BOIs proposed Hybrid Tier I notes given 'BB' rating

Mumbai, Mar 26: Standard&Poor's Ratings Services said today it assigned its 'BB' issue rating to the proposed Hybrid Tier I notes to be issued by India's Bank of India (BOI) acting through its Jersey branch.

These notes are being issued under the bank's USD 1 billion medium -term notes (MTN) program. The proposed Hybrid Tier I notes are in the form of perpetual non-cumulative subordinated debt securities with a call option 10 years from the date of issue. The proceeds will be used to meet the bank's general funding requirements, subject to regulatory approvals, said a bank's release issued here.

The rating differential between the senior unsecured notes and the proposed Hybrid Tier I notes reflects the junior subordinated nature and the interest deferral feature embedded in the latter. The interest deferral feature of the proposed Hybrid Tier I notes is linked to the compliance with the regulatory capital adequacy ratio (RCAR) and a profit test. The profit test is, in turn, linked to the ''balance in profit and loss account,'' which is a component of the reserves and surplus on a bank's balance sheet.

A negative balance in this account is defined as a ''net loss''.

If BOI is in compliance with the RCAR but reports a ''net loss'', it is required to seek the Reserve Bank of India's permission before it can make interest payments on the notes. If BOI is not in compliance with the RCAR, it will not be obliged to make interest payments. As of December 31, BoI's RCAR stood at 11.76 per cent compared with the minimum regulatory requirement of 9 per cent.

The proposed Hybrid Tier I notes are not included in Standard &Poor's measure of core capital, which is adjusted common equity.

This is in line with Standard&Poor's treatment of other forms of hybrid capital, including preference shares, in its analysis of capital. Standard&Poor's will, however, recognize equity capital credit in the bank's adjusted total equity for hybrid capital issue with maturity of at least 20 years. Hence, Standard&Poor's will recognize equity capital credit of up to 25% (intermediate-strong equity credit) of the bank's quantum of adjusted total equity for the proposed Hybrid Tier I notes.

UNI