Mumbai, June 18: Global rating agency Standard & Poor’s today assigned a BB rating to the State Bank of India’s $225 million (Rs 900 crore) hybrid Tier 1 perpetual notes issue.

The rating indicates speculative grade, or below investment grade. S&P said this was because the terms of the issue had imposed restrictions on interest payments.

Besides, claims of the investors to this paper are below that of subordinated debt holders. They are, however, higher, than that of preference and equity shareholders. This means the bank will first pay off the subordinated debt holders followed by the investors to the perpetual notes and preference and equity shareholders.

The restrictions on interest payments are linked to the bank’s compliance with the regulatory capital adequacy ratio. If the ratio is below the minimum regulatory requirement stipulated by the Reserve Bank of India, it is mandatory for the bank to skip interest payments. As of March 31, 2007, the SBI’s regulatory capital adequacy ratio stood at 12.34 per cent compared with the RBI’s requirement of 9 per cent.

S&P said the central bank’s permission on interest payments was necessary even if the ratio confirmed to the norms. This will happen if the bank reports a net loss.

It said that such perpetual notes were not included in its measure of core capital. “This is in line with Standard & Poor’s treatment of other forms of hybrid capital, including preference shares, in its analysis of capital.”

The issue is part of the medium term note programme of the bank under which it plans to raise $5 billion. The notes have a call option 10 years from the date of the issue.

Earlier this year, the SBI issued perpetual bonds to raise $400 million. With many other banks also raising funds through this route, analysts say the country’s largest bank may have to come up with attractive yields for prospective investors.

In March this year, the SBI had announced that it was raising the size of its medium term note programme to $5 billion from $2 billion.

The purpose of the issue is to fund the bank’s overseas expansion plans and meet higher requirements of capital.

When the programme was launched in November 2004, the size of the issue was $1 billion. The plan was to raise the money in two tranches of $500 million each.

The issue size was raised to $2 billion in October 2006 and then to $5 billion.