Standard & Poor's Ratings Services today assigned the following ratings to various notes proposed under the multi-currency US$1 billion medium-term note (MTN) program of Syndicate Bank (BBB-/Stable/A-3):
'BBB-' rating to the senior unsecured notes;
'BB+' rating to the lower Tier II (LT2) subordinated notes; and
'BB' rating to the upper Tier II (UT2) subordinated and hybrid Tier I notes.
Accordingly, the bank's recently announced senior unsecured notes issuance under the MTN program is rated 'BBB-'.
The senior notes will constitute direct, unconditional, unsecured, and unsubordinated obligations of the bank, and will rank pari passu among themselves and equally with all other unsecured obligations. The LT2 and UT2 subordinated notes will constitute unsecured and subordinated obligations of the bank. Syndicate Bank's payment obligation toward the hybrid Tier I notes would be junior to the claims of senior and subordinated debt holders, excluding share holders (preference and equity).
We assigned the same rating to the program's senior unsecured debt as Standard & Poor's long-term counterparty credit rating on Syndicate Bank. The 'BB+' rating on the program's LT2 subordinated notes reflects the subordinate ranking of the notes to the bank's senior unsecured debt.
The differential between the 'BBB-' counterparty credit rating and the 'BB' rating on the UT2 and hybrid Tier I securities reflects the subordinated nature of the notes and the embedded interest deferral feature.
The interest deferral feature is linked to the bank complying with the capital to risk (weighted) assets ratio (CRAR) requirement and passing a profit test. The profit test is, in turn, linked to the balance in the profit and loss account in the reserves and surplus section of a bank's balance sheet. A net loss is defined as a negative balance in this account.
In case of both the UT2 and hybrid Tier I securities, the bank will require permission from the Reserve Bank of India to make interest payments on the notes if the bank meets the CRAR requirement but reports a net loss. On the other hand, skipping interest payments is mandatory for UT2 notes and is optional for hybrid Tier I notes if the bank doesn't meet the CRAR requirement and reports a net loss.
As at Dec 31, 2010, Syndicate Bank's CRAR was 11.74%, much more than the minimum requirement of 9%.
For investment grade issuers, Standard & Poor's recognizes equity capital credit in the bank's adjusted total equity for hybrid capital instruments with a maturity of at least 20 years. Hence, we will recognize equity capital credit of up to 33% of Syndicate Bank's adjusted common equity for the proposed hybrid Tier I notes. For UT2 subordinate notes, no capital credit will be recognized, if their tenor is less than 20 years or the step-up is not moderate.
RELATED CRITERIA AND RESEARCH
Criteria Assumptions Regarding Coupon Step-Ups In Equity Hybrids Issued By Banks And Insurers, published Sept. 16, 2009
Hybrid Capital Handbook: September 2008 Edition, published Sept. 15, 2008
About Standard & Poor’s
Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of credit ratings. With offices in 23 countries, Standard & Poor's is an important part of the world's financial infrastructure and has played a leading role for 150 years in providing investors with information and independent benchmarks for their investment and financial decisions. For more information, visit http://www.standardandpoors.com
