B of A High Yield Large-Cap Index down 0.18% in week; YTD loss widens to 1.36

By Paul Deckelman

New York, Feb. 20 - The Banc of America High Yield Large Cap Index suffered its third decline in a row in the most recent week, although it was far smaller than the losses notched over the previous two weeks. The index eased 0.18% in the week ended Feb. 14; it had plunged 1.62% the previous week and 1.22% the week before that.

The index's year-to-date loss widened to 1.36% in the most recent week, from 1.18% in the week ended Feb. 7.

The index had started the year strongly, with three consecutive weeks of sizable gains swelling the year-to-date return, before the market gauge turned uncertain for several weeks and then, finally, negative.

In the most recent week, the index's spread over Treasuries narrowed slightly to 851 basis points from 853 basis points the week before, while its yield-to-worst likewise was little changed at 12.94%, from 12.93% the week before.

Despite its recent weakness, the index continues to show an overall improvement from where it stood at the end of 2001, when it lost about 3% overall for the year and posted a spread at year's end of over 900 basis points off Treasuries and a 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 around $600 billion.

In the most recent week, the index tracked 341 issues with a total market valuation of $140.245 billion, down from 345 issues worth $142.478 billion in the week ended Feb. 7. The worst performer among the three credit tiers into which B of A divides its index was the top credit tier - issues rated BB+ and BB (18.52% of the index), which lost 0.31%. Next weakest was the middle tier (issues rated BB-, B+ and B, comprising 57.71% of the index), which was eased 0.20%. The smallest loss was seen in the lowest tier - bonds rated B- and below (23.77% of the index), which inched down 0.04%.

Banc of America analysts noted that distressed issues (i.e., those trading at spreads 1,000 basis points or more above comparable Treasury issues) - make up a greater percentage of the market (in terms of total value) now than they did at the end of 2001 - not a surprising conclusion, given the recent downturn in the high yield secondary market, as seen in the index's losses over the past few weeks. Its report said that while the number of such distressed cash pay issues in B of A's High Yield Broad Market Index actually fell to 337 on Feb. 7 from 363 on Dec. 31, 2001 (falling to 27.6% of the total number of cash-pay issues from 29% earlier), the market value of those distressed issues rose to $47.787 billion (17.5% of the overall cash-pay market) as of Feb. 7 from $44.434 billion (16.4% of the market) on Dec. 31.

(The HY Broad Market Index, as the name implies, is a somewhat broader-based, and thus, in theory, more representative index than the HY Large Cap Index, since it includes almost 1,300 issues of $100 million or more, with a total market value of almost $290 billion. The latest statistics exclude some $20 billion of deferred-pay (i.e. zero-coupon) debt).

The analysts said the utility and telecommunications sectors accounted for the largest gains in the value of distressed credits since year end. While just two utility cash pay issues with a total market value of $334.3 million had been considered distressed at year-end, there were nine such issues, with a total value of $3 billion, by Feb. 7. The percentage of utility cash-pay bonds considered distressed (versus the sector's overall market value) jumped to 25.5% in February from just 2.9% in December. But the deterioration in the sector was not broadly based; "we take comfort in the fact that only two issuers (AES Corp. and Azurix Corp. accounted for this increase," the report said.

However, the B of A analysts added, "we cannot be as sanguine about the distressed trend in the telecom sector."

They noted the fact that while the number of distressed telecom cash-pay credits in the HY Broad Market Index dropped to 63 as of Feb. 7 from 73 at Dec. 31, their total market value increased to $11.6 billion (60.3% of the sector's market value) on Feb. 7 from $9.1 billion (42% of the sector's value) on Dec. 31. They also pointed out that while the distressed list for the end of 2001 included such clearly struggling credits as Global Crossing Ltd. and McLeodUSA Inc. (both recently went into bankruptcy-court reorganization), the Feb. 7 grouping includes "a long list of PCS/cellular issuers, such as Alamosa, Crown Castle and Leap Wireless, none of which were on the list on Dec. 31, 2001. They further opined that the increase in the portion of cash-pay telecom issues in the HY Broad Market Index now in distress "becomes even more significant when we consider the fact that both Global Crossing and McLeodUSA are excluded from this analysis due to their defaults."

In the most recent week, the steel sector was the worst performing industry group, down 3.81% as Murrin Murrin Holdings Pty's 9 3/8% notes dove 16 points after Moody's Investors Serviced put the company's ratings on review for a possible downgrade. The steelers had also been in the Bottom Five grouping of worst-performing sectors the week before, when they lost 2.04%. The absolute worst performing sector the week before had been domestic wireline telecom (down 9.01%).

PCS/cellular issues (down 2.95% as both Nextel Communications Inc. and Leap Wireless moved lower), international cable (down 2.48% on weakness in Telewest plc debt on restructuring fears), utilities (down 2.16%) and technology (off 0.97%) rounded out the Bottom Five. In the previous week, PCS/cellular (down 6.89%), utilities (down 6.38%) and technology (down 2.54%) had all been among the worst laggards, but international cable (up 2.51%) had been the best-performing group.

On the upside, advertising dependent media (up 1.96% as Young Broadcasting bonds rose 9% on news it would sell its Los Angeles TV station) was the best performer; as noted, the international cablers had been the best performer the week before.

Domestic wireline telecom (up 1.80% on strength in Level 3 Communications Inc. and XO Communications Inc.) was the second-strongest sector this past week; the week before, as noted, the domestic telecoms had been the worst finishers.

Business services (up 1.39% thanks to a rise in Allied Waste bonds), satellite services (up 1.35%) and publishing (1.12%) rounded out the Top Five list of the best-performing sectors in the most recent week.

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