Schaeffler Group, the bearings maker strained by 11 billion euros ($14 billion) in debt from buying Continental AG, may consider a debt-for-equity swap if it fails to get German government aid, people close to the talks said.

Lenders led by Royal Bank of Scotland Group Plc may be forced to swap debt for shares owned by Maria-Elisabeth Schaeffler and her son Georg after the company failed to attract fresh capital to cut borrowings, said three people, who declined to be identified because the talks are private.

The banks may be reluctant to take control of Schaeffler because they will struggle to find buyers for Schaeffler’s assets amid a slump in the auto market. Talks are continuing and Schaeffler wants to convince the banks that better options are available as it lobbies the government, the people said.

“Everything’s up for grabs, but asset sales will be hard to pull off in the current environment,” said Michael Tyndall, a London-based analyst with Nomura Securities. “The banks control Schaeffler’s destiny.”

RBS, along with UBS AG, Commerzbank AG, Dresdner Kleinwort, Landesbank Baden-Wuerttemberg and UniCredit SpA’s HVB Group unit financed Schaeffler’s purchase last year of 90.2 percent of Continental, Europe’s second-largest car-parts maker. Schaeffler paid 79 percent more than the current value of Continental stock before the recession soured the automotive market.

Continental’s tire business may have the best shot of being sold off to raise cash. The unit, Europe’s second-largest tiremaker, may find a buyer willing to pay 6 billion to 7 billion euros in the second half of this year at the earliest, one of the people said.

Fewer Deals

Last year’s acquisition of Continental by Schaeffler, the second-largest ball-bearing maker after SKF AB, was the biggest deal in Germany since 2000, according to data compiled by Bloomberg. The total value of transactions in Germany fell 51 percent in 2008 to $191.5 billion.

Hanover, Germany-based Continental is in the process of carving out the tire division into a separate business as Chief Executive Officer Karl-Thomas Neumann reviews a combination of the company’s remaining car-parts operations with Schaeffler’s.

Markus Breidenstein, a spokesman for the bearings maker, declined to comment on bank discussions. A spokeswoman at RBS in London said she couldn’t immediately comment.

Schaeffler’s troubles have piled up since its July 15 hostile bid for Continental, a company three times its size. Schaeffler, based in the Bavarian hamlet of Herzogenaurach, expected that derivatives contracts and what was then a low-ball bid would secure a stake of 30 percent to 50 percent. Instead, 82.4 percent of Continental’s capital was tendered, adding to a 7.8 percent holding, as investors sold amid collapsing markets.

Aid Plea

The Schaefflers have said they appealed for “temporary” government aid for their 53-year-old company after failing to find investors. The owners pledged to “do everything to prevent a senseless breakup.”

Schaeffler was rebuffed in previous attempts for German aid. After talks on Jan. 28, the government called on the company to submit a “viable” business plan in agreement with its banks. Chancellor Angela Merkel ruled out government support for Schaeffler, which needs 3 billion to 5 billion euros, Bild reported Feb. 2.

Schaeffler, which makes transmission parts and ball bearings for cars, planes and fishing reels, intended to create the world’s top auto-parts maker, combining Continental’s electronics and software expertise with Schaeffler’s mechanical know-how. The two companies have a combined 22 billion euros of debt as the global recession plunges the auto industry into its worst crisis in more than a decade. U.S. car sales plunged 37 percent in January in the worst month since 1981.

Earnings Erosion

Schaeffler has an estimated 899 million euros in interest expenses in the first year of the deal, enough to suck up 84 percent of operating profit, based on first-quarter 2008 figures given in the Continental offer Since then, weak demand for cars has likely eroded earnings, and Schaeffler’s expenses have risen after the company raised the bid in August.

The company directly holds 49.9 percent of Continental’s capital after transferring 40.3 percent to private German banks B. Metzler seel. Sohn & Co. and Sal. Oppenheim Jr. & Cie KGaA for possible sale later.

The arrangement is the result of an August agreement between the two companies that governs the relationship. It restricts Schaeffler from boosting the direct stake to a majority or adding to Continental’s debt, and calls on Schaeffler to support management’s strategy.

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