JPM JP Morgan Chase and Co

In-flight Internet provider Gogo Inc. on Thursday took the rare step of canceling a bond sale days after it agreed to terms, saying it was in negotiations with an airline it didn't identify about serving a large portion of its fleet.

Lawyers involved with the $525 million bond offering advised that "we should pull the bond deal until this negotiation is complete," Varvara Alva, vice president of investor relations and treasurer with Gogo, said.

The company would likely try to resell the bonds at a later date once the negotiation is complete, a person familiar with the matter said.

The six-year bond had carried a low, or junk, credit rating and a 12% interest coupon, an attractive rate considering assets deemed safe, such as 10-year U.S. Treasurys are yielding under 2%.

Some investors speculated the potential airline deal would improve the company's finances and could help Gogo lower its interest rate when it tries to sell the debt again.

Gogo's stock surged some 16% in recent trading to $11.20 a share.

The pulled deal and the company's intentions to return to the market reflect a shift in sentiment in junk-rated corporate bonds, which were rocked by a selloff in late 2015 and early 2016 amid concern that a possible U.S. recession would make it difficult for companies to service their debt. But the market has rebounded as those fears have eased in recent months, and companies have had little trouble selling new debt after sales largely came to a halt earlier in the year.

Investors say companies from time to time pull bond sales if the debt is financing a merger or acquisition that fails to close, which is typically viewed as a negative for the company. But Gogo's announcement on Thursday was unusual because the company had announced what was considered positive news. That likely irked some bond buyers because the debt would probably have risen in price if the bond deal had gone through, investors said.

"It's not good for them if they want to come back and tap the market," said Matthew Duch, a portfolio manager at Calvert Investments, who said he decided against buying the bonds when they priced on Monday. "I think to not close on the deal, that would leave me frustrated."

In a filing with the Securities and Exchange Commission, Gogo said it received a proposal from an airline on Wednesday. The bond issue was scheduled to close on Thursday, giving the company time to cancel the deal. In the filing, Gogo cautioned there was no guarantee an agreement with the airline would be reached.

The bond sale was led by Morgan Stanley, J.P. Morgan and Bank of America Merrill Lynch. Representatives for the underwriters declined to comment.

Gogo's investors were rattled in February by a dispute with American Airlines Group Inc., which had notified the company it considered a competitor's service an improvement over Gogo's for some of its planes. Gogo sent American a proposal to install a faster Internet service on the planes in question, but is awaiting a decision by the airline, according to a bond prospectus. American can decide to terminate its agreement with Gogo for those planes if it deems Gogo's offer less favorable than the competitor, the prospectus said.

"We're still evaluating all of our options for Wi-Fi providers," said Casey Norton, a spokesperson for American.

Still, there has been some good news recently for Gogo. In May, Delta Air Lines Inc. agreed to expand its partnership with the company and International Consolidated Airlines Group SA selected Gogo to provide connectivity service on aircraft operated by British Airways, Iberia and Aer Lingus, the prospectus said.

Gogo reported an operating loss of about $8.6 million in the first quarter, compared with a loss of $9.8 million in the first quarter of 2015.

"The market viewed this news that came out in February about Gogo being in some sort of dispute with American as existential, and I think now it's starting to understand there's a lot of battles to be fought in this area," said Matthew Robison, senior analyst at Wunderlich Securities. "There's a way for all the parties involved to win."

Write to Mike Cherney at mike.cherney@wsj.com

(END) Dow Jones Newswires

May 26, 2016 16:55 ET (20:55 GMT)

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