ALBANY (Reuters) - German auto parts giant Continental plans to raise its capital by about 1 billion euros ($1.31 billion) to repair its balance sheet following the renegotiation of covenants that govern an 11.8 billion euro syndicated credit line at higher risk premiums.
In an interview with Reuters, Chief Financial Officer Alan Hippe said the company's equity cushion was still manageable even after a goodwill impairment of up to 1 billion euros for 2008 it revealed in December but caution was preferrable.
"In view of the difficulty to predict how things will develop over the course of this year, it's completely logical to think about strengthening your equity capital by the same amount," he said, adding it was too early to give a timeframe for the measure.
Continental shares fell 7.2 percent to 22.85 euros by 0850 GMT while the German mid-cap index fell 2.7 percent.
The capital increase would force new major shareholder Schaeffler to stump up more cash if it wants to maintain its 49.9 percent stake, since Continental could very well have to issue its maximum 58.6 million new shares on top of the roughly 170 million in circulation to raise 1 billion euros at current market prices.
Only a week ago the privately held bearings maker had to sell shares tendered at 75 euros apiece earlier this month to Merrill Lynch and two private German banks at a potential loss so as not to breach an agreement with Continental stipulating it doesn't own a majority until at least 2012.
Coming up with the funds could be difficult since Schaeffler borrowed heavily to finance its takeover bid and may not get any dividends this year after Continental said last month it was considering whether to scrap its 2008 payout entirely.
"In principle, there is only room for a very small dividend," the Continental executive explained.
Hippe just finished winning the necessary two-thirds majority support among around 50 lenders to change the covenants of the credit line for this year and into the next one as well.
"We will have to pay 135 to 145 basis points more than before if we remain investment grade, and roughly 200 basis points more if we are rated below it," he said.
"The good news is that while we will have to pay a higher spread, we will have no substantially higher financing costs due to the overall decline in interest rates this year."
In 2008 the average underlying interest rate was about 4 percent and has since declined to roughly 2.6 percent. It could fall more should the European Central Bank keep cutting rates.
In order to address the risk to creditors posed by Schaeffler and concerns it could push for a quick sale of its Rubber Group amid poor market environment, Continental and its lenders introduced parts of the investor agreement struck by the two parts suppliers into the revised conditions.
"The banks view the Rubber Group's business very positively since they know that it generates a lot of cash. So they tell us that we have get a good price for it if we want to sell it," said Hippe, who also acts as head of Continental's tyre and non-tyre rubber division.
Continental still has liquidity of more than 3.5 billion euros in cash and undrawn approved credit lines, and the CFO pledged that the group will generate a positive free cash flow in 2009, one way or the other.
"We have taken the steps required for it, so things would have to become very, very hard for us not to achieve this target," he explained.
Hippe said the company might look to gain access to any German government rescue package for car parts manufacturers.
"If there is state aid for suppliers and the Schaeffler Group stood to benefit from it, then we would expect that we at Continental would also have the chance to participate in it," the CFO concluded.