What is a 'Foreign Currency Convertible Bond - FCCB'

A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.

BREAKING DOWN 'Foreign Currency Convertible Bond - FCCB'

A bond is a debt instrument that provides income to investors in the form of regular scheduled interest payments called coupons. At the maturity date of the bond, the investors are repaid the full face value of the bond. Some corporate entities issue a type of bond known as convertible bonds.

A bondholder with a convertible bond has the option of converting the bond into a specified number of shares of the issuing company. Convertible bonds have a conversion rate at which the bonds will be converted to equity. In 2014, Twitter raised $1.8 billion in convertible bond offering. The 7-year bond has a $1,000 face value with 1% coupon rate, and a conversion rate of 12.8793 shares. This means that an investor can effectively purchase 12.8793 shares for $1,000/12.8793 = $77.64 per share. Over the life term of the bond, if the share price of TWTR rises above $77.64, bondholders will exercise their option to convert the bonds into equity. However, if the stock price stays below the conversion price, the bond will not be converted. Thus, convertible bonds allow bondholders to participate in the appreciation of the issuer’s underlying shares. There are various types of convertible bonds, one of which is the foreign currency convertible bond.

A foreign currency convertible bond (FCCB) is a convertible bond that is issued in a foreign currency, which means the principal repayment and periodic coupon payments will be made in a foreign currency. For example, an American listed company that issues a bond in India in rupees has, in effect, issued an FCCB. Foreign currency convertible bonds are typically issued by multinational companies operating in a global space and looking to raise capital in foreign currencies. FCCB investors are usually hedge fund arbitrators and foreign nationals. These bonds can be issued along with a call option (whereby the right of redemption lies with the bond issuer) or put options (whereby the right of redemption lies with bond holder).

A company may decide to raise money outside its home country to gain access into new markets for new or expansionary projects. 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. 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, thereby, reducing its debt-financing costs. In addition, a favorable move in the exchange rates can reduce the issuer’s cost of debt, which is the interest payment made on bonds.

Since the principal has to be repaid at maturity, an adverse movement in exchange rates in which the local currency weakens, can cause cash outflows on repayment to be higher than any savings in interest rates, resulting in losses for the issuer. In addition, issuing bonds in a foreign currency exposes the issuer to any political, economic, and legal risks prevalent in the country. Furthermore, if the issuer’s stock price declines below the conversion price, FCCB investors will not convert their bonds to equity, which means the issuer will have to make the principal repayments at maturity.

An FCCB investor can purchase these bonds at a stock exchange, and has the option to convert the bond into equity or a depositary receipt after a certain period of time. Investors can participate in any price appreciation of the issuer’s stock by converting the bond to equity. Bondholders take advantage of this appreciation by means of warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.

RELATED TERMS
  1. Convertibles

    Convertibles are securities, such as bonds, that can be turned ...
  2. Bond Floor

    The bond floor is the lowest value that convertible bonds can ...
  3. Straight Bond

    A straight bond is a bond that pays interest at regular intervals, ...
  4. Foreign Bond

    A foreign bond is a bond that is issued in a domestic market ...
  5. International Bond

    An international bond is a debt investment that is issued in ...
  6. Forced Conversion

    A forced conversion allows an issuing company to make a security ...
Related Articles
  1. Investing

    3 Best High-Yielding Convertible Bond ETFs (CWB, ICVT)

    Discover how convertible bond ETFs can offer investors growth and income while hedging fixed income portfolios in a rising rate environment.
  2. Investing

    Convertible bonds: pros and cons for companies and investors

    Understand what effect convertible bonds have on investors and companies. Find out the advantages, disadvantages, and what the issue means from a corporate standpoint before buying in.
  3. Investing

    A Guide to High Yield Corporate Bonds

    The universe of corporate high yield bonds encompasses multiple different types and structures.
  4. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  5. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  6. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
RELATED FAQS
  1. How Are Convertible and Reverse Convertible Bonds Different?

    Determine the difference between a regular convertible bond and a reverse convertible bond, including how this is affected ... Read Answer >>
  2. Why would a corporation issue convertible bonds?

    Discover how corporations issue convertible bonds to take advantage of much lower interest rates as a result of a conversion ... Read Answer >>
  3. How is convertible bond valuation different than traditional bond valuation?

    Read about bond valuation, particularly the differences between how a traditional bond is valued and how a convertible bond ... Read Answer >>
  4. What are 'death spiral' convertible bonds?

    Conventional convertible bonds give the bondholder the right to exchange the bond for a certain amount of the issuer's common ... Read Answer >>
  5. What are the risks of investing in a bond?

    Are you thinking of investing in bond market? Learn more about bond market investment risk, including interest rate risk, ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center