Chapter 11 isn't slowing Merry-Go-Round's stock

January 27, 1994|By New York Times News Service

Fidelity Investments' interest in Merry-Go-Round Enterprises, the trendy retailer that filed for bankruptcy protection earlier this month, has caused something tantamount to a riot in the market for distressed investments, spiking the price of the company's debt and equity to levels that analysts believe are unrealistic.

Fidelity has bought more than $50 million of Merry-Go-Round's debt, as well as a big piece of its equity. Shares closed at $3 yesterday, up 12.5 cents and an extraordinarily high price for the stock of a company in Chapter 11.

And yesterday, traders said, Bear, Stearns & Co. paid about 87 cents on the dollar for a $25 million chunk of the company's debt, even though analysts believe that it is not worth more than 50 cents to 75 cents on the dollar.

Prices have soared so high so quickly that traders believe that all but one of the company's original creditors have sold out.

"The unsecured debt is trading in the high 80s, which is significantly higher than what we believe is its value," said Nikos Hecht, an analyst at M. J. Whitman L.P., which specializes in trading distressed securities. "It's crazy."

Mr. Hecht recommends buying Merry-Go-Round's $265.3 million of debt, none of which is secured, for 50 cents on the dollar or less.

Traders credit Fidelity with buoying the price of Merry-Go-Round stock and debt. Fidelity, the $300 billion Boston mutual fund company, has emerged as a key player in the battle for R. H. Macy & Co., the department store chain that is operating under bankruptcy-law protection and being pursued by its rival, Federated Department Stores Inc.

Daniel Harmetz, the portfolio manager who masterminded Fidelity's Macy strategy and has parlayed stakes in numerous other high-profile bankruptcies into handsome profits, has a reputation for spotting shrewd investments in distressed securities, and now other investors are trying to ride his coattails.

Mr. Harmetz declined to comment yesterday. But traders and analysts said Fidelity began buying Merry-Go-Round stock before the company filed for Chapter 11 protection, when it traded as low as $1.625 a share. They say it began buying debt as soon as the company filed for bankruptcy protection and paid as much as 84 cents on the dollar for it.

Merry-Go-Round has relatively little debt on its books and $90 million of cash, plus a $125 million credit line at its disposal, and analysts speculate that Mr. Harmetz may be figuring that shareholders are likely to realize a hefty return in the form of new stock worth $5 or $6 a share.

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