What Is the Definition of a Foreign Currency Convertible Bond?

FCCBs are convertible bonds issued in a currency other than the issuer’s local currency. Thus, the issuing corporation raises foreign currency. Convertible bonds combine debt and equity. It makes coupon and principal payments like bonds, but bondholders can convert them into shares.

Understanding FCCBs

Bonds are financial instruments that offer investors periodic interest payments, known as coupons. Investors receive the entire face value of the bond at maturity. Corporations issue convertible bonds.

A convertible bondholder can convert their bond into a set number of shares of the issuing business. At a specific rate, convertible bonds can be converted to stock. The bond will not be restored if the stock price remains below the conversion price. Thus, convertible bonds let bondholders profit from the issuer’s share price. Certain convertible bonds are foreign-currency convertible bonds.

A corporation may issue FCCBs in a country’s currency with lower interest rates or a more stable economy.

Foreign Currency Convertible Bonds: How They Work

Principal repayment and periodic coupon payments are paid in a foreign currency using a foreign currency convertible bond (FCCB). An American-listed corporation that issues a rupee bond in India has issued an FCCB.

Global enterprises that want to raise capital in foreign currencies issue foreign currency convertible bonds. Foreigners and hedge fund arbitrators invest in FCCB. Bonds can be issued with a call or put options, with the issuer or bondholder having the right to redeem.

Special Considerations

A corporation may raise funds abroad to enter new markets for new or expansionary initiatives. Companies commonly issue FCCBs in the currency of nations with lower interest rates or more stable economies. Because the bond’s equity adds value, the issuer pays lower coupon payments than a coupon-bearing plain vanilla bond, lowering its debt-financing costs. Additionally, advantageous exchange rates can reduce the issuer’s cost of debt, which is the interest paid on bonds.

Since the principle must be returned at maturity, a weak local currency might cause cash outflows on repayment to exceed interest rate savings, resulting in issuer losses. In addition, foreign currency bonds subject the issuer to political, economic, and legal risks in the country. If the issuer’s stock price drops below the conversion price, FCCB investors won’t convert their bonds to equity; therefore, the issuer must refund the principal at maturity.

FCCB investors can buy bonds on a stock market and convert them into equity or a depositary receipt after a specific term. Converting the bond to equity lets investors profit from stock price increases. Bondholders participate in stock appreciation through warrants linked to their bonds, which activate when the stock price reaches a particular point.

Conclusion

• Foreign currency convertible bonds (FCCBs) are issued in a currency other than the issuer’s native currency.
• In between debt and equity, convertible bonds serve as bonds but may be converted into stock.
• Large multinational corporations with global operations list these bonds to raise foreign currency.