Foreign Currency Convertible Bond (FCCB)
Candlefocus EditorThis is beneficial to corporations that use FCCBs as an alternative form of funding, being able to diversify the investor base and attract a new pool of capital to their company. It also provides investors with higher returns through the equity characteristics, while still maintaining the lower risk features of a bond.
A foreign currency convertible bond involves two main components. Firstly, it is a debt security, with a fixed coupon rate and a set maturity date, just like any other bond. However, a convertible feature is also attached to the bond, which allows the investor to convert the bond into the company’s stock at a predetermined conversion price.
The conversion of a bond into equity depends on the market price of the company’s equity at the exercise date. A conversion will occur if the market price of the equity is trading above the conversion price. This provides investors with the option of converting to equity if the stock performs well, allowing them to benefit from the returns associated with the equity market.
Due to their hybrid structure, FCCBs have become an attractive option for investors who are looking for higher returns than what bonds usually provide. Similarly, companies have been able to raise capital from new, non-domestic investors, ultimately diversifying their investor base and opening up new markets.
It is important, however, to remain aware of the risks associated with investing in FCCBs. As they are exposed to the currency risk, there may be alterations in the value of the bond should the exchange rate move significantly. In addition, the stock to which the bond has been converted may also have an effect on the repayment of the bond, meaning that investors may not always receive the full repayment amount at maturity.
Despite the volatility and risks associated, the flexibility provided with foreign currency convertible bonds is attractive enough for both companies, and investors looking for a greater return on their investments. It is important to proceed with caution due to the potential changes in value of the investment over time.