Facing a borrowing-base shortfall, Denver E&P Delta Petroleum Corp. (Nasdaq: DPTR) plans to issue up to $175 million in equity to stave off a covenant violation. The company has entered a forbearance on its credit facility with its bank group and must raise $140 million by April 15.

The plan is to sell 58.3 million shares at $3 per share with an offering period of 20 days. The stock was trading at $1.19 at press time.

The company says it will additionally pursue joint ventures and asset monetizations to address its liquidity situation. Delta’s core areas are in the Piceance and Paradox basins in the Rockies and on the Gulf Coast.

Year-end 2008, Delta had $65 million cash on hand and was fully borrowed on its bank credit facility of $295 million.

An amended agreement with JPMorgan Chase and other financial institutions provides relief by waiving the March 31 current ratio covenant requirement. Delta must raise a minimum of $140 million by April 15, with potential extensions until June 15 depending on its progress in raising capital. Delta would use the $140 million to repay the outstanding borrowings on its credit facility, as well as repay accounts payable.

Roger Parker, Delta chairman and CEO, says, “While 2008 was a year of impressive operating results, dramatic declines in oil and gas prices during the past 12 months have presented Delta and many energy companies with liquidity challenges in recent months. The combination of our capital-raising efforts, cost reductions and relief provided by our banks should provide the company with the liquidity and flexibility necessary to endure the current environment.”

He adds, “We have weathered downturns before, and I am confident that Delta will again realize its potential as a successful development and exploration company.”

Tracinda Corp., Beverly Hills, Calif., the private investment company owned by Kirk Kerkorian, holds a 35% stake in Delta.

Standard & Poor's Ratings Services lowered Delta’s corporate credit rating to “CCC” from “B-”. Delta had been on CreditWatch with negative implications since Jan. 16 due to concerns of near-term liquidity and covenant compliance. The outlook is now “developing.”

S&P credit analyst Paul Harvey says, “The downgrade reflects our concern that Delta may be unable to raise the $140 million in capital required…which could lead to an event of default.”

He says the agreement was necessary due to Delta's failure to comply with its working capital covenant as of Dec. 31, 2008, and a required acceleration of debt repayment totaling $68.8 million.

Harvey says the developing outlook reflects the potential for negative or positive rating actions depending on the success of Delta's capital-raising efforts and the resulting liquidity “If Delta fails to raise the necessary capital, we would lower the ratings. However, if Delta were to improve liquidity and covenant compliance via the proposed $175-million preferred equity offering or through a combination of equity and asset sales, we could take a positive rating action.”