5/8% notes due 2012 to nosedive 17 points. In the June 27 week, PCS/cellular names, as mentioned, had suffered the largest loss in the Index.

Utilities, which includes the independent power producers, were was the second worst performers in the latest week (down 4.97%) as the sector continued to weaken, with Calpine Corp.'s issues down 2-2.5 points during the week and Edison International Inc.'s 6 5/8% notes due 2004 dropping eight points. It was the second straight time in the Bottom Five for the utilities, which had lost 9.11% in the June 27 week.

Transportation (down 3.81% as many major airliners, including American, Delta, Northwest, Continental and United, reported year-over-year declines in their June air traffic), consumer non-durable issues (down 1.67%) and health care (down 1.32%) rounded out the Bottom Five list in the latest week.

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