Nowadays, the only lines being formed in the regional retail and supermarket industries are outside U.S. Bankruptcy Court.

But the financial services firms that target these sectors say that for the most part they are not getting burned when retailers blow up. They say they have become much more sophisticated in deciding which stores to finance.

One of the latest retailers to seek bankruptcy protection is Pen Traffic Co., a Syracuse, N.Y., supermarket chain that announced in February it had agreed with creditors to reorganize.

Pen Traffic's financing includes a $300 million credit line led by Fleet Financial Group Inc. Like most loans in the troubled parts of the retail sector, the line is backed by the inventory and assets of the chain.

"In the worst of situations, if there are sufficient assets upon liquidation, that loan is still good money," said Peter J. Nolan, a managing director in Bankers Trust's syndicated lending shop.

Bankers and industry analysts say companies such as Pen Traffic, Caldor Corp., and Crowley Milner & Co. are suffering from a rash of consolidations in a fiercely competitive, low-margin business. They have lost out to bigger players such as Wal-Mart Stores Inc., which have the crushing advantage of scale.

"It's happened very fast," said Tom Casey, a managing director in the consumer finance group at Bankers Trust Corp. "The big are getting bigger. Unless you have a company with a strong local franchise, you're going to be out."

Credits like Pen Traffic's, called "debtor in possession" or "DIP" loans, were also in place when Caldor announced in January that it would end its attempts to emerge from bankruptcy protection. Lenders said they expect to recoup all of the $450 million credit line extended to the company.

That is because the line, arranged by BankBoston Corp., was fully collateralized by inventory and real estate assets. Of course, the decision to liquidate wasn't all Caldor's. Some lenders were worried that Caldor's weakening fourth-quarter performance might continue, putting their loans in jeopardy. They pressured Caldor to shut down.

"You have to watch inventory very closely," said Ed Siskin, chief operating officer at BankBoston Retail Finance Inc., who warned that even asset-based loans are not a sure bet. "There's always a chance something could happen."

Still, BankBoston has aggressively pursued retail finance deals, including many that other banks will not touch. Mr. Siskin said that about 30% of his unit's employees are former retail executives.

But BankBoston is facing increasing competition in retail finance. More than $44 billion of loans were syndicated to the industry in 1998, along with $18.7 billion in bond issues, according to Securities Data Co.

Though retail finance was once the province of factoring companies and specialty finance firms, most leading commercial banks now have retail finance teams.

Asked about incentive, bankers point to the hefty returns that asset- based loans pay.

Michael Rushmore, a loan analyst in Chicago for BankAmerica Corp., said the incentive to lend to distressed retailers is substantial but "you really have to know what you're doing.

"DIP financing provides a higher yield than any other financing," Mr. Rushmore said. "For the borrower, it's new money provided in a bulletproof fashion."

Nevertheless, of the 39 distressed loans traded in the secondary market, 13 were to retailers, Mr. Rushmore said.

Among these is Montgomery Ward & Co., a Chicago department store chain that is operating under bankruptcy protection. On Feb. 1, it said it had agreed with its lenders, led by GE Capital Corp., to extend a $1 billion loan to yearend, by which time the company hopes to have emerged from bankruptcy.

Some lenders keep clear of trouble by sticking with the winners. On the surface, Bankers Trust looks as though it might have hefty exposure to retailers gone bad. The New York banking company managed $6.18 billion of loans to the industry in 1998, ranking third, behind No. 1 BankAmerica Corp. and Chase Manhattan Corp.

But a closer look finds that Bankers Trust led just seven loans, and that most of its deal flow has been to companies like Los Angeles-based Yukaipa, a leveraged-buyout shop that has consolidated three supermarket chains in the West.

"We've been very lucky," said Mr. Nolan. "If you have an ability to discriminate, people will respect you for that."

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