Schaeffler Financing Complete. Next on Deck: Continental Merger and Lots of Pain for RBS

Aug.18.09 | About: The Royal (RBS)

New developments in that "other" German automotive soap opera. Reuters is reporting that the most insanely leveraged behemoth of an auto-supplier, Continental-Schaeffler has finally managed to close on the terms of a critical $17 billion deal, a critical step which will make the biggest M&A blunder in the last decade (tiny ball-bearing maker Schaeffler's purchase of much, much larger and much more indebted auto supplier conglomerate Continental).

According to Reuters:

Merging Schaeffler and Continental would create an automotive supplier with 33 billion euros in annual sales and around 200,000 employees.

Schaeffler's debt agreement now gives it more breathing room to sort out its finances and tighten its grip on Continental.

"Through this (financing plan) the takeover by Schaeffler is a done deal," said analyst Heino Ruland at Ruland Research.

Continental shares jumped on the news and were up 14.8 percent at 25.55 euros by 1224 GMT, heading the German midcap index which was up 0.7 percent.

I guess when you have no BB&T to drive the market higher subsequent to a new share issuance, you rely on a 10x leveraged auto supplier to do it for you.

Ironically some of the biggest losers here are the same banks that when the market collapsed they fought tooth and nail to derail the transaction. Now that 6 months later Ben Bernanke waved a magic wand and everything is back to normal, it only makes sense that the huge potential loss secured lenders were facing can never again be repeated.

Lenders that financed Schaeffler's risky leveraged takeover have continued to provide it with loans to buy time for a solution as the company was hit by the double whammy of high debt service payments and crumbling demand for auto parts.

Now its banks -- Commerzbank, Royal Bank of Scotland, UBS, Unicredit's HVB and German state-owned LBBW -- have agreed to split existing loans into two tranches maturing in 4.5 and 6 years, Schaeffler said.

"The last 12 months have been war. Now the war is over," one banker close to the transaction said.

If the SPARCs ever realize that low volume can also mean a down direction, and the market reverts back to something resembling logic, it will be RBS et al running to their respective domiciles again, begging for bailouts and once again promising not to receive bonuses (unless the SPARCs get their mojo back again of course).

Then again, in a worst case scenario, unlike in the VOW-POR case, rescue financing would at least have come from hedge funds who would be happy to stock up their brand new 10,000 car garage with GTs, pledged as collateral. In this case, ball bearings and inner tubes make for substantially less sexy and lower LTV backstop packages.

As for the one real question - where demand would come from in a world where a 20mm SAAR will not be back for at least 2 decades, well, that's one that seems far too obvious for the bankers to ask, who instead prefer spending 48 hour drafting sessions, literally dotting the i's and crossing the t's on 200 page 10 font offering memoranda, with the hopes of offloading the worthless debt from their books to Iceland or whoever else may be the token idiot in this particular "bull" market.