After almost two years of trying to turn itself around, the subprime lender Aames Financial is still losing money and in danger of defaulting.

Fitch IBCA has put $276 million of the Los Angeles company's already junk-rated debt on review for possible downgrade, citing "considerable uncertainty as to timely payment of principal, interest, and preferred dividends."

"Protection factors are narrow, and risk can be substantial with unfavorable industry conditions and company developments," Fitch said late last month. The rating agency rates Aames senior debt CCC and its subordinated convertible debt CC. Downgrading to C would indicate that Fitch expects a default.

Fitch's warning capped a month of bad news for Aames. On May 19 it reported a $61.5 million first-quarter loss. It also said that Capital Z had agreed to provide $50 million in exchange for preferred stock, under the New York Stock Exchange's financial-distress exception, which lets a company sell the stock without getting shareholder approval.

Capital Z and Equifin Capital, both of New York, have pumped $170 million into Aames since February 1998; they now own 80% of the company. If not for those infusions, analysts said, Aames - which has lost $350 million since September 1998 - would have closed long ago.

Three days after announcing its first-quarter results, Aames said that it expects more losses this year because of writedowns and an "unfavorable market in the whole-loan sales market."

"It's a very touchy situation," said Christopher D. Wolfe, associate director of Fitch IBCA. "While we view the additional equity investment as a positive note, without it, this firm would have been in dire straits and probably would have had to file" for bankruptcy protection.

"The fact that the company on an operating basis is not able to generate any kind of profitability leads us to believe that there is a tremendous concern," Mr. Wolfe said.

Mani A. Sadeghi, managing partner of Equifin Capital Management and a director of Aames, said his firm and Capital Z realized from day one that the Aames investment would not bring immediate dividends. But he said the subprime business is viable and that Capital Z and Equifin approach all investments with the expectation that they will take three to seven years to pay off.

"We understand that this is a difficult industry, and until the company can report solid profitability, it's going to be hard for the progress of this turnaround strategy to be visible," Mr. Sadeghi said. He said Equifin and Capital Z have changed the company in significant ways - including management, capital structure, and underwriting and credit quality practices.

"Six months from now we will be one of the very few left standing in a handful of independent platforms in the subprime industry," Mr. Sadeghi said.

But Mr. Wolfe of Fitch said he feared the private equity investors might eventually cut their losses and walk away from Aames. "At some point they're going to have to show the profits," he said. "If they don't, I don't believe that Capital Z will continue to pour good money after bad."

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