The 'vultures' riding Merry-Go-Round

September 04, 1994|By Jay Hancock | Jay Hancock,Sun Staff Writer

Dan Harmetz was everywhere in Macy's bankruptcy case this year.

The money manager spent half a billion dollars to buy at least five kinds of R.H. Macy & Co. secured debt. He huddled with Macy managers to chart the company's future - without the knowledge of Macy's board, some directors claimed.

He tried to start a bidding war for Macy after Federated Department Stores Inc. moved to buy the chain. He pushed for a reorganization plan that would have enriched his investors and wipe out other creditors.

Mr. Harmetz "clearly was the 800-pound gorilla in this case," says Henry D. Jackson, a financial adviser hired by Macy's unsecured creditors. He "brought to the table an enormous amount of financial sophistication and bankruptcy experience and a very deep pocket."

So which "vulture investor," which flint-eyed tycoon was backing Mr. Harmetz? Former TWA Chairman Carl Icahn? Apollo Partners' Leon Black? A big pension fund?

Not quite. Mr. Harmetz works for the small guy, at least in part. Anybody with $2,500 can enter the arcane, high-stakes world of bankruptcy investing through an unusual mutual fund Mr. Harmetz helps run.

In less than four years, Mr. Harmetz, 32, and fellow manager David Breazzano, 38, have turned Boston-based Fidelity Investments into one of the biggest bankruptcy investors in the country. Like other vulture players, Fidelity's Capital & Income Fund buys cheap debt in foundering companies and then aims for big profits by trying to quickly convert it to cash or new securities through the bankruptcy proceeding.

So far, the $2.7 billion fund has succeeded, yielding meaty, double digit-returns since its vulture forays began in 1991. "They're a much more successful Dan-and-Dave team than Reebok's," said Don Phillips, publisher of Morningstar Inc., a fund analysis service.

Mr. Harmetz, a Harvard Law graduate, and Mr. Breazzano, who used to work at Baltimore- based T. Rowe Price Associates, have helped push mutual funds into new territory.

While most funds are prohibited by their charters from investing in bankrupt companies, Capital & Income avidly seeks them out. While most funds invest passively, Mr. Harmetz and Mr. Breazzano energetically dive into company operations, buttonhole managers and throw elbows at other creditors and shareholders.

"Often the way you make money on this paper is, you make an active pest of yourself," said A. Michael Lipper, president of Lipper Analytical Services, a fund-tracking firm. "It is not usual for mutual funds to get actively involved in bankruptcies. The bankruptcy-paper game is primarily a private-investor and private-partnership game."

Capital & Income ("Aggressively pursuing the rewards of lower-quality securities") isn't the only mutual fund that invests in bankrupt companies. But it is the biggest and most visible.

One company that has seen Messrs. Harmetz and Breazzano up close is Merry-Go-Round Enterprises Inc., the large, Joppa-based clothing chain that entered bankruptcy proceedings in January.

Since Fidelity became Merry-Go-Round's biggest creditor and one of its biggest stock owners earlier this year, Mr. Harmetz and Mr. Breazzano have become intimate in its affairs and feared by its shareholders.

They pushed to speed the retailer's bankruptcy process. They tried to block its first request for more time to reorganize. They filed regulatory papers saying Fidelity intends to "participate actively" in Merry-Go-Round's planning. They tried to stop shareholders from hiring a strategic adviser with $70,000 a month of Merry-Go-Round's money. Mr. Harmetz regularly visits Joppa.

Last week Fidelity agreed to give Merry-Go-Round until Feb. 28 to present a reorganization plan - but only after extracting promises from the retailer to finish a preliminary outline this fall.

It's all in a day's work for Dan and David.

"In the old days, bankruptcies would go on for years, because no one would really take charge, and it would tend to get dominated by bankruptcy professionals, the attorneys and accountants and forth," Mr. Breazzano said in an interview. "We can cut through all that and speed the process... We have the flexibility and the reputation, if you will, to be very creative, and often that will cause other parties to get rational very quickly."

The two arrived at Fidelity by different routes.

Mr. Breazzano got a master's degree in business administration from Cornell University and worked from 1983 to 1985 at First Investors Corp., an early, enthusiastic buyer of the high-yield, junk bonds that were to become so popular later in the decade. The father of three boys and an avid sports fan, he came to T. Rowe Price in 1985 to help set up a junk-bond mutual fund, then established a Price fund to invest in defaulted bonds and bankruptcy situations.

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