Continental's banks against Schaeffler deal-source

FRANKFURT, May 27 (Reuters) - The banks of German tyre maker and auto parts group Continental AG (CONG.DE: Quote, Profile, Research) oppose a deal that would see Continental taking over its peer Schaeffler, a source close to the matter told Reuters on Wednesday.

Such a move would lead to a significant increase in debt and therefore higher risks for Continental's banks, the source said.

Schaeffler said last week it was mulling a plan that could see it merge with Continental as the junior partner, in a reversal of last year's daring bid to swallow its bigger rival.[ID:nLK251649]

Last July, the German ball-bearing maker launched a hostile $18 billion bid for Continental, but ended up collecting more shares than it could afford, lumbering it with a crushing debt millstone as car sales collapsed.

Abandoning the plan would be a humiliating climbdown for ball-bearings baroness Marie-Elisabeth Schaeffler and would mirror a turning of the tables in Porsche's (PSHG_p.DE: Quote, Profile, Research) bid for Volkswagen (VOWG.DE: Quote, Profile, Research), which also backfired in the financial crisis. [ID:nLJ651796]

The Financial Times Deutschland also reported on Wednesday that Continental's banks were opposing the deal and said the banks were planning to set up a steering committee to represent their interests. (Reporting by Philipp Halstrick; Editing by Rupert Winchester)