Liquidity Crisis
Posted on December 3, 2009
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Whenever liquidity crisis arises the business houses tend to raise the funds from various sources like bank borrowings, issue of shares, bonds and various other means. With wider options on the card, leading companies scout for the cheaper funds from abroad and invest for better return.
One of the means adopted by the companies to raise foreign fund is through the FCCB. It is the Foreign Currency Convertible Bonds. It is a mix of bond and equity.
It is more beneficial for both the issuer and the subscriber. The holder of the bond has the option to convert these FCCBs in to equity whenever the shares of they said company appreciates. This will ensure them a better return.
From the point of view of the company it needs to pay the agreed coupon and the principal on an ongoing basis and in case of conversion to equity, the debt burden gets reduced. Whenever the interest rates abroad are favourable the companies resort to these route for easy and cost effective funds.
At times the foreign entities who are holding these bonds even convert the entire FCCb amount in to equities so that the company needs not service the debt. As such, it is a debt instrument with the warrants attached for conversion in to equity as and when the holder like to desires do so
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