After several cash infusions, Aames Financial Corp. is at another crossroad.

A $125 million credit line from Bank of America Corp.'s NationsBank unit expired on Monday. The Los Angeles finance company has been drawing on the line since last April to fund new loans. John Madden, associate general counsel at Aames, said the company is in negotiations with several banks but has not yet gotten a new line of credit.

Even if Aames secures a new credit line to fund lending, the subprime mortgage lender faces significant long-term challenges, according to Thomas J. Abruzzo, senior director at Fitch IBCA, a bond rating agency.

Aside from negative operating earnings and a poor cash flow position, Aames faces weak profit margins in home loan markets, high financing costs, and falling asset quality, Mr. Abruzzo said.

Aames was among the subprime lenders that ran aground when the market for their securities dried up after the Russian debt default in 1998. Aames averted bankruptcy, giving up control in the process to an investor, Capital Z Financial Services Fund II LP, which has put $125 million into the company.

A. Jay Meyerson, an industry veteran who was appointed chief executive officer last year, said the company is on the upswing, despite the need for a new credit line.

"Aames has been able to attract new capital," he said. "Our strategy consists of improving the liquidity position of the company, providing the ability to execute a turnaround plan targeted to improve the overall operating performance of the company.

"We are improving operating efficiency and the valuation of loans that we originate. We will have a disciplined focus on performance. We plan to invest in technology to better manage our business," he said.

Mr. Meyerson also said the company is adopting risk-based pricing for its loans. "Our prices have increased 75 basis points over the last 45 days, and we are now leading the industry in raising prices."

"Aames is still not out of the woods," said Brian Quinn, an analyst at Duff & Phelps Credit Rating Co. in Chicago. It "did not have a stellar quarter ending in December," he said, "posting $48 million in losses," He said the loss was not as severe as the $195 million Aames lost in the same quarter a year earlier. But he added that there has been no improvement in the price Aames gets for whole loans on the secondary market, despite the demise of several competitors.

In February Aames took out a $15 million loan from Greenwich Capital Financial Products Inc.to pay interest to investors in its mortgage-backed securities. Payments on the underlying loans would normally have covered the amount owed to bondholders, but Aames' borrowers are late in making payments.

The loan will be tacked on to a larger one arranged last summer.

Duff & Phelps downgraded Aames' credit rating to B-minus in November 1998 and has not seen fit to change it. But news of the new loan prompted Mr. Abruzzo of Fitch to downgrade Aames' senior debt to CCC, from B-minus. Standard & Poor's rates Aames' senior debt CCC-plus, with a negative outlook, and it reaffirmed that position last May.

"Any rating that is CCC is a tenuous situation," Mr. Abruzzo said. The rating means Aames faces the "real possibility of default," he said.

Mr. Meyerson questioned the ratings action. "Fitch never visited the company nor did they meet with management," he said. "They based their research on assumptions we're not familiar with.

"The fact that we did successfully get this $15 million loan indicates that there are obviously a wide variety of opinions," he said.

Indeed, the company's change in management and its ability to attract capital from the likes of Capital Z Partners are positive developments, said Mr. Quinn of Duff & Phelps. He also said pricing discipline, and a change in the company's origination mix favoring the retail market, are moves in the right direction.

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