June 24 (Bloomberg) -- Lenders holding half of Continental AG’s 11 billion euros ($15.5 billion) in debt plan to challenge a combination of the carparts maker with dominant shareholder Schaeffler Group, three people familiar with the situation said.

The banks are concerned that the debt at a merged company would be too high, hurting chances Continental would be able to pay it all back, according to the people, who asked not to be identified because the discussions are private. The creditors are aiming to create enough backing to block changes to a loan agreement first reached in 2007, said the people.

Schaeffler controls about 90 percent of Hanover, Germany- based Continental, Europe’s second-largest tire- and car-parts maker, after a debt-financed takeover. The closely held company, owned by the founder’s widow Maria-Elisabeth Schaeffler and their son Georg, is seeking to merge operations with Continental to help cope with 23 billion euros in combined debt amid the worst slump in auto demand in decades.

“Continental can do very little without the approval of its banks,” Bjoern Voss, an analyst with M.M. Warburg in Hamburg, Germany, said in a telephone interview.

Continental Chief Executive Officer Karl-Thomas Neumann aims to submit a plan by Aug. 1 and the alternatives include merging operations of the two auto-parts makers. Schaeffler is based in Herzogenaurach, Germany.

“It will be the end of July before we can say anything about our future relationship with Schaeffler,” Neumann said during a conference in Frankfurt today.

Citigroup, Goldman

Continental’s lenders are unwilling to accept higher risks to accommodate Schaeffler and its banks, according to the people. Amendments to the loan, whose terms have been revised since 2007, would likely be necessary if Continental and Schaeffler combine and that would require backing of a two- thirds majority, two of the people said.

Citigroup Inc. and Goldman Sachs Group Inc. were lead arrangers of the original loan, which includes a change of control provision that would allow the banks to demand repayment in the event of a takeover. About 50 banks currently hold Continental debt, according to the people.

Jeffrey French, a spokesman for Citigroup in London, declined to comment. Monika Schaller, a spokeswoman at Goldman in Frankfurt, couldn’t immediately be reached for comment.

Antje Lewe, a spokeswoman for Continental, and Detlef Sieverdingbeck, a spokesman for Schaeffler, declined to comment.

Schaeffler’s troubles have piled up since its July 15 hostile bid for Continental, which generates about three times the parent company’s revenue. Continental became a target after it was weakened by debt taken out to acquire auto-component maker VDO from Siemens AG in 2007.

‘Irresponsible’

Schaeffler, which makes transmission parts and bearings for cars, planes and windmills, obtained derivatives contracts and made what was then a low-ball bid for Continental, aiming to secure a stake of 30 percent to 50 percent. Instead, 82.4 percent of Continental stock was tendered as investors sold in response to collapsing markets.

The approach was opposed by Continental’s then-CEO Manfred Wennemer, who called it “egotistic, high-handed, and irresponsible.” Wennemer stepped down in August after negotiating a higher offer as well as an agreement that limited Schaeffler’s influence over Continental.

Commerzbank AG, Royal Bank of Scotland Group Plc, UBS AG, Landesbank Baden-Wuerttemberg and UniCredit SpA’s HVB Group unit financed Schaeffler’s purchase of Continental, which was completed in January.

“Schaeffler’s banks have few options and will likely have to do a debt-for-equity swap, leaving Schaeffler no longer entirely independent,” M.M. Warburg’s Voss said.

Share Sale?

Options under discussion include a merger of all or part of Schaeffler’s operations into Continental, because Continental could raise money by selling new shares, an alternative that’s not available to family-owned Schaeffler, the people said.

On June 2, Moody’s Investors Service lowered Continental’s debt by one level to Ba3, its third-highest junk rating, citing the “severe downturn in global automotive markets” and “uncertainty” over the manufacturer’s strategy. Moody’s may lower the rating further, the rating agency said at the time.

To contact the reporter on this story: Chris Reiter in Berlin at creiter2@bloomberg.net

Last Updated: June 24, 2009 10:13 EDT