Yield spreads on telephone company issues have widened as the market envisions the highly regulated industry migrating closer to the industrial camp where earnings volatility is greater.

Since Bell Atlantic Co., TeleCommunications Inc., and Liberty Media Co. announced merger plans on Oct. 13, telephone issue spreads to Treasury securities have widened anywhere from five to 10 basis points, according to Joe Mullally, a vice president and senior fixed income strategist CS First Boston Corp.

As telephone companies seek to align themselves with cable companies or with overseas telephone companies, the earnings investors could once expect from a government regulated industry become less certain, Mullally said.

"Companies with greater volatility in earnings then are going to have to trade at wider spreads," he said.

Asked which telephone companies are next in line to align themselves with the industrial camp, Mullally said, "[It's] tough to speculate."

Mullally said that the oppposite migration has been true with bank issues. As the banking industry has become more tightly regulated, spreads have been narrowing, he said.

"I guess it wouldn't be a bad comparison," one high-grade trader said of Mullally's assessment that telephones were moving closer toward industrials. "Spreads have definitely widened." While telephones used to trade much tigher plan industrials, that gap is closing, the trader said.

A second high-grade trader yesterday said he has been telephone issues widen by three to eight basis points in the past few trading sessions.

"It's an uncertain time," he said. If a telephone company becomes involved with the cable company, it risks taking on a hefty debt load, the trader said.

"You're not going to treat telephone companies anymore as just telephone companies," a third trader said. However, the trader said that he did see some slight tightening in spreads yesterday following the widening that occurred after the merger news.

But a fourth trader said that while long telephone paper has widened out about five basis points since the merger, most debt is operating company paper, and will not be greatly affected by what happens at the holding company level.

Meanwhile, in the high yield area, cable companies gained anywhere from one to eight points following the announcement of Bell Atlantic and TCI's merger plans, and while they have leveled off, they are largely holding those gains, one high-yield fund manager said.

A high-yield trader yesterday said cable issues lost 1/4 to 3/8 point yesterday as the merger frenzy cooled, while the rest of the high-yield market went "sideways" in unevenful trading.

Spreads on investment grade issues ended largely unchanged. Elsewhere in the investment-grade ranks, General Motors Acceptance Corp. paper is on a tightening trend, a trader said. The company's 8 1/2% debt of 2003 has narrowed to roughly 125 basis points over comparable Treasuries from about 150 basis points over two to three weeks ago. The trader said he could not explain the tightening.

New Issues

Pathmark Stores Inc. priced a two-part offering totaling $560 million. The first part consisted of $440 million of 9 5/8% senior subordinated notes due 2003. Noncallable for five years, the notes were priced at 99.233% to yield 9.75%. The company can call 35% of the tranche at 109 in the third year if it completes an initial public offering.

Moody's Investors Service rates the notes B2, while Standard & Poor's Corp. rates them B. The tranche was increased from $425 million.

The second piece consisted of $120 million of junior subordinated deferred coupon notes due 2003. Noncallable for six years, the notes were priced at 53.274 for a 10.75% yield to maturity. They have no coupon for the first six years. The company can call 35% of the tranche at 110 if it completes an initial public offering in the first three years. Merrill Lynch & Co. was sole manager.

PaineWebber Group Inc. issued $200 million of 6.5% notes due 2005. The noncallable notes were priced at 99.628 to yield 6.54% or 129 basis points more than comparable Treasuries. Moody's rates the offering A3, while Standard & Poor's rates it BBB-plus. PaineWebber Inc. was sole manager.

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