Simple Facts on the UBS Loan Arrangement

by DAVID LEPI

Whilst the recent Oil Search share offloading by the government is attracting a vast array of discussions that are now gaining momentum by the day and the Prime Minister said to make public the facts surrounding the share sales perhaps it might be good we go back where all things started and take a look at the chronology of events.

IPIC Loan

It started in 2009 from what is known as the largest investment decision ever made by any PNG government. The Somare led government was investing in the 11 billion Exon-Mobil led LNG project in taking up equity of 16.8 percent by borrowing 1.68 billion Australian dollars from a little-known fund called International Petroleum Investment Company (IPIC) in the Middle Eastern oil state of Abu Dhabi. This took place at a time when the economy was feeling the global credit crunch and a dramatic drop in commodities prices that had made finding funds for new resource projects very uncertain. Arthur Somare, the then state enterprise minister, raised $1.68 billion by selling IPIC a bond against its Oil Search stake, which was to mature in five years.

Effectively, what the government did was forward sell all its 17.5 percent shares it had with Oil Search at the price of A$8.55 per share- exchangeable bonds- a far higher price than the share price at the time and some eight times the price in 2002 when the government first acquired the shares. Even the price was higher IPIC was willing to pay because it was confident that Oil Search shares would steadily increase over time- which it did. In fact, over the five years, Oil Search’s share price had increased by nearly 80% making it one of the best performers in the Australian stock market.

During the foreign exchange of the loan, a cool K900 million lost along the way. This was because the entire loan money was converted to one currency without any currency hedging in place, a normal precaution for such large financial transactions.

Another blunder surrounding the loan that was to haunt the PNG government and its people is the short leash arrangement of the loan repayment for only 5 years. In other words, we need to repay this very large loan before we have an income stream from the project for which the loan was taken out. It would have been more sensible to take out the loan for a longer period, which would have enabled the loan repayments to have been made after the project was in full production.

IPIC Loan Maturity

Moving forward five years, our fears were confirmed when PNG couldn’t repay the IPIC loan and in March 2014 the exchangeable bonds matured and were exchanged into the Oil Search shares in line with the original agreement. This happened just months away for the PNG LNG project started generating large cash flows. The O’Neill-led government, unfortunately, had to inherit the blunder and its attempts to buy back the shares from IPIC were unsuccessful. This left PNG without a direct stake in Oil Search- in a company that used to represent a significant investment for PNG with a proven record of delivering high returns to shareholders- for the first time

Buying Oil Search Shares and UBS Loan

A core strategy of the O'Neill government was to grow the state-owned enterprise sector -- especially in the resources and energy sectors -- on similar lines to some of our Asian neighbors including Malaysia, Singapore, and Indonesia. Oil Search always proved to be a viable investment destination given its proven track record, long association with the past PNG governments and its people and shared objectives in developing the country’s abundant gas resources.

Oil Search again presented an opportunity when the petroleum company was assessing funding alternatives to finance its PLR 15 acquisition. The government approached Oil Search with an offer to fund 10% placement and Oil Search accepted. And that’s where O’Neill and company had to borrow A$1.2 billion (PGK 3 billion) from the Union Bank of Switzerland (UBS) mortgaging expected revenue from the promising PNG LNG.

Political opponents claim that the UBS deal failed to get parliamentary approval and that led to Prime Minister Peter O'Neill being referred to a leadership tribunal. Whilst these allegations are only for failing to comply with administrative and financial processes including the normal borrowing process on the investment side the decision by the government to diversify its investments in buying shares in not only a major player in the oil and gas industry but a very strong performing company with a clear record is very prudent and was in the best interest for Papua New Guinea.

Furthermore, the Government’s decision to buy shares in Oil Search boosted investor confidence in PNG and at the same time allowing PNG to partake in some of the country’s major businesses.

Conclusion

We must appreciate the fact the UBS loan of A$1.239 billion comprises two components – a bridge loan of A$335 million with an interest rate of 5.5 percent per annum and a collar loan of A$904 million at an interest rate of 4.95 percent. It is scrutinized by the value of the Oil Search shares itself within a call-and-put structure. And the collar maturity was extended to 2019.

As the Oil Search shares are now falling in the unpredictable share markets the wise thing any government would have done is to sell its 10% shares in Oil Search and pay off the UBS debt before the share values further decline. In September 2017 the government sold its shares with Oil Search shares extinguishing the debt with the UBS loan.

There is now no further obligation on the part of the state whilst a residual value of K120 million was made from the sales.

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