by Government Insider
UBS Loan has been in the center of the discussion in Papua New Guinea politics and even everyday discussion since the O’Neil-Dion Government took it out in March 2014.
In my previous article on IPIC and the reason for USB Loan, I have given an account on why it as necessary for another loan to be taken in order for Papua New Guinea to safeguard its interest with Oil Search.
The USB Loan has been misunderstood by a lot of commentators and even social media has taken it into a level where it has been dissected incorrectly and is causing uncertainty to the readers. This article is to clear the muddy waters for all and hopefully once and for all.
The USB Loan is NOT just like another ordinary loan. It is a financial package put together to achieve the objectives of the Government of the day. The financial package of AUD1.235 Billon comprises two different facilities;
- AUD $ 900.4 million COLLAR LOAN at an interest of 4.95% per annum
- AUD $ 335 million BRIDGING LOAN facility at an interest of 5.50% per annum
The Collar Loan is collateralized by selling the 137 million (137, 012, 250) Oil Search shares at the maturity loan for $.7.40 per share even if the price falls below that rate. The maturity date for the Collar Loan is May 2016. This Collar Loan is issued to UBS and held in trust for PNG Government.
The Bridge Loan is to finance the State’s DIRECT shareholding of 12 million (12, 377,994) Oil Search shares, which is under the PNG Government’s own named. This is a straight forward loan facility which the PNG Government
The Collar Loan facility is the more complicated of the to facilities and I would like to spend some time to explain it.
According to Investopedia is “A collar is a protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option. ………
The purchase of out-of-the money put option is what protects the underlying shares from a large downward move and locks in the profit. The price paid to buy the puts is lowered by amount of premium that is collect by selling the out of the money call. The ultimate goal of this position is that the underlying stock continues to rise until the written strike is reached.
Suppose an options trader is holding 100 shares of the stock XYZ currently trading at K48 in June. He decides to establish a collar by writing a JUL 50 covered call for K2 while simultaneously purchases a JUL 45 put for K1.
Since he pays K4800 for the 100 shares of XYZ, another K100 for the put but receives K200 for selling the call option, his total investment is K4700.
On expiration date, the stock had rallied by 5 points to K53. Since the striking price of $50 for the call option is lower than the trading price of the stock, the call is assigned and the trader sells the shares for K5000, resulting in a K300 profit (K5000 minus K4700 original investment).
However, what happens should the stock price had gone down 5 points to K43 instead? Let’s take a look.
At K43, the call writer would have had incurred a paper loss of K500 for holding the 100 shares of XYZ but because of the JUL 45 protective put, he is able to sell his shares for K4500 instead of K4300. Thus, his net loss is limited to only K200 (K4500 minus K4700 original investment).
Had the stock price remain stable at K48 at expiration, he will still net a paper gain of K100 since he only paid a total of K4700 to acquire K4800 worth of stock.
In PNG Government Scenario:
UBS who is the Option Trader is holding 137 million shares of Oil Search for PNG Government. They have decided to write a COLLAR for MAY 2016 purchase at $8.20 per share. They purchased a PUT May 2016 at $7.40 per share.
During maturity in May 2016, the Oil Search share price was below $7.40, however, the PNG Government did not which to sell its shares and therefore, it made a “MARGINAL CALL.” Since the trading is a LONG collar, the maturity is every 2 years. Any gains from this Option trading is used to repay the “Bridge Loan Facility”
In a nutshell, the Collar Loan Facility is used as a money-generating stream to repay the Bridge Loan Facility. It all boils down to Oil Search share pricing and the purchase of a stake in Papua LNG paints a positive picture for Oil Search.