FCCB Is it really cheap for companies? Investment Shastra

However, FCCBs turn out to be a nightmare, when the company’s share price declines as they have to be repaid either by raising debt  at higher interest rates or through internal accruals. If the FCCBs do not get converted, it increases the debt equity ratio. In the case of default, FCCB’s being the unsecured debt along with lack of strong bankruptcy laws in India, doesn’t leave the FCCB holding company with much choice. The company can either restructure the debt or go in for a liquidation.

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. A convertible bond in India is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. … Exercising this option leads to redemption of the bond prior tomaturity, and its replacement with equity. Understanding how a foreign currency convertible bond works requires an understanding of the same fundamentals for regular bonds. However, the option of converting the bond to stocks is the aspect that makes FCCBs unique.

Now, what’s in it from an investor’s perspective?

In case of restructuring,  the conversion price is lowered and debt repayment schedule is extended, which leads to dilution and fall in stock prices. Indian companies may restructure the terms of their FCCBs with the agreement of the bondholders. Proposals for restructuring FCCBs that do not involve a change in the conversion price will be considered by the RBI under the approval route, on a case-by-case basis. Prior approval of the RBI is required to change the conversion price.

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. A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency different than the issuer’s domestic currency.

Foreign currency convertible bonds

FCCBs appear on the liabilities side of the issuing company’s balance sheet. Gordon Scott has been an active investor and technical analyst or 20+ years.

Reports estimate that approximately half of the FCCBs due to mature in the second half of 2012 will need to be restructured, as it will prove difficult for companies to refinance the FCCBs in the current debt market. Foreign Currency Convertible Bonds (FCCBs) mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency. Investor’s view FCCBs as an attractive investment as it provides the upside potential with conversion option of debt to equity and the downside risk is mitigated by the fixed interest rate element. FCCBs may turn out to be beneficial for the companies with robust business model and the ability to implement the same. FCCBs or Foreign Currency Convertible Bonds, as fancy as they may sound, are still a mystery to many.

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A company may decide to raise money outside its home country 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 usually lower than the home country or 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.

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 bondholder). Indian companies, currently reeling under the pressure of widening current account deficit, depreciating rupee and higher interest costs, now also have FCCB’s to worry about. Suzlon hit headlines when it failed to get an extension from its bondholders for FCCB’s worth USD 221 million, which is claimed to be India’s biggest foreign currency convertible bond (FCCB) default. Though FCCB issuance has long been in practice, it became a topic of discussion recently owing to the rising defaults and approaching maturity/redemption dates of many FCCB’s (issued by Indian companies) in 2013. Logically then, this has spiked the interest of investors, industry analysts and sector experts alike.

Issue of Shares by Indian Companies under Foreign Currency Convertible Bonds ( Foreign Direct Investment )

The name also suggests that the bonds are convertible in nature, indicating that investors not only receive principal and coupon payments but also offer the option of converting their bonds into stocks. Foreign currency convertible bonds are equity linked debt securities that are to be converted into equity or depository receipts after fccb meaning a specified period. Thus a holder of FCCB has the option of either converting it into equity share at a predetermined price or exchange rate, or retaining the bonds. Foreign currency convertible bonds are typically issued by multinational companies operating in a global space and looking to raise capital in foreign currencies.