The Swiss Financial Market Supervisory Authority (FINMA) has confirmed it is “familiar” with the deal and said it is in “in contact with the bank”.

UBS declined to comment.

Legitimacy questioned

The renewed interest in the UBS loan followed an investigation last month by Karin Wenger, a journalist with Swiss Public Radio.

Paul Barker, director of the Institute of National Affairs in Port Moresby, said the deal “totally lacked transparency”.

“There’s a very big question mark over its legitimacy, as a loan of that size should have been approved by parliament,” he said.

FINMA’s inquiries come just days after UBS was fined a record €3.7 billion for tax fraud in France, while the broader investment banking community is facing greater scrutiny after Goldman Sachs’ involvement in the 1MDB loan scandal in Malaysia.

The UBS loan to PNG was controversial from the moment it became public in late February 2014.

Not only was the deal highly complex and potentially unconstitutional because it was not approved by parliament, it was at the high-risk end of the investment spectrum.

PNG borrowed $1.24 billion to purchase a 10 per cent stake in Oil Search, which was developing natural gas assets in the PNG Highlands. The PNG government’s stake then allowed Oil Search to purchase a 23 per cent strategic interest in the rival Elk-Antelope gasfields, also in the highlands.

It was billed as a strategic win for Oil Search, while at the same time giving PNG a stake in the company Prime Minister O’Neill regarded as the country’s national champion. The stake also acted as a “blocking stake” to protect Oil Search from a takeover.

UBS’ role was finding a way for the cash-strapped PNG government to finance its stake in Oil Search, a priority for Mr O’Neill since he came to power in 2012.

Loan documents and an independent report that was commissioned by a PNG government entity show UBS charged PNG interest rates of 8.2 to 10.16 per cent during the first nine months of the $330 million “bridging loan”.

The documents show PNG pre-paid $107 million in interest and incurred fees of $10.9 million from UBS and a further $1.6 million from professional service firms Ashurst, Norton Rose and KPMG.

The main $905 million loan was underpinned by a complex “cap and collar” scheme designed to limit any losses if the share price fell, while also capping gains.

The profits from managing this position would have also been “significant”, according to traders familiar with how such schemes work, but they said it was impossible to calculate any potential gains without looking at the share register.

At the 2014 Christmas party two sources recall UBS’ Australian bankers boasting about the firm’s success that year, largely due to profits made on the PNG loan.

Oil price factor

Another investment banker who examined the loan documents said the interest rate charged by UBS was “on the high side” given it had security over the shares, the dividend income generated by Oil Search and the right to any revenue the government received from its 16 per cent holding in the PNG LNG project.

The PNG government has never disclosed its losses on the deal but opposition politicians, including former Prime Minister Sir Mekere Morauta, have put the figure at 1 billion kina ($420 million).

The losses were largely the result of a dramatic fall in the oil price, from over $US100 a barrel in March 2014 to below $US35 by February 2016.

Prime Minister O’Neill claimed PNG made a 100 million Kina profit on the deal, although this appeared to be a refund on interest paid in advance.

PNG was forced to sell the last of its shares in September 2017 at $6.70 after buying in at $8.20.

Mr O’Neill has said the state’s investment in Oil Search was “the right decision at the time” but was undermined by “unforeseen global factors and baseless political opposition”. Soon after PNG purchased its shares the oil price fell sharply.

The independent report commissioned by the government entity found there was “no evidence to suggest that UBS were acting improperly in their role as adviser and arranger for the State”.

The potential issue for UBS is not so much the losses incurred by PNG but the process under which the deal was approved by Mr O’Neill’s government.

Legal advice provided by State Solicitor Daniel Rolpagarea indicated the loans needed parliamentary approval, which was never sought.

Treasurer Don Polye also refused to sign off on the deal citing the lack of due diligence and resigned in protest. The loan would later be investigated by the PNG ombudsman, who sought to freeze the deal, but was told the transaction had settled. The ombudsman sought to determine if the Prime Minister had acted improperly, but efforts to take the matter further were quashed by the Supreme Court.

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