Why Aerojet Rocketdyne Holdings Inc.'s Shares Popped 16% Today

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What happened

Shares of aerospace supplier Aerojet Rocketdyne Holdings Inc. (NYSE: AJRD) fell as much as 16.4% on Thursday after the company announced a debt offering. At 3:30 p.m. EST shares were still down 10.9%.

So what

After the market closed yesterday, management announced a $200 million private offering of convertible senior notes, which could increase to $230 million if the overallotment is exercised by underwriters. They said the money will be used to repay the company's revolving credit facility and redeem other outstanding debts, plus for some general purposes.

What often worries investors about convertible offerings is that they dilute shareholders if they're converted into shares. And with a current market cap of $1.3 billion, the dilution from a $230 million offering could be substantial.

Now what

The debt offering hasn't been priced yet, so we don't know exactly what the conversion price will be at the end of the day. But there's no way around its dilutive effects if shares rise in the future.

Investors also need to keep in mind that this may help the company's operations long-term. If the interest payment is lower than the revolver it's replacing, interest costs could go down and free cash flow could go up. But that's the trade-off for offering convertible debt, something investors aren't bullish on today.

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