B of A High Yield Large-Cap Index breaks skid, bounces 1.93%; 2002 loss cut to 14.05%

By Paul Deckelman

New York, Oct. 22- The Banc of America High Yield Large Cap Index broke out of its four-week long funk with a sizable gain in the week ended Thursday Oct. 17, jumping 1.93%, a solid turnaround from the yawning 3.66% plunge the week before, ended Oct. 10. The battered telecommunications and domestic cable sectors led the way.

B of A analysts said that while last week's economic releases continued to point to slow economic growth, the strong rebound in the equity markets helped lift general investor sentiment, as the CBOE VIX Index - a measure of volatility and a proxy of investor sentiment - dropped to 40.16 from 46.29 a week earlier. They said that the high-yield market's technicals were further helped by the nearly $207 million high-yield mutual fund inflow reported by AMG Data Services-the first weekly inflow in four weeks (the fund flow numbers are seen by many market participants as a reliable proxy for overall junk market liquidity trends).

In a sharp turnaround from the trend which had been seen in each of the previous two weeks, when 24 of the industry sectors into which B of A divides its index posted negative returns, all but a handful of the industry groupings were in the black this time around.

The index's year-to-date loss narrowed to 14.05% in the most recent week - certainly a huge deficit, but still considerably smaller than the 15.68% - the biggest cumulative loss for the year - which had been seen the week before.

The Large Cap Index's spread over Treasuries narrowed to 1,163 basis points in the most recent week from 1,248 basis points the week before while its yield-to-worst likewise diminished to 15.09% from 15.43%. The yield-to-worst and spread figures for the week before represented the peak levels for the year to date.

Even with the notable bounce in the most recent week, the index's cumulative performance still remains badly below the relatively modest loss level 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 370 issues with a total market value of $141.631 billion, up from 359 issues worth $135.740 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 gained 1.37% in the most recent week, with a spread over Treasuries of 1,030 basis points - down from the previous week's peak level for the year of 1,098 basis points - while the yield to worst for the grouping fell to 13.73%, also down from the year's peak of 13.91%.

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. That strong initial showing by the non-telecom credits helped to pace the overall index's hefty gains earlier in the year. However, in recent months, the Ex-Telecom Sub Index's performance eroded, dragged down especially by the embattled transportation and utility sectors, which in turn helped to push the Large Cap Index as a whole deeply into the red. Ex Telecom's weekly gains and losses are now generally not too far afield from those of the overall High Yield Large Cap Index.

Reversing the trend seen in each of the previous two weeks - when all three of the credit tiers into which B of A divides its index showed negative returns, with the most credit-worthy tier having the smallest losses and the least credit worthy having the largest - all three of the credit tiers were back in the black this past week. The bottom tier - bonds rated B- and below, making up 29.44% of the index, including many of the rebounding telecom and cable issues - gained 3.10% on the week, while the middle tier (issues rated BB-, B+ and B, comprising 53.55% of the index) was a distant second, with a 1.67% gain. Bringing up the rear with a gain of just 0.75% was the top credit tier (issues rated BB+ and BB, making up 17.01% of the index).

The best performing industry sector in the most recent week was domestic wireline telecom, which gained 6.43% as most bonds in the sector traded up, including Level 3 Communications Inc.'s 9 1/8% notes due 2008, which edged up a point to 53. In the previous week, the wirelines had been on the Bottom Five list of the week's worst-performing sectors with a 7.69% loss, while international cable operators had been the index's best-performing sector - and its only group showing a positive return for the week - with a meager 0.43% return.

PCS/cellular companies had the second-strongest showing in the most recent week, rising 5.76% as bonds firmed across that board, including Nextel Communications Inc.'s 9 3/8% notes due 2009, which advanced four-and-a-half points to end at 79.75 and its zero-coupon/9.95% notes due 2008, which rose four-and-a-quarter points to close at 77.75. SBA Communications Corp.'s 10 ¼% notes due 2009 gained 5 points to close at 43. PCS/cellular had been in the Bottom Five the week before, with a 4.90% loss.

North American cable operators were up 5.46% in the week ended Thursday, powered by a rise in Charter Communications Holdings bonds, which were up on average 2.4 points; Charter's benchmark 8 5/8% notes due 2009 advanced four points to end at 53.75, while Cablevision's CSC Holdings 7 5/8% notes due 2011 gained four-and-a-half points to close at 78. The domestic cablers was another group which had been among the Bottom Five the week before, when it lost 5.46%, a mirror-image inversion of the group's showing in this latest week.

Technology issues (up 4.84%) and lodging credits (up 3.68%) rounded out the Top Five list of the best performing sectors for the latest week.

On the downside, non-ferrous metals and mining dropped an index-worst 4.91%, with UCAR Finance pulling the sector down as its parent company GrafTech International announced preliminary third quarter results, with loss per share expected to be worse than consensus estimates. That caused UCAR's 10¼% notes due 2012 to plummet 18 points to close at 70. In the previous week, utilities were the worst performers of all, swooning 11.44%.

Transportation issues dropped 2.59% to land among the Bottom Five for a seventh straight week, as Delta Air Lines reported a third-quarter loss of $326 million and announced plans to further cut personnel by up to 8,000, or approximately 11% of its workforce. The Atlanta-based air carrier's 8.3% notes due 2029 fell 2½ points to close at 45.5. Northwest Airlines meanwhile reported a third-quarter net loss of $46 million, causing its 8 7/8% notes due 2006 to drop 5½ points to end at 42.5. The week before, the transportations had fallen 6.24%.

Industrials were off 2.10% as Foamex International Inc. warned that it expects to post a loss for the third quarter due to increased raw material costs - while analysts had expected a third-quarter profit. The company's 10¾% notes due 2009 nosedived 27 points to end at 51.

Utilities (off 0.49%) and international cable companies (which edged up 0.05%) rounded out the Bottom Five in the most recent week; the utilities, as previously noted, had been the worst performer of all the week before (down 11.44%), while the international cable operators , as noted, had gained 0.43% - the only sector showing a positive return.

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