Reliance Acceptance Corp. is the latest to succumb to the asset- deterioration virus plaguing the subprime auto finance industry.

The San Antonio-based lender, which was spun off last month from Cole Taylor Financial Group, had its debt rating reduced Tuesday to D-4-below investment grade-from D-2 by Duff & Phelps Credit Rating Co.

Reliance's downgrading affects $15.8 million of commercial paper and $25 million of subordinated debt obligations.

The news on Reliance came as Mercury Finance Co., the subprime auto lender whose restatement of four years' earnings sent the sector into a tailspin in late January, continues to scramble to avert bankruptcy.

The Lake Forest, Ill., lender got an extension through Friday of its $50 million loan from BankAmerica Corp. The extension gives it time to negotiate with creditors for their permission to renew the loan.

Mercury has defaulted on about $315 million of short- and medium-term debt, and permission from its creditors is required for it to get another 30 days on the bank loan.

The quality of Reliance's loans has "deteriorated materially" in the past four months, said Duff analyst Reilly Tierney. The company has had difficulty getting sufficient returns on repossessed cars sold at auction, and the caliber of customer has also dropped as more lenders compete with Reliance. Company efforts to replenish loss reserves "appear inadequate," Mr. Tierney said.

"We looked at Reliance, and they looked like any other company in this field" that's in trouble, he said.

As for Mercury Finance's negotiations with its creditors, a spokesman said, "Everyone's hopeful, but we all know these things go down to the last minute."

The spokesman, Jim Fitzpatrick of the Dilenshneider Group, said Mercury would not necessarily "fall apart" if it can't get waivers from its creditors, but he acknowledged that recovery would become "more expensive and more difficult."

In the meantime, in an effort to give investors and creditors an accurate look at Mercury's condition, Arthur Andersen & Co. is preparing an audit that should be ready in early April, Mr. Fitzpatrick said.

That report should be Mercury's "D-Day," said Mr. Tierney of Duff & Phelps. "If creditors look at the books, see there's something there and still don't want to extend them loans, that's the end," he said.

Meanwhile, he said, the company is letting its debts pile up in what could be a prelude to a bankruptcy filing. Since its creditors have similar claims, Mr. Tierney said, a bankruptcy court would frown on Mercury's paying some debts now, but not others.

But Michael Durante, analyst at Prudential Securities, said while the company would probably have to sell itself, it wouldn't need bankruptcy protection. "I think the company has been able to establish some stability of late, and that bodes well," he said.

Reliance shares closed at $13.375, down $1.125. Mercury closed at $2.81, up 6 cents.

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