What happened

Shares of in-flight Wi-Fi provider Gogo (GOGO 2.04%) have plunged today, down by 15% as of 11:30 a.m. EST, after the company announced an offering for $200 million in convertible senior notes. The company is using the proceeds to repurchase $200 million in existing convertible notes that are currently outstanding.

So what

Gogo is repurchasing outstanding 3.75% convertible notes due in 2020 and issuing convertible notes that will be due in 2022. The offering is only available to qualified institutional buyers, and the terms such as conversion price and interest rate will be determined in private negotiations.

Gogo headquarters

Image source: Gogo.

The company warned that significant market volatility could result, as many of the holders of the 2020 convertibles utilize a convertible arbitrage strategy that will need to be unwound as Gogo repurchases the notes, potentially including various other derivative positions like forwards that the investors may also hold. "Any repurchase of Gogo's existing convertible notes could affect the market price of Gogo's common stock," the company said.

Now what

Convertible arbitrage is a common strategy among hedge funds that entails taking a long position in the convertible note while simultaneously shorting the stock, or taking a short position in the convertible note while simultaneously buying the stock. Taking a position in the underlying stock is a hedge against market movements for the bonds, reducing risk while taking advantage of pricing inefficiencies in the market to generate a return. As such, investors purchasing the new convertibles would likely short the stock as part of this strategy, creating selling pressure.

"The effect, if any, of any of these transactions and activities on the market price of Gogo's common stock or the notes will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could adversely affect the value of Gogo's common stock, which could affect the value of the notes and the value of the shares of common stock, if any, investors receive upon conversion of the notes and investors' ability to convert the notes," Gogo added.