Chicago and counterparty Wells Fargo haven't made a deal on three swaps that reached termination events through recent Chicago downgrades.

CHICAGO — Counterparty Wells Fargo has so far refused to lower the rating threshold for three Chicago swaps that reached termination events through recent downgrades, a market source familiar with negotiations said.

Though it hasn't changed the threshold, Wells Fargo has not demanded, by designating an early termination date, that the city make an estimated payment of $38 million based on a recent negative mark-to-market valuation.

The bank is now allowed to do so under the automatic termination event triggered by the city's recent downgrade from Moody's Investors Service but is giving the city time to resolve its swaps dilemma even as it's refused to lower the rating threshold as requested, the source said.

Sources cautioned that some agreement on revised swap terms could still be struck depending on ongoing negotiations between the city and bank.

Market sources said Chicago is planning to remarket a chunk of floating rate general obligation debt in a fixed-rate mode next week and it's expected to include paper tied to one of the Wells Fargo swaps in question. The city would not confirm the information.

Sources said the city would reoffer its series 2003B bonds which have four swaps attached, including one for a notional amount of $136 million with Wells Fargo that was negatively valued at $20.8 million.

All four swaps attached to the bonds carry an estimated negative valuation of $33 million. It's unclear how the reoffering would impact the swaps and whether the city would cancel them and make termination payments. The other three swaps that would be impacted have termination events at ratings lower than Baa2 and Baa3.

The Feb. 27 Moody's downgrade of the city's general obligation rating to Baa2 from Baa1 triggered termination events on four swaps, three with counterparty Wells Fargo and one with BMO Harris Bank.

BMO Harris Bank agreed to lower the rating threshold, allowing the city to avoid an estimated $20 million payment on a $66.8 million floating-to-fixed-rate swap that was part of a $223 million 2005 floating rate GO issue.

A city finance department spokeswoman and Wells Fargo declined to comment although some announcement on the upcoming financing and related swaps' status was expected at some point after the Tuesday mayoral election.

Mayor Rahm Emanuel defeated challenger Jesus "Chuy" Garcia in a runoff contest, ending a six-week battle in which the city's fiscal woes played a central role in the candidates' attacks on each other. The Moody's downgrade helped push the city's stressed financial condition to the forefront of discussion.

The city has sufficient liquidity to cover the swap payments and could also tap a credit line, several rating agencies said.

The city last year drew $36.3 million from its short-term borrowing program to cover termination payment on two of its swaps on a notional principal amount of $206 million from a 2002 issue. The city then planned to convert the paper to a fixed-rate structure, according to a past offering statement.

The other two Wells Fargo swaps for $100 million each are tied to a $200 million 2007 sale. They are floating-to-floating rate swaps each negatively valued at $8.7 million.

The city's 24 swaps tied to $2.4 billion of floating-rate general obligation and revenue-backed paper were almost $400 million underwater based on market valuations at the close of 2014.

The administration's financial team has tinkered with its derivative portfolio, tightening up mismatches in basis trades and maturity dates, winning changes in rating thresholds, and terminating its swap options and other swaps in deals converting the underlying debt to a fixed-rate structure. Since 2011, Chicago has terminated seven swaps or swap options on $1 billion of floating-rate debt and struck more favorable terms on termination triggers on 12 derivatives tied to $1.3 billion of debt since 2011.

Two additional swaps face termination triggers if the city's GO or sales tax rating is lowered one more notch by Moody's, including one tied to the 2003B series being reoffered. Combined, they are negatively valued at $33 million. The city bears no collateral posting obligations on any of its swaps.

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