FCCB (Foreign Currency Convertible Bonds) also called FCCN([/b]Foreign Currency
Convertible Notes)are a type of bond, issued ?n a currency different from the issuer’s domestic currency.Thus the money raised by a company is in a foreign currency. Th?? bond ?? a mix between th? debt and equity instrument.It is a convertible bond .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.FCCBs ?r? considered attractive to both investors and issuers. The FCCB market is basically a limited market consisting of FII, Banks, Mutual Funds and HNIs.
Some features of FCCB:-
1. FCCB is a quasi-debt instrument, which can be converted into a company’s equity shares if the investor chooses to do so, at a pre-determined strike rate. Investors are hedge-fund arbitrators or foreign nationals.
2. FCCB issues have a ‘Call’ and ‘Put’ option to suit the structure of the Bond. A call option entitles the issuer to “ Call ” the loan and make an early redemption. On the other hand, a put option entitles the lender to exercise the option to convert the FCCB into equity, both the options are subject to RBI guidelines.
3. The interest component or coupon on FCCBs is generally 30 per cent – 40 per cent less than on normal debt paper or foreign currency loans or ECBs. This translates to cost saving of approx 2-3 per cent p.a.
4. The coupon on bonds can also be zero as in case of zero coupon Bonds (ZCB) in view of attractiveness of options attached to them. In case of ZCB, the holder is basically interested in either
conversion of the bonds in equity or capital appreciation.
5. The redemption of FCCB can be made at a premium or at par or even at a discount depending upon the coupon offered.The Present value of overall remaining cash flow determines the valuation of Bonds.
6. FCCB are generally issued by Corporate, which have high promoter shareholding and hence do not perceive any risk.
7. The pricing of the FCCB options is generally between 30 per cent – 70 per cent premium over the Current Market Price giving sufficient cushion to the issuer. The FCCB holder opts to convert the FCCB, in case the market price exceeds the option price or if there is an intent to make strategic investment by the lender irrespective of the stock price in market.
8. FCCB can be secured as well as unsecured. Most of the FCCB issued by Indian Companies are generally unsecured.
9. FCCB can be converted into Indian Shares or American Depository Shares (ADS).
10. FCCB's appear on the liabilities side of the issuing company's balance-sheet.
Some important RBI Guidelines:-
1. ECB/FCCB can be raised under Automatic route ( for specified Industries only on meeting specified conditions) or on RBI approval. RBI has set up an empowered committee to consider requests for approval.
2. The automatic route is available to real sector i.e. Industrial sector, specially infrastructure sector-in India, while all other sectors have to take RBI approval .
3. The eligible borrowers under the approval route include Financial Institutions dealing exclusively with with infrastructure or export finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM Bank are considered on a case by case basis. The list also includes Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted to the extent of their investment in the package and assessment by RBI based on prudential norms.
4. RBI has recently issued a circular no A.P.(DIR Series) No. 15 dated 4th November, 2005 , whereby Special purpose vehicles (SPV) or any other entity notified by RBI set up to finance infrastructure companies or project will also be treated as Financial Institutions for the purpose of consideration of their application under approval route.
5. Minimum Average Maturity of FCCB shall be 3 years for borrowing up to US$ 20 million and 5 years in case it exceeds US$ 20 Million.
6. The maximum all in all cost to be incurred on FCCB can not exceed following limits :For Average Maturity period of 3-5 years- 200 bps over 6 month LIBOR(London Interbank Offered Rate) and for those with Average Maturity exceeding 5 years - 350 bps for over 5 years LIBOR.
FCCB have been extremely popular with Indian Corporate for raising Foreign Funds at competitive rates.FCCB are treated as Foreign Direct Investment (FDI) by Government of India. Companies raise money in many different ways and one of the modern methods is issuing FCCB. All the money raising methods have some advantages and disadvantages and FCCB is not an exception. Though FCCB method has been in practice for a long time, it came in to prominence in India only in recent decades. The Pros and Cons of FCCB for both the issuers and investors are as under:
Benefits for the Issuer
· FCCB ?? a g??d source of raising funds with minimum cost as interest rate being much lower than any other debt instrument because of its equity component.
· The company ??n raise loan without ?r??t?ng security ?n assets.
· The issuing companies get the benefit of raising the money from the foreign markets, thus opening another source of financing for them.
Benefits for the Investors
· Investors could enjoy safety of guaranteed payments on the bond.
· FCCBs are more attractive due to their debt to equity conversion option.
· Investors not only get the benefit of capital protection, but also an opportunity to earn profit from the price appreciation of company’s shares after conversion.
· Redeemable at maturity if not converted.
On the flipside, like any other financial instruments, FCCBs also have their own disadvantages to both issuers and investors.
· Exchange risk is more in FCCBs as interest on bond would be payable in foreign currency.
· If the stock price plummets, investors will not go for conversion but redemption. So, companies have to refinance to fulfill the redemption promise which can hit earnings.
· It will remain as debt in the balance sheet until conversion thereby inflating the debt equity ratio of the company.
Convertible Notes)are a type of bond, issued ?n a currency different from the issuer’s domestic currency.Thus the money raised by a company is in a foreign currency. Th?? bond ?? a mix between th? debt and equity instrument.It is a convertible bond .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.FCCBs ?r? considered attractive to both investors and issuers. The FCCB market is basically a limited market consisting of FII, Banks, Mutual Funds and HNIs.
Some features of FCCB:-
1. FCCB is a quasi-debt instrument, which can be converted into a company’s equity shares if the investor chooses to do so, at a pre-determined strike rate. Investors are hedge-fund arbitrators or foreign nationals.
2. FCCB issues have a ‘Call’ and ‘Put’ option to suit the structure of the Bond. A call option entitles the issuer to “ Call ” the loan and make an early redemption. On the other hand, a put option entitles the lender to exercise the option to convert the FCCB into equity, both the options are subject to RBI guidelines.
3. The interest component or coupon on FCCBs is generally 30 per cent – 40 per cent less than on normal debt paper or foreign currency loans or ECBs. This translates to cost saving of approx 2-3 per cent p.a.
4. The coupon on bonds can also be zero as in case of zero coupon Bonds (ZCB) in view of attractiveness of options attached to them. In case of ZCB, the holder is basically interested in either
conversion of the bonds in equity or capital appreciation.
5. The redemption of FCCB can be made at a premium or at par or even at a discount depending upon the coupon offered.The Present value of overall remaining cash flow determines the valuation of Bonds.
6. FCCB are generally issued by Corporate, which have high promoter shareholding and hence do not perceive any risk.
7. The pricing of the FCCB options is generally between 30 per cent – 70 per cent premium over the Current Market Price giving sufficient cushion to the issuer. The FCCB holder opts to convert the FCCB, in case the market price exceeds the option price or if there is an intent to make strategic investment by the lender irrespective of the stock price in market.
8. FCCB can be secured as well as unsecured. Most of the FCCB issued by Indian Companies are generally unsecured.
9. FCCB can be converted into Indian Shares or American Depository Shares (ADS).
10. FCCB's appear on the liabilities side of the issuing company's balance-sheet.
Some important RBI Guidelines:-
1. ECB/FCCB can be raised under Automatic route ( for specified Industries only on meeting specified conditions) or on RBI approval. RBI has set up an empowered committee to consider requests for approval.
2. The automatic route is available to real sector i.e. Industrial sector, specially infrastructure sector-in India, while all other sectors have to take RBI approval .
3. The eligible borrowers under the approval route include Financial Institutions dealing exclusively with with infrastructure or export finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM Bank are considered on a case by case basis. The list also includes Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted to the extent of their investment in the package and assessment by RBI based on prudential norms.
4. RBI has recently issued a circular no A.P.(DIR Series) No. 15 dated 4th November, 2005 , whereby Special purpose vehicles (SPV) or any other entity notified by RBI set up to finance infrastructure companies or project will also be treated as Financial Institutions for the purpose of consideration of their application under approval route.
5. Minimum Average Maturity of FCCB shall be 3 years for borrowing up to US$ 20 million and 5 years in case it exceeds US$ 20 Million.
6. The maximum all in all cost to be incurred on FCCB can not exceed following limits :For Average Maturity period of 3-5 years- 200 bps over 6 month LIBOR(London Interbank Offered Rate) and for those with Average Maturity exceeding 5 years - 350 bps for over 5 years LIBOR.
FCCB have been extremely popular with Indian Corporate for raising Foreign Funds at competitive rates.FCCB are treated as Foreign Direct Investment (FDI) by Government of India. Companies raise money in many different ways and one of the modern methods is issuing FCCB. All the money raising methods have some advantages and disadvantages and FCCB is not an exception. Though FCCB method has been in practice for a long time, it came in to prominence in India only in recent decades. The Pros and Cons of FCCB for both the issuers and investors are as under:
Benefits for the Issuer
· FCCB ?? a g??d source of raising funds with minimum cost as interest rate being much lower than any other debt instrument because of its equity component.
· The company ??n raise loan without ?r??t?ng security ?n assets.
· The issuing companies get the benefit of raising the money from the foreign markets, thus opening another source of financing for them.
Benefits for the Investors
· Investors could enjoy safety of guaranteed payments on the bond.
· FCCBs are more attractive due to their debt to equity conversion option.
· Investors not only get the benefit of capital protection, but also an opportunity to earn profit from the price appreciation of company’s shares after conversion.
· Redeemable at maturity if not converted.
On the flipside, like any other financial instruments, FCCBs also have their own disadvantages to both issuers and investors.
· Exchange risk is more in FCCBs as interest on bond would be payable in foreign currency.
· If the stock price plummets, investors will not go for conversion but redemption. So, companies have to refinance to fulfill the redemption promise which can hit earnings.
· It will remain as debt in the balance sheet until conversion thereby inflating the debt equity ratio of the company.