What is a Foreign Currency Convertible Bond?

A foreign currency convertible bond (FCCB) is a special kind of convertible bond issued in a currency different than the issuer’s domestic currency. Multinational companies and governments routinely issue bonds denominated in various currencies to benefit from lower borrowing costs, and also match their currency inflows and outflows. FCCB gives investors an opportunity to convert these bonds at a fixed conversion price or as per a pre-determined pricing formula. A convertible bond is a mix between a debt and equity instrument. Like any other type of bond, an FCCB makes regular coupon and principal payments till a certain date. When the bonds mature, if the shares are trading above that price, bondholders can convert their bonds into equity. Else, they settle for redemption of bonds if equity conversion isn’t more beneficial.

Advantages of FCCBs

FCCBs are generally issued by companies in the currency of those countries where interest rates are usually lower than the home country or the foreign country economy is more stable than the home country economy. The coupon payments on these bonds are usually lower than the bonds which do not have option of converting to equity which in a way helps the issuer to reduce the cost of borrowing. The conversion of FCCBs into equity usually happens at a price already decided at the time of issuance and is usually at a premium, so weakening of the company is lesser.

Disadvantage:

If the bond holders settle for redemption of bonds on maturity instead of converting it into equity share, the company shall have to make the repayment in foreign currency. In a scenario, exchange rate moved considerably as compared to the prevailing on the day of the borrowing, may result in losses for the company compared to savings in the interest rate.