* Cobham Q1 profit plunges 70 pct to 15 million pounds
* Cobham to raise equity due to covenant breach worries
* Shares 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 defencecompany Cobham launched a 500 million pound ($725million) emergency rights issue to shore up its balance sheetafter a costly move to gain more commercial customers led to aprofit warning that knocked its shares.
Cobham made its name in aerial refuelling gear for militarycustomers but in 2014 bought communications equipment makerAeroflex, which serves the wireless, space, medical andmicroelectronics industries, to gain more exposure to commercialcustomers to counter the impact of lower defence spending.
But defence spending by some western governments has turneda corner while Cobham faces difficulties in its commercialbusiness as sluggish economic conditions have hurt demand.
The company said on Tuesday that a 70 percent plunge infirst-quarter profit was partly due to delayed shipments afteran isolated internal problem at its Wireless communicationsbusiness, formed out of the Aeroflex acquisition, as well aslower demand from oil and mining customers in commercial flyingservices in Australia.
Without the new finance from the rights issue the ratio ofits net borrowing to its core earnings could come close to thecovenant level agreed with its lenders when this is nextreviewed on June 30, Cobham warned.
A company can be penalised if it breaks such bank covenantratios and also risks credit ratings downgrades.
The 500 million pound rights issue, due to take place thisquarter and fully underwritten by investment banks Bank ofAmerica Merrill Lynch and Jefferies, would provide new equityfinance to help it reduce its indebtedness.
Shares in the FTSE 250 company sank as much as 20 percent totheir lowest level since late 2011, before paring losses totrade down 15 percent at 182 pence.
Cobham also said it planned to pay out a rebased totaldividend for 2016 of 126 million pounds, the same as last year,prompting questions from analysts on a call about why it wasmaintaining the payout at the same time as asking investors fornew equity.
One analyst asked whether the company should have started astrategic review as a way to better create returns forshareholders, 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 recoverin the second-half.
"We believe that this is the best way to deliver value intime."
Cobham, which was founded in 1934 and today providesequipment used by Lockheed Martin and Boeing aircraft, was well-placed to deliver growth over the mediumterm, said Murphy, adding that the Wireless issue was anisolated one.
"MISCALCULATION"
Raymond James analyst Harry Breach said Cobham had sowed theseeds of its leverage problem when it bought U.S. communicationsequipment maker Aeroflex Holding Corp for $1.46 billionincluding debt in 2014.
"They miscalculated how to finance the deal and they didn'tfinance enough of it via equity," he said.
"As a consequence the debt level got to a place where itcouldn't absorb the working capital and capex needs of thebusiness combined with slow downs in certain end markets."
Cobham, which last year made 38 percent of its revenues fromcommercial markets, had warned in March that those markets wouldbe "subdued" this year, compared to a "stable" outlook for itsdefence and security markets, which account for the balance ofrevenues.
The company said it started a cost-cutting programmedesigned to save 30 million pounds a year, and said that it nowexpected 2016 trading profit to be 15 million pounds lower thanthe previous consensus expectation of 315 million pounds.
There was little read-across from Cobham's difficulties toother British companies with exposure to defence, reflecting theuniqueness of Cobham's air-to-air refuelling and communicationsbusiness. BAE Systems, the biggest defence contractorin the UK, for example, only traded down 0.8 percent. ($1 = 0.6898 pounds) (Reporting by Sarah Young, additional reporting by SineadCruise; Editing by Kate Holton, Alexander Smith, Anna Willard)
