MUNICH -- German supplier Continental had its rating lowered to junk status by Standard & Poor's credit rating company.
Analysts at S&P called Continental's liquidity weak, mainly due to "substantial" refinancing needs in the medium term.
S&P warned investors that Continental would default on its debt by August 2010 if management had not by then disposed of its tire business, a key cash flow generator for the group.
Continental's long-term debt was reduced by two levels to BB from BBB-, the lowest investment grade, Standard & Poor's said. The rating has a negative outlook, indicating S&P may reduce it again.
Continental and its new owner, Schaeffler Group, have a combined debt of some 22 billion euros.
"The downgrade reflects our view that Continental appears unlikely to achieve our debt-protection requirements," said S&P's credit analyst Werner Staeblein in a statement. "It also reflects the refinancing risks the company faces in 2010 and the potentially negative impact of Continental's majority ownership by Schaeffler."
Continental said it had at its disposal liquidity of more than 3.5 billion euros in cash, cash equivalents and unused credit lines.
A Continental spokeswoman 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.
Continental and Schaeffler plan to integrate their automotive businesses to create synergies and to help finance the companies' debts.
Continental also will spin off its rubber and tire division into an "organizationally and legally independent" unit ahead of a possible sale.
Schaeffler controls 90 percent of Continental's shares after launching a hostile takeover of Continental last year.
The takeover saddled Schaeffler with a net debt of more than 10 billion euros. Continental still has a large debt from its 11.4 billion acquisition of German supplier Siemens VDO in 2007.
Schaeffler, of Herzogenaurach, Bavaria, makes bearings, engine components and clutches under the INA, FAG, Luk brands. In 2007, its revenues were 8.9 billion euros.
Continental, of Hanover, Germany, targets annual sales of 25 billion euros for 2008.