Cobham profit warning forces emergency rights issue, shares sink

* Cobham Q1 profit plunges 70 pct to 15 million pounds

* Cobham (Other OTC: CBHMF - news) to raise equity due to covenant breach worries

* Shares (Berlin: DI6.BE - news) fall 20 percent following results, rights issue

* CEO says problem at Wireless a "one-time" problem (Adds further comments from analyst call)

By Sarah Young

LONDON, April 26 (Reuters) - British aerospace and defence company Cobham launched a 500 million pound ($725 million) emergency rights issue to shore up its balance sheet after a costly move to gain more commercial customers led to a profit warning that knocked its shares.

Cobham made its name in aerial refuelling gear for military customers but in 2014 bought communications equipment maker Aeroflex, which serves the wireless, space, medical and microelectronics industries, to gain more exposure to commercial customers to counter the impact of lower defence spending.

But defence spending by some western governments has turned a corner while Cobham faces difficulties in its commercial business as sluggish economic conditions have hurt demand.

The company said on Tuesday that a 70 percent plunge in first-quarter profit was partly due to delayed shipments after an isolated internal problem at its Wireless communications business, formed out of the Aeroflex acquisition, as well as lower demand from oil and mining customers in commercial flying services in Australia.

Without the new finance from the rights issue the ratio of its net borrowing to its core earnings could come close to the covenant level agreed with its lenders when this is next reviewed on June 30, Cobham warned.

A company can be penalised if it breaks such bank covenant ratios and also risks credit ratings downgrades.

The 500 million pound rights issue, due to take place this quarter and fully underwritten by investment banks Bank of America Merrill Lynch and Jefferies, would provide new equity finance to help it reduce its indebtedness.

Shares in the FTSE 250 company sank as much as 20 percent to their lowest level since late 2011, before paring losses to trade down 15 percent at 182 pence.

Cobham also said it planned to pay out a rebased total dividend for 2016 of 126 million pounds, the same as last year, prompting questions from analysts on a call about why it was maintaining the payout at the same time as asking investors for new equity.

One analyst asked whether the company should have started a strategic review as a way to better create returns for shareholders, an idea dismissed by Chief Executive Bob Murphy.

"We considered all the options that we had available to us," he told the call, saying that he believed Cobham would recover in the second-half.

"We believe that this is the best way to deliver value in time."

Cobham, which was founded in 1934 and today provides equipment used by Lockheed Martin (Swiss: LMT.SW - news) and Boeing aircraft, was well-placed to deliver growth over the medium term, said Murphy, adding that the Wireless issue was an isolated one.

"MISCALCULATION"

Raymond James analyst Harry Breach said Cobham had sowed the seeds of its leverage problem when it bought U.S (Other OTC: UBGXF - news) . communications equipment maker Aeroflex Holding Corp for $1.46 billion including debt in 2014.

"They miscalculated how to finance the deal and they didn't finance enough of it via equity," he said.

"As a consequence the debt level got to a place where it couldn't absorb the working capital and capex needs of the business combined with slow downs in certain end markets."

Cobham, which last year made 38 percent of its revenues from commercial markets, had warned in March that those markets would be "subdued" this year, compared to a "stable" outlook for its defence and security markets, which account for the balance of revenues.

The company said it started a cost-cutting programme designed to save 30 million pounds a year, and said that it now expected 2016 trading profit to be 15 million pounds lower than the previous consensus expectation of 315 million pounds.

There was little read-across from Cobham's difficulties to other British companies with exposure to defence, reflecting the uniqueness of Cobham's air-to-air refuelling and communications business. BAE Systems (LSE: BA.L - news) , the biggest defence contractor in the UK, for example, only traded down 0.8 percent. ($1 = 0.6898 pounds) (Reporting by Sarah Young, additional reporting by Sinead Cruise; Editing by Kate Holton, Alexander Smith, Anna Willard)