"It can only concern loan guarantees, and not taking a direct equity stake," said Economics Minister Martin Zeil of the laissez-faire Free Democrats (FDP) after a meeting to discuss state aid with representatives of Schaeffler.
Schaeffler declined comment.
The family owned company, which agreed with Continental that it would not take a stake of more than 50% in the tyremaker, found itself paying about 10 billion euros ($13.20 billion) when Continental shareholders tendered their stock en masse following a mandatory takeover bid.
The two companies are groaning under the combined weight of some 22 billion euros in debt.
However, Continental said it had at its disposal liquidity of more than 3.5 billion euros in cash, cash equivalents and unused credit lines.
Separately, Standard and Poor’s warned investors earlier that Continental would default on its debt by August 2010 if management had not by then disposed of its tyre business, a key cash flow generator for the group.
After downgrading Continental’s long-term corporate credit rating on Tuesday by two notches to ‘BB’, analysts at S&P called liquidity at the company weak due mainly to "substantial" refinancing needs in the medium term.
"Tranche B of a 3.5 billion euro syndicated loan to finance the acquisition of VDO is due in August 2010," the ratings agency said in a statement.
"Meeting this maturity would only be achievable if the company were to sell its rubber activities."
It also referred to further risks stemming from the potential influence of privately held bearings maker and largest shareholder, Schaeffler, which owns 49.9% of the votes.
A credit event like this would trigger sellers of outstanding credit default swaps to pay the insurance owed to investors hedging their debt exposure.
A spokeswoman for Continental declined to comment, but noted the company had proactively approached its banks to adjust the covenants and that it did not see the need to modify the debt maturity schedule.
On Jan. 23, Continental said its syndicated loan of 11.8 billion euros, the breakdown and maturities of the individual tranches as well as their term from August 2009 to August 2012 were not affected by these modifications.
The next day it announced management would oversee a carve-out of their tyre and non-tyre rubber business into a legal and separate entity, which is often seen by the market as the first stage of a disposal. Nonetheless, the valuations of 5 billion to 7 billion euros that analysts estimate are seen as difficult to achieve amid floundering M&A activity, frozen credit markets and a severe slump in the auto industry.
As a result of its credit rating being downgraded to junk, Continental must pay about 60 basis points more than before for the syndicated loan although it does not expect a material impact on its 2009 earnings as a result. (Tire Review/Akron)
