UBS loan interest above risk-free rate, says consulting firm

THE interest rate charged by the Union Bank of Switzerland (UBS) in 2014 on a loan to the Government was “above the risk-free rate”, according to a consulting firm.
The Brattle Group, a consulting firm which gave evidence through documents filed at the Commission of Inquiry into the UBS loan on Thursday, explained unusual features of the K3 billion transaction in 2014.
“The collar loan was structured so that UBS was not exposed to the State’s credit risk, not exposed to market risk which could have been hedged with the same collar loan UBS gave to the State.
“Yet, the interest rate UBS charged was above the risk-free rate. If the risk-free rate had been charged, the State’s interest payments would have been AU$56 million (K146.07mil) lower.
“UBS stated that the collar structure was nil-premium, yet our modelling suggests the structure was worth AU$25 million (K65.21mil) to UBS.”
A collar loan is defined as a financial strategy that limits the possible returns on a financial asset such as a stock.
Brattle said UBS lent AU$1.346 million (K3.51bil) to PNG but received AU$1,225million (K3.19bil).
“UBS expected to receive (increasing) interest payments on the bridge loan, plus a renewal fee after six month.”