Freeport seeking ‘mutually beneficial outcome’ on surprise €67 million bill

The government and the Malta Freeport Corporation are discussing how to dodge an unexpected €67 million 'hole' after global financial services firm UBS pulled the plug on a sway currency transaction.

Freeport officials were taken by surprise with MaltaToday's revelation last week on Sunday that UBS will be terminating a swap transaction for a $250 million loan (€200 million), which will leave the Freeport with an imminent bill of $58 million (€43 million) from UBS.

Earlier this week, a Freeport official commented that news of the cancellation of the UBS swap transaction "could have damaged the Freeport's interests with credit rating agencies".

A government source has told MaltaToday that the calculations provided by UBS still need to be verified. "But UBS has the clear right to terminate the swap transaction, and it will be difficult for the Freeport to negotiate a different price. Even if the Freeport assigns the swap transaction to a third party bank, the terms would have to be negotiated among UBS, the Freeport and the bank.

"We could ask UBS whether they are ready to reconsider the decision to terminate, but it seems unlikely that UBS is prepared to continue except on terms that would be less favourable than the present ones."

In an official comment from the parliamentary secretary for competitiveness and economic growth, run by Edward Zammit-Lewis, the government said it was discussing the matter with the appropriate stakeholders "with a view to arriving at a mutually-beneficial outcome".

"Discussions on this commercially-sensitive matter are at an initial stage. Nothing has been decided as yet."

As things stand, the Freeport stands to lose $58 million bill and a further $32 million that the government already guarantees on losses from the fluctuations between the dollar and the euro, which have been accumulating since 2004.

UBS's decision to terminate the swap transaction came just one month after the Freeport's new board of directors posted their 2012 financials, in which it was clear that they did not foresee the possible termination.

UBS is terminating the transaction because of a change in strategic direction after the EU demanded banks to increase their capital reserves.

The swap transaction sees the Freeport paying UBS a sum in euros, for its dollar equivalent, so it pays annual interest in dollars to another bank for a $250 million loan it took out in 2004.

The 'bullet loan' was used for development of the freeport and purchase of machinery, and the Freeport has to pay a 7.25% interest every year until its termination in 2028, and finally pay the $250 million capital in one fell swoop in the last year.

Since the government pays a subvention to the Freeport in euros, in 2004 the corporation entered into the swap transaction with UBS: under its terms, the Freeport had to pay UBS €14 million every year in return for its equivalent in dollar at $18 million, which the Freeport would then use to pay the interest on the bullet loan. Finally in 2028, the Freeport would pay UBS €200 million in return for $250 million, which would go towards the repayment of the original capital loaned.

By hedging against the US dollar, the Freeport was hoping it could make purported currency savings of €666,000 (Lm286,000) in annual interest payments.

But the fluctuations in the USD-euro exchange rate have been so unfavourable to the Freeport, that the corporation has since 2004 already lost $14 million on currency losses alone. The government guarantees a total of $32 million on these interest losses.

This brings the total losses on the currency rate swap to $90 million (€67 million).

An alternative the Freeport has is to assign the swap transaction to a third party, but this must take place in agreement with UBS and might be difficult to achieve.