Time for UBS to come clean on PNG loan

Swiss investment bank, UBS, needs to lift the transparency around how the sovereign lending sausage it sold to the PNG government was made, and what it earned from making it.

UBS can respond in one of two ways to the damning report by counsel assisting the Papua New Guinea royal commission into a $1.3 billion (US$960 million) loan in 2014 to finance the purchase of 10 percent of Oil Search.

It can maintain its current position of staying below the radar with minimal public disclosure of its position or it can reveal exactly how this complex financing sausage was made and how much it earned from it.

Counsel assisting the royal commission James Renwick says the commission should refer UBS to the Australian Securities and Investments Commission. 

Chanticleer believes the second of these choices is in the best interests of UBS, the PNG government and the cohort of developing countries using bankers to access capital markets.

Counsel assisting the royal commission, James Renwick, SC, says in his final submission to the royal commissioners, Salamo Injia and Margaret White, that UBS should be asked to repay the money it overcharged the PNG government.

Renwick has accepted evidence from consulting firm Brattle Group that UBS made $175 million (US$125 million) plus and interest from a series of loan transactions, or about $80 million (US$59 million) more than the “fair value”.

Renwick says the commission should refer UBS to the Australian Securities and Investments Commission to consider whether action should be taken against current or former staff.

UBS has refused to engage with the commission in a serious manner.

It refused to allow any of the estimated 30 people involved in the PNG loan to give evidence.

Documents should be made public

Its engagement has been limited to making two submissions to the royal commission – one in November last year that allegedly demolishes the Brattle Group report and a second in March this year.

These submissions include copies of the workbooks used by the UBS bankers involved in the transactions, including multiple spreadsheets showing the workings behind the bridge loan and two collar loans in 2014 and transactions undertaken in February 2016.

UBS should make these documents public as soon as possible and, if the documents do not reveal the amount it earned in fees, it should publish that information as well.

UBS says it only made about $28 million (US$20 million) from the PNG loan, but there are rumours it was closer to $100 million (US$73 million). The truth is probably somewhere between these two numbers.

A 10-year ban on UBS working in PNG would be a pyrrhic victory for the royal commission given that UBS must have long ago decided never to go back there.

The Brattle Group analysis of the UBS loan makes some extraordinarily naive theoretical assumptions, including the suggestion that UBS should have put its balance sheet behind a $1.3 billion (US$960 million) liability at a “risk-free” rate of return.

The Brattle Group believes UBS earned a return of more than four percent a year above the risk-free rate of return.

Also, the Brattle Group does not appear to have made any assessment of the market risks assumed by UBS in the hedging contracts put in place to protect the downside from a fall in the Oil Search share price.

Oil Search shares plunged in value over the life of the loan contracts because of a drop in the oil price. It is estimated the PNG government lost about $400 million (US$295 million) on margin calls.

The Brattle Group said the PNG government would have saved $80 million (US$59 million) if it had not used UBS and “had implemented a process that delivered a competitive financing solution”.

This statement appears to ignore the fact that when UBS did a collar loan with the PNG government in 2016, it did a simultaneous transaction with JPMorgan on the same terms as those applied to the PNG government.

The Brattle Group said this transaction was not relevant to its analysis.

Reveal communications

If UBS does decide to go down the road of transparency it should reveal the communications it had with regulators in Australia and Switzerland about five or six years ago triggered by a complaint about the PNG government loan.

Did the Swiss and Australian authorities rule out action against the bank?

UBS could also publish the report prepared by business advisory firm FTI Consulting, which was commissioned to analyse the Brattle Group report.

A 10-year ban on UBS working in PNG would be a pyrrhic victory for the royal commission given that UBS must have long ago decided never to go back there.

It is impossible to separate the UBS loan inquiry from the political machinations in PNG, which is holding an election in June.

The election will pit Prime Minister James Marape, who established the royal commission, against former prime minister Peter O’Neill, who features heavily in the UBS loan negotiations.

Renwick opened the royal commission proceedings by referring to a 332-page report compiled by the Ombudsman Commission of PNG in 2019 which found the UBS loan should have been sent to parliament for approval and may also have breached 15 laws.

But Renwick’s final submission did not come to the conclusion there had been illegal activity.

O’Neill does not come out of Renwick’s final submission well given that the counsel assisting has raised questions about his evidence. Nevertheless, there is no conclusion that there were breaches of PNG laws.

In hindsight, the complex UBS loan structure with its 137 million separate call options and 137 million separate put options was far too complex for a sovereign owner of resources seeking to increase its exposure to assets belonging to the PNG people…..PACNEWS