* Follows warnings in July, Sept
* Says needs to recapitalise
* "Significant challenges remain" -interim CEO (Adds analyst, detail)
Nov 17 (Reuters) - Carillion's shares tumbled 34 percent after the British construction company issued its third profit warning in five months and said it was heading towards a breach of debt covenants and would need fresh capital.
Carillion is fighting for its survival after costly contract delays and a downturn in new business at the company, which handles major infrastructure projects for the British and other governments. Its CEO quit in July.
His temporary replacement has been trying to free up cash through asset sales and cost cuts to keep its operations afloat and pave the way for a debt restructuring. On Friday the company said those efforts were taking longer than expected.
The firm could end up being controlled by creditors, with one analyst predicting a debt for equity swap.
Carillion said it needed some form of recapitalisation which could involve a restructuring of the balance sheet in the first quarter of next year and "a further announcement will be made in due course."
Shares in Wolverhampton-based Carillion, which also helps maintain Britain's roads, schools and hospitals, slumped as much as 60 percent. They were still down 38 percent at 25.5 pence at 1537 GMT.
"It doesn't make a difference how many hundreds of millions or billions of pounds of contracts you've lined up over the years. It's a short-term focus for Carillion and what they desperately need is money in the door," said David Madden, an analyst at CMC Markets.
The firm, which has called in financial advisers and KPMG to go over its books, won new work from the British government since the first profit warning in July, including a 1.4 billion pound contract to help build Britain's planned high-speed rail link HS2.
The government said on Friday it had been kept informed of Carillion's turnaround efforts and backed its discussions with stakeholders.
The company may have to speed up asset sales by cutting the price and could end up selling machinery or pulling back from work they had previously agreed to carry out, analysts said.
The prospects for shareholders to staunch losses appeared bleak. Peel Hunt analysts suspended estimates for Carillion and said they saw little value currently for equity holders.
Liberum said it expected a debt-for-equity swap and said Carillion's financial liabilities were more than 500 million pounds higher than the company's enterprise value.
"SIGNIFICANT CHALLENGES REMAIN"
Carillion's shares have lost 87 percent of their value since the July profit warning. Its troubles have been compounded by its debt burden, pension obligations and delays in collecting cash from clients.
It said it would defer the test date for meeting its financial covenants with lenders until April 30 next year and was talking to stakeholders.
After the financial crisis, British construction companies bid for long-running, fixed-price contracts to keep work coming in. This left them exposed whenever the projects faced delays or bigger than expected costs.
The industry is also suffering delays in UK public spending decisions after Britain voted to leave the European Union.
Part of Carillion's business is in the Middle East, where winning new contracts became harder with lower oil prices.
Carillion's projects include high-profile redevelopment work on London's Battersea Power Station, Liverpool Football Club's Anfield Stadium and Toronto's Union Station.
The firm blamed the latest profit warning on delays in selling some publicprivate partnerships, a slippage in the start date of a "significant" project in the Middle East and lower-than-expected profit margin improvements at a small number of UK Support Services contracts.
"Whilst we continue to target cash collections, reduce costs, execute disposals and focus on delivering for our customers, it is clear that significant challenges remain and more needs to be done to reduce net debt and rebuild the balance sheet," Interim CEO Keith Cochrane said.
In October, it agreed to new credit facilities and deferrals on some debt repayments. A month earlier it had said it would be in compliance with its financial covenants.
On Friday it raised its expected 2017 average net borrowing to 875 million to 925 million pounds from the 825 million to 850 million pound range it gave in September and said this, coupled with its latest forecasts, would mean a covenant breach.
Analysts estimated Carillion's debts including provisions, pensions and accounts payable at about 1.5 billion pounds ($1.98 billion). ($1 = 0.7557 pounds)
(Reporting by Noor Zainab Hussain in Bengaluru; Editing by Jason Neely and Tom Pfeiffer)