LEAK CONFIRMS PNG ALREADY IN DEFAULT TO USBS LOAN REPAYMENT





Mr Riga A. Lua, OBE
Chief Ombudsman
Ombudsman Commission of PNG
Ground Floor, Deloitte Tower
P 0 Box 1831
Port Moresby 131, NCD


Dear Chief Ombudsman

INTEREST PAYMENT OBLIGATION OF STATE- USBS LOAN


I refer to your letter of 15 May 2014 in response to my request for your approval to pay the interest
of the UBS Loan. which was undertaken to purchase 10.01% of Oil Search Limited (OSH).

In such letter you stated that you received my correspondence dated 14 May 2014 and noted the contents, particularly the reference to both the National Court's and the State's interpretation of the current effect of the directives. I note that you stated that you would analyse my request and respond to me in the next couple of days.

I am required to inform you that time is of the essence and the State must act and I seek your understanding in this regard.

The letter I sent concerned the payment obligations of the State under a current valid loan agreement, specifically to pay interest according to the timelines provided in the agreement. The Ombudsman Commission (the Commission) is in possession of ·-.all relevant agreement documentation.

To further assist the Commission, I pointed out the binding nature of the obligations and the serious ramifications that would occur should the State not make interest payments as and when they fall due.

I reiterate that the OSH Shareholding is an extremely valuable asset of the State. Based on the updated closing Australian Stock Exchange trading price for: Oil Search Limited on 15 May 2014, of $9.18 per share, the States OSH Shareholding has a value of $1.43 billion (Australian dollars), which is the Kina equivalent of K3.64 billion. That equates to a gain to Papua New Guinea of approximately K800 Million kina since purchase of each share for $8.20 on 12 March 2014.

Under the UBS Loan, the State is required to make periodic interest payments. If the State is
prevented from making those payments, the State will be in default, and UBS will have the right to
commence enforcement processes without further notification to the State.


Currently, the State is on notice that should the interest payment not reach the requisite bank
account of UBS by 5pm this afternoon (16 May 2014), the shares will automatically be sold. This
is the effect of the collar loan- if the interest is not paid, the shares will be liquidated.


This enforcement process will result in the loss by the State of its OSH Shareholding and
furthermore, lead to substantial financial and strategic disadvantages to the State because it would
lose the opportunity to benefit from holding those shares. This is not the objective of the State and
I believe this is also not the intention of the Commission.

I take this opportunity to respectfully remind the Commission that a default under the UBS Loan is also highly likely to have much broader adverse ramifications for the State and its people. Loans to the State from multilateral institutions, such as the World Bank and ADB, typically include cross default provisions.

A default under the UBS Loan is likely to trigger cross defaults under such other loan arrangements which would clearly have significant adverse implications for the economic development of the State and its people, and would no doubt adversely affect the sovereign credit ratings of the State. An associated perception by international capital markets of an increase in sovereign risk would likely have significant adverse implications for the value of the Kina, and the ability and cost of the State and its subsidiaries to borrow from banks and international investors. It is the State's position that there is no other option than to ensure that the interest payment arrives at UBS by 5pm on 16 May 2014.

I will pass on the details of such payment to the Commission as soon as it becomes available so it can be fed into the Commission's investigation into the matter which is no doubt still continuing. I therefore kindly request your understanding in this matter.

Yours faithfully


DAIRI VELE
A/Secretary For Treasury



COPY OF LEAK HERE

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