What Is a Foreign Currency Convertible Bond?

What Is a Foreign Currency Convertible Bond?

Let me explain what a foreign currency convertible bond, or FCCB, really is. It's a convertible bond issued in a currency that's not the issuer's home currency, meaning the company raises money in foreign funds. Think of it as a hybrid: it works like a regular bond with coupon payments and principal repayment, but it also lets the bondholder convert it into the company's stock.

Understanding Foreign Currency Convertible Bonds (FCCB)

You know a bond is basically a debt tool that pays investors interest through coupons, and at maturity, you get the full face value back. Some companies issue convertible bonds, which give you the option to turn that bond into a set number of shares in the company. The conversion happens at a specific rate, but only if the stock price rises above that conversion price—otherwise, it stays a bond. This setup lets you, as a bondholder, share in the company's stock gains. Among convertible bonds, the FCCB stands out because it's in a foreign currency.

A company might go for FCCBs in a country with lower interest rates or a steadier economy than their own—that's a key point you should note.

How Foreign Currency Convertible Bonds Work

Here's how an FCCB operates: it's a convertible bond in a foreign currency, so both the principal and coupons are paid in that currency. For instance, if a U.S. company issues a bond in Indian rupees, that's an FCCB. These are common from global multinationals aiming to pull in foreign capital. Investors are often hedge funds or foreigners, and the bonds might include call or put options—call for the issuer to redeem early, put for you as the holder.

When you buy an FCCB on a stock exchange, after a lock-in period, you can convert it to equity or a depositary receipt. If the stock price climbs, you convert and profit from that rise, often via attached warrants that kick in at a certain price level.

Special Considerations

Companies issue FCCBs abroad to tap new markets for projects or expansions. They choose currencies from countries with low interest rates or stable economies, which cuts their debt costs since the equity feature means lower coupons than plain bonds. Favorable exchange rates can even reduce interest expenses further.

But watch out—adverse exchange rate shifts, like a weakening local currency, can inflate repayment costs at maturity, wiping out any savings. You're also exposed to the foreign country's political, economic, and legal risks. And if the stock price doesn't hit the conversion level, investors won't convert, leaving the company to repay the full principal.