What happened

After the market closed Tuesday, Infinera (INFN 6.85%) announced that it plans to raise funds by selling new convertible debt notes. The market responded on Wednesday by punishing the communications equipment specialist. As of noon ET, its share price was down roughly by 20%.

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So what

Infinera intends to offer $275 million in convertible senior notes that will come due in 2028. The initial purchaser of the notes will also have an option to buy up to $41.25 million in principal notes within 13 days of their initial purchase.

Convertible senior notes are debt instruments that generate interest payments for their holders, but that can also be converted into the issuing company's stock at a predetermined share price. Infinera has been issuing new stock in order to raise funds, and investors are likely right to think that these senior notes will eventually be converted to stock, further diluting shareholders.

The company has increased its outstanding share count by roughly 21% over the last three years. That wouldn't necessarily be a concerning amount if the business were posting profits and still growing at a rapid clip, but its performance has been relatively weak lately. While the company did beat top- and bottom-line expectations in the second quarter, it still posted a non-GAAP (adjusted) loss of $0.05 per share with sales growing 5.8% to roughly $358 million. 

Now what

Infinera now has a market capitalization of roughly $1.1 billion and is valued at approximately 72% of this year's expected sales. If the base level of proposed senior notes were to be converted to stock at current prices, it would be equivalent to a roughly 25% increase in the company's outstanding share count. Given that level of potential stock dilution, it's not surprising that the share price tumbled.