Bankers Trust Advisory Role Threatened If Grand Union Files for

One of the most problematic roles banks play in the bankruptcy labyrinth is as financial advisers, and observers say Bankers Trust New York Corp. soon may face a conflict in its dealings with the ailing Grand Union Co.

Bankers Trust and Goldman, Sachs & Co. are acting as financial advisers to Grand Union, a New Jersey-based supermarket chain. But industry sources say Grand Union soon may be forced to file for Chapter 11 protection from creditors.

Experts say that could present a problem for Bankers Trust. A company headed for bankruptcy puts at least one of an advisory banks' roles at risk, said Michigan bankruptcy expert Jay Alix, since bankers cannot logically advise companies on dealing with loans the banks themselves issued. If Bankers Trust has a Grand Union loan on its books, it would be required to forgo its advisory role.

"While there is some synergy for a commercial bank that serves as a bankruptcy adviser, there is also some conflict," said Mr. Alix, president of Jay Alix & Associates, Southfield, Mich.

Banks can get "conflicted out" in a host of ways, including as debtor- in-possession financers or creditors. Even sharing a loan syndication on a different loan with a company's creditors might call into question a bank's role as adviser.

Banks must be willing to forgo other conventional roles to remain as an adviser for a company that proceeds through bankruptcy. Experts suggest that commercial banks will scrap their role as advisers sooner than as creditors.

Perhaps this has kept the number of commercial banks serving as bankruptcy advisers low. Analysts cite Chemical Banking Corp. and Bankers Trust as significant players in this field.

Experts stressed that a scrutiny of potential conflict of interest does not single out commercial banks. "All advisory firms, once a company goes into bankruptcy, must disclose all relationships and connections to a creditor," said Mr. Alix.

Although Grand Union on Tuesday denied a bankruptcy is pending, certain analysts and bankruptcy experts suggest otherwise.

One supermarket expert says the company denied preparing to file because it wanted to reassure its food providers that it would pay its bonds.

Others suggested that the need for significant restructuring mandates a bankruptcy filing. "The company is too big, and there are too many different constituent groups to do an out-of-court workout successfully," said Mr. Alix.

The chain of 241 stores has been spending $60 million to $80 million annually to upgrade its outlets. This represents about 2.5% of sales, which is almost a percentage point lower than the industry average, said Mark Husson, a supermarket analyst at J.P. Morgan.

Grand Union faces some serious competition from other supermarket chains such as A&P Food Stores and Stop and Shop Cos. Many think that Grand Union must enter bankruptcy court to survive.

Bankers Trust can remain as adviser only if it avoids other financial roles, experts say.

One factor that reduces Bankers Trust's exposure to conflict is the comparatively small amount of debt on Grand Union's books. The company carries a relatively modest $80 million worth of bank debt, according to market sources. Thus, Bankers Trust's advisory role may remain unchallenged through a bankruptcy proceeding.

Officials at Bankers Trust could not be reached for comment.

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