The full form of FCCB is Foreign Currency Convertible Bond. It is an example of a convertible bond that is issued in a currency other than that of the domestic currency of the issuer. It is a combination of equity and debt instruments. An FCCB is usually listed by MNCs (Multinational Companies) having offices all across the world. They list these convertible bonds to raise money in foreign currencies.
Features of FCCB
The distinctive characteristics of foreign currency convertible bonds include the following aspects:
- FCCBs bear resemblance to convertible securities, entailing regular interest payments and principal repayment in a foreign currency until a specific date. Following that period, the issuer gains the ability to convert them into equity.
- These convertible bonds are issued with lower interest rates compared to standard bonds.
- The issuance of FCCBs does not necessitate any security or collateral.
- FCCBs are traded on foreign stock exchanges.
- As equity-linked debt instruments, bondholders have the option to convert the bond into equity or depository receipts at a later point.
- Companies have the flexibility to issue bonds with a call or put option, enabling investors to convert the bonds into stock through a put option.
- The funds raised through FCCBs are utilised in accordance with External Commercial Borrowing (ECB) guidelines.
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Advantages of FCCB
FCCBs offer advantages to both the issuing company and the bondholders:
For the Issuing Company
- The coupon rates are typically lower than conventional bank interest rates, leading to reduced debt financing costs.
- Conversion of the bonds into equity allows the company to decrease its debt and acquire equity capital.
- Favourable movements in exchange rates can result in reduced debt expenses for the company.
For the Bondholders
- Assurance of a minimum fixed rate of return.
- Investors have the opportunity to participate in the appreciation of the issuer’s stock value upon conversion.
- Bondholders enjoy flexibility in choosing between entering the capital market or receiving a steady income stream through bond payments.