The Deal: Repsol Enlists Outside Arbitrator for YPF Payout Talks

NEW YORK ( TheStreet) -- Spanish oil producer Repsol SA has asked for an independent arbitrator to mediate compensation talks with the Argentine government because of concerns that an offer of $5 billion of government bonds could leave the Madrid-based company shortchanged.

The unnamed arbitrator, described as an international bank, was inserted into the talks by Repsol's board at the last minute on Wednesday as a condition of negotiating with the Argentine government over compensation for the seizure of Repsol's 51% stake in YPF SA  ( YPF) last year.

Repsol wants the bank to assess the liquidity and ascertain the real value of $5 billion of 10-year government bonds offered by Argentina. The dollar-denominated bonds will pay a coupon of about 8.5%, according to a source with knowledge of the situation.

"The value of the bonds is not their face value -- that is clear to everyone," said the source. "The Argentine government has been a recalcitrant partner in arriving at these negotiations and Repsol wants to make sure that everybody knows exactly the value of what is on the table."

Argentine officials on Monday accepted a proposal based on a Repsol heads of agreement that included the payment of $5 billion of cash as the basis for compensation talks. Repsol had tabled the offer months ago, according to the source, but it was accepted only after it was presented by Spanish government representatives and after Argentina had replaced the cash payment with the bonds.

Repsol's board late Wednesday approved entering talks with Argentina, despite concerns over the real value of the bonds on offer.

"With the aim of developing this heads of agreement, Repsol has decided to start in due course conversations between its teams and those of the Argentinian government, with the objective of finding a fair, effective and quick solution of the controversy," the company said. "The board of directors has approved the engagement of an international renowned investment bank to support Repsol's team and to facilitate a professional management of the process."

Repsol declined to name the bank.
 


Repsol's offer of a $5 billion settlement is just under half the $10.5 billion in cash that it is seeking in international courts from Argentina in compensation for the seizure of its stake in YPF in May 2012.

"The equity market is not generally assigning any value to YPF in its assessment of Repsol and so reaching an agreement for compensation would be positive," CreditSights analysts Andrew Moulder and Augustin Monnoyeur said.

Funds from a settlement will significantly increase Repsol's war chest, which will already expand with the sale of a 30% stake in Gas Natural SDG SA that is valued at about $7 billion. Repsol Chairman Antonio Brufau said in October that the Madrid-based company could spend as much as $10 billion to buy assets to boost its growth.

The Argentine government said earlier this week that any agreement will have to include an end to Repsol litigation linked to YPF. That would include claims against Chevron ( CVX), which is being sued by Repsol for signing a memorandum of understanding to partner with YPF in developing shale gas reserves at the Vaca Muerta, or Dead Cow, shale field in Argentina's Patagonia region.

Vaca Muerta is estimated to hold 308 trillion cubic feet of technically recoverable shale gas and 16 billion barrels of shale oil.

Shares in Repsol have gained 5% since Monday, the day before Argentina announced that talks between its representatives and Repsol had resulted in an outline compensation deal. Repsol shares traded Thursday morning at 19.36 euros ($26.34), up less than 1% on their Wednesday close.

YPF's U.S.-listed shares have gained just over 12% since Monday and closed Wednesday at $29.95, up 58 cents, or 2%, on their Wednesday close.

-- By Paul Whitfield in Paris.

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