FRANKFURT (Reuters) - German ball bearings and automotive parts maker Schaeffler AG plans to list on the Frankfurt stock exchange to restructure its finances seven years after a takeover of rival Continental (>> Continental AG) almost bankrupted the family-owned group.

The Schaeffler initial public offering, scheduled for Oct. 5, could become Germany's largest listing this year, with one source familiar with the matter saying that it could raise significantly more than 2.5 billion euros ($2.8 billion).

Schaeffler plans to sell around a quarter of its stock, the company said on Monday, making it the latest arrival in an increasingly crowded initial public offering (IPO) market in Germany.

Depending on the outcome of a bookbuilding, its size could eclipse that of Bayer's (>> Bayer AG) 2.5 billion euro flotation of its plastics unit Covestro and create and a candidate for Germany's midcap index <.MDAXI>.

"This is the final step to realign refinancing, to deleverage and to open up new growth opportunities," Schaeffler Chief Executive Klaus Rosenfeld told Reuters.

Schaeffler's announcement comes after other German companies including Covestro and digital classifieds group Scout24 have unveiled listing plans. Others such as shipping group Hapag-Lloyd and construction materials group Xella are expected to follow suit.

Germany is seeing a string of listings as companies try to take advantage of robust equity markets and to lock in high valuations ahead of a potential rise in interest rates, which may lure investors towards fixed income products.

British payments processing firm Worldpay pressed ahead with its plan to raise about 890 million pounds ($1.4 billion) in a London listing last week after the U.S. Federal Reserve left rates on hold.

Despite the rush to the stock exchange, equity capital market bankers still expect there be sufficient investor appetite for IPOs.

"Large, must-have assets will not have problems finding enough investor demand. The big funds will likely sell some stock of other car parts makers to invest in Schaeffler," one banker said, who declined to be named.

"Investors also still have large amounts of cash at hand," the banker said.

DEBT REDUCTION

However, Schaeffler is not immune to the turmoil in China.

Schaeffler cut its forecast for 2015 revenue growth to about 4-5 percent on Monday, excluding currency swings, from previous guidance for 5 to 7 percent, citing weaker than expected market developments in recent months, especially in China.

Schaeffler will offer investors up to 166 million non-voting shares, of which 100 million would be existing stock owned by a holding company of the Schaeffler family and 66 million would be new shares from the operating business, Schaeffler AG.

Proceeds from the IPO will be used to pay down debt both at Schaeffler AG and Schaeffler Holding.

"Payments from own cash flow will let the group deleverage by another 1 billion euros by 2018," CEO Rosenfeld said.

The debt is a legacy of Schaeffler's attempt to buy Continental in 2008, a deal that unraveled during the financial crisis although the family still owns 46 percent of the company.

By 2018, Schaeffler plans reduce its debt to less than 1.5 times its earnings before interest, taxes, depreciation, and amortization (EBITDA), Rosenfeld said. That compares with 2.8 times EBITDA at the end of June.

Deutsche Bank (>> Deutsche Bank AG) and Citi (>> Citigroup Inc) are acting as so called global coordinators of the listing, while Bank of America (>> Bank of America Corp) and HSBC (>> HSBC Holdings plc) are acting as bookrunners.

($1 = 0.8846 euros)

($1 = 0.6435 pounds)

(Reporting by Arno Schuetze and Maria Sheahan; Editing by Keith Weir)