HANOVER, Germany (Reuters) -- Continental AG will issue a high-yield bond in coming weeks to restructure its massive debts, sources said on Tuesday, taking it a step nearer merging with main shareholder Schaeffler.
"It won't happen in January, but in February for sure," one banking source said.
A company source said he expected the bond of up to 2 billion euros ($2.9 billion) to be issued before Feb. 23, when the company is due to release full-year figures.
"This way, Continental could use the same securities prospectus for the bond as it has for its recent capital hike," the source at the German supplier said.
Continental sold shares worth 1.1 billion euros as part of a capital increase to refinance a 3.5 billion euro loan payment due in August a few days ago.
In December, Continental's secured lenders agreed to extend a loan of 2.5 billion by two years to August 2012, for which the capital increase was a precondition.
Continental's debts stood at 9.46 billion euros at the end of September 2009.
German companies such as Daimler AG, BMW AG and HeidelbergCement are lining up to tap debt markets with benchmark bond issues in the hopes of locking in favorable market conditions ahead of likely interest rate hikes.
"A couple of months ago, Continental would have had to pay a coupon of more than 10 percent," a company source said. As prices have come down significantly, the auto supplier was now hoping for about 7 percent, he added.
However, a banking source said the rate would be higher. "An interest rate of 7 percent is very challenging -- it will be more expensive," he said.
Shares in Continental fell 1.5 percent to 41.38 euros by 11:38 GMT.
Merger will create global No. 2
Continental's debt restructuring is an important step on the path to a merger with main shareholder Schaeffler, which holds just over 75 percent of Continental's shares after the capital hike.
The combination of the bearings maker Schaeffler and Continental will create the world's second-biggest automotive supplier after Robert Bosch with 33 billion euros in annual sales and about 200,000 employees.
Schaeffler took control of the much larger Continental 12 months ago after launching a hostile $18 billion bid in which it ended up collecting more shares than it could afford, lumbering itself with billions of euros of debt.
The resulting standoff had triggered repeated power struggles with Continental that Schaeffler ultimately won after ousting former CEO Karl-Thomas Neumann and replacing large parts of the supervisory and management boards.
Continental's current CEO is the former head of Schaeffler's automotive parts business.