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F
oreign Currency Con- the option to convert the 2004 will be due for re-
vertible Bonds are at- FCCB into equity, both demption at 95.111 per
tractive to both inves- the options are subject to cent of principal.
tors and issuers. The investors RBI guidelines. l The Yield to Maturity
receive the safety of guaran- l The interest component (YTMs) in case of FC-
teed payments on the bond (if or coupon on FCCBs is CBs normally ranges
interest payment is involved) generally 30 per cent -40 from 2 per cent to 7 per
and are also able to take ad- per cent less than on nor- cent.
vantage of any price apprecia- mal debt paper or foreign l FCCB are generally is-
tion in the company’s stock. currency loans or ECBs. sued by Corporate, which
Bondholders take advan- This translates to cost have high promoter
tage of this appreciation by saving of approx 2-3 per shareholding and hence
means of warrants attached cent p.a. do not perceive any risk
to the bonds, which are acti-
vated when there is substan-
tial price appreciation of the Foreign Currency Convertible Bonds (FCCB) are debt
stock. Due to the equity side instruments issued in a currency different than the issuer’s
of the bond, the coupon pay- domestic currency with an option to convert them in com-
ments on the bond are lower, mon shares of the issuer company. It’s a quasi debt instru-
thereby reducing its debt - fi- ment to raise foreign currency funds at attractive rate. FCCB
Sanjoy Banka
nancing costs for the issuer. acts like a bond by making regular coupon and principal pay-
FCCB are also referred ments; and also gives the bondholder an option to convert the The author is the
member of the Institute.
as FCCN (Foreign Currency bond into stock. He can be reached at
sanjoy.banka@relian-
Convertible Notes) by some ceinfo.com.
issuers. Bonds of foreign l The coupon on bonds of losing management
countries are called by various can also be zero as in case control even after exercise
names in International mar- of zero coupon Bonds of conversion option.
kets. For example in US, over- (ZCB) in view of attrac- l The pricing of the FCCB
seas bond listed with SEC are tiveness of options at- options is generally be-
called Yankee Bonds, while tached to them. In case of tween 30 per cent - 70
they are referred to as Bulldog ZCB, the holder is basi- per cent premium over
Bonds (in U.K.) and Samurai cally interested in either the Current Market Price
Bonds (in Japan). conversion of the bonds giving sufficient cushion
in equity or capital appre- to the issuer. The FCCB
Salient Features ciation. holder opts to convert the
l FCCB is a quasi-debt in- l The redemption of FCCB, in case the mar-
strument, which can be FCCB can be made at a ket price exceeds the op-
converted into a compa- premium or at par or even tion price or if there is an
ny’s equity shares if the at a discount depend- intent to make strategic
investor chooses to do so, ing upon the coupon of- investment by the lender
at a pre-determined strike fered. The Present value irrespective of the stock
rate. of overall remaining cash price in market.
l FCCB issues have a ‘Call’ flow determines the valu- l In many cases, the FCCB
and ‘Put’ option to suit ation of Bonds e.g. out of issuer as well looks for-
the structure of the Bond. 3 series of FCCN issued ward to exercise of option
A call option entitles the by Tata Motors Limited, by lender, so that there is
issuer to “ Call ” the loan 1 per cent FCCN of 2003 no fund outflow on re-
and make an early re- are redeemable on July demption. Instead the is-
demption. On the other 31 2008 at 116.824 per suers reserves are inflated
hand, a put option enti- cent of Principal, whereas by receipt of premium. If
tles the lender to exercise Zero Coupon FCCN of however, the FCCB hold-