Freeport avoids €67 million currency penalty

The Malta Freeport’s chief executive Aaron Farrugia has told MaltaToday the corporation has managed to avoid a substantial €67 million penalty that would have been borne by taxpayers.

According to Farrugia, the global financial services firm UBS will not unwind a currency swap transaction it entered into in 2004 with the Freeport.

“A US dollar and euro deposit collateral has been agreed to by both parties and it is understood that this will be signed in the coming days. This means that UBS will not unwind the swap agreement with the consequential heavy losses,” Farrugia said.

The Freeport was facing an imminent bill of $58 million (€43 million) and a further $32 million (€23 million) in losses, after UBS warned it would pull the plug on a €200 million currency swap transaction.

The Malta Freeport is a government corporation that owns the land on which Malta Freeport Terminals operates.

In 2004, Malta Freeport took out a $250 million loan to develop the Freeport infrastructure.

Under the terms of the ‘bullet loan’, the Freeport would pay 7.25% interest every year until 2028, and then pay the $250 million capital in one fell swoop in 2028.

Since the Freeport books its accounts in dollars, it entered into a swap transaction with UBS to buy its dollar currency. The swap meant that the Freeport would pay UBS €14 million every year in exchange for $18 million, which the Freeport would use to pay its interest on the bullet loan. And in 2028, the Freeport would pay UBS €200 million in exchange for $250 million for its final payment on the bullet loan.

But in 2013, UBS informed Malta Freeport that due to EU demands asking banks to increase their capital reserves, they will be changing their strategic direction and no longer enter into so called “derivative transactions”.

Under the terms of the agreement between Malta Freeport and UBS, both parties had the option to terminate this swap either in January 2014 or in January 2024.

But the termination would have come at a cost of $58 million for the Freeport and another $14 million it has accumulated since 2004 on exchange rate losses. The Maltese government guarantees up to €32 million on currency losses – which means it is the taxpayer who funds these losses.

The fluctuations in the dollar and euro exchange rates have been so violent that the Freeport lost $5.1 million in interest on the swap agreement in 2012, when the year before it actually made a gain of $8.4 million and another $21 million in 2010.

This shows how volatile markets for foreign exchange swaps are.