What is a Foreign Currency Convertible Bond (FCCB)? An FCCB is a type of convertible bond issued in a currency different from the issuer’s domestic currency. In other words, the issuing company raises money in foreign currency. A convertible bond is a combination of debt and equity instrument. It behaves like a bond with regular coupon and principal payments and also gives the bondholder the option to convert it into stock.
Key Takeaways: An FCCB is a bond issued in a currency other than the issuer’s home currency. Convertible bonds are between debt and equity instruments, acting as a bond and allowing investors to convert to stock. These bonds are often listed by large multinational companies seeking foreign currency funds. Understanding FCCBs: A bond is a debt instrument providing income in the form of regularly scheduled interest payments (coupons). At maturity, investors are repaid the full face value. Some corporate entities issue convertible bonds. A bondholder with a convertible bond can convert it into a specified number of shares. Convertible bonds have a conversion rate. If the stock price is below the conversion price, the bond won’t be converted. There are various types of convertible bonds, including FCCBs. A company may issue FCCBs in a country with lower interest rates or a more stable economy. How FCCBs Work: An FCCB is a convertible bond issued in foreign currency, so principal repayment and periodic coupon payments are in foreign currency. For example, an American listed company issuing a bond in India in rupees has issued an FCCB. FCCBs are typically issued by multinational companies looking to raise capital in foreign currencies. FCCB investors are usually hedge fund arbitrators and foreign nationals. These bonds can be issued with a call option (redemption right with issuer) or put options (redemption right with bondholder). Special Considerations: A company may raise money outside its home country for new or expansionary projects. FCCBs are generally issued in countries with lower interest rates or more stable economies than the home country.Foreign Currency Convertible Bonds (FCCBs) are a type of bond that offers both debt and equity characteristics. Due to their equity component, which adds value, the coupon payments on these bonds are lower for the issuer compared to traditional coupon-bearing bonds. This reduction in coupon payments helps to decrease the issuer’s debt-financing costs. A favorable movement in exchange rates can further reduce the issuer’s cost of debt, which is the interest payment made on bonds. However, an adverse movement in exchange rates, where the local currency weakens, can result in higher cash outflows on repayment, potentially leading to losses for the issuer. Issuing bonds in a foreign currency also exposes the issuer to political, economic, and legal risks prevalent in the country of the currency. If the issuer’s stock price falls below the conversion price, FCCB investors may opt not to convert their bonds to equity, leading the issuer to make principal repayments at maturity. Investors can purchase FCCBs on a stock exchange and have the option to convert the bond into equity or a depositary receipt after a certain period. By converting the bond to equity, investors can participate in any price appreciation of the issuer’s stock. Additionally, bondholders can take advantage of stock price appreciation through warrants attached to the bonds, which are activated when the stock price reaches a certain point.