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what are disadvantage of FCCB

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 asked

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

Hi all, **The disadvantages of FCCB are** :- 1) Companies that borrow funds via FCCB in foreign currency shall have to make the repayment in foreign currency on maturity of the bond. The exchange rate prevailing on the day of maturity, if has moved considerably as compared to the rate prevailing on the day of the borrowing, may result in losses for the company. The exchange rate in a volatile scenario may cause cash outflows on repayment to be much higher than the saving in the interest rate. Thus a cost saving motive may be totally taken off,if home currency depreciates beyond the interest rate saving. 2) If the stock prices do not appreciate and instead depreciate, the bond holders might refrain from converting bonds to equity and the money might have to be repaid by the issuer on bond maturity. Hence if the company is going through a bad phase, the stocks may not do well and therefore may not be converted to equity by FCCB holders. In such a scenario, the already troubled company may face additional burden of interest and principal repayment to be made to the bond holders. Hence, an FCCB may be suitable in a bull market scenario and may be affected by bear market phases. 3) Issuing bonds in foreign currency in a foreign market may always be exposed to legal, political and economic risk of that foreign country. One may have much better idea about the macro-economic conditions of the home country compared to those in a foreign country. 4) FCCBs continue to remain on the books of accounts as a debt till the time it is converted and continues to hamper the debt to equity ratio and other debt and interest service coverage ratios.

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