Foreign Currency Convertible Bond (FCCB)
What Is a Foreign Currency Convertible Bond?
A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency unique in relation to the issuer's domestic currency. At the end of the day, the money being raised by the responsible company is as foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making ordinary coupon and principal payments, however these bonds likewise give the bondholder the option to change over the bond into stock.
Figuring out Foreign Currency Convertible Bonds (FCCB)
A bond is a debt instrument that turns out revenue to investors as routinely scheduled interest payments called coupons. At the maturity date of the bond, the investors are reimbursed the full face value of the bond. A few corporate substances issue a type of bond known as convertible bonds.
A bondholder with a convertible bond has the option of changing over the bond into a predefined number of shares of the responsible company. Convertible bonds have a conversion rate at which the bonds will be switched over completely to equity. Nonetheless, in the event that the stock price stays below the conversion price, the bond won't be changed over. In this way, convertible bonds permit bondholders to partake in the appreciation of the issuer's underlying shares. There are different types of convertible bonds, one of which is the foreign currency convertible bond.
A company might decide to issue FCCBs in the currency of a country with lower interest rates or a more stable economy than the issuer's nation of origin.
How Foreign Currency Convertible Bonds Work
A foreign currency convertible bond (FCCB) is a convertible bond that is issued in a foreign currency, and that means the principal repayment and periodic coupon payments will be made in a foreign currency. For instance, an American listed company that issues a bond in India in rupees has, in effect, issued a FCCB.
Foreign currency convertible bonds are typically issued by multinational companies operating in a global space and hoping to bring capital up in foreign currencies. FCCB investors are generally hedge fund referees and foreign nationals. These bonds can be issued alongside a call option (by which the right of redemption lies with the bond issuer) or put options (by which the right of redemption lies with bondholder).
Special Considerations
A company might choose to fund-raise outside its nation of origin to gain access to new markets for new or expansionary projects. FCCBs are generally issued by companies in the currency of those countries where interest rates are typically lower than the nation of origin or foreign country economy is more stable than the nation of origin economy. Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the issuer than a straight coupon-bearing plain vanilla bond, in this way, paying off its debt-funding costs. Likewise, a positive move in the exchange rates can reduce the issuer's cost of debt, which is the interest payment made on bonds.
Since the principal must be reimbursed at maturity, an adverse movement in exchange rates in which the nearby currency debilitates can make cash outpourings on repayment be higher than any savings in interest rates, bringing about losses for the issuer. Likewise, giving bonds in a foreign currency opens the issuer to any political, economic, and legal risks common in the country. Moreover, on the off chance that the issuer's stock price declines below the conversion price, FCCB investors won't switch their bonds over completely to equity, and that means the issuer should make the principal repayments at maturity.
A FCCB investor can purchase these bonds at a stock exchange, and has the option to change over the bond into equity or a depositary receipt after a certain period of time. Investors can partake in any price appreciation of the issuer's stock by changing the bond over completely to equity. Bondholders exploit this appreciation through warrants joined to the bonds, which are initiated when the price of the stock arrives at a certain point.
Features
- Convertible bonds fall in debt and equity financial instruments, both going about as a bond yet permitting investors to change over the bond into stock.
- These sorts of bonds are many times listed by large, multinational companies with offices around the world, seeking to fund-raise in foreign currencies.
- A foreign currency convertible bond (FCCB) is a type of bond that is issued in a currency other than the issuer's home currency.
