DALLAS — Seeking to forestall default on $127 million of stadium bonds, the Harris County Houston Sports Authority is challenging a UBS Investment Bank demand for a $26.75 million swap termination fee issued last week.

After months of discussion, the bank terminated the swap agreement on Series 2001C, D, and E bonds on Wednesday and said the termination fee was payable in two business days.

“This action preserves the legal rights of UBS under the transactions,” UBS spokeswoman Michelle Lee said in a prepared statement.

“We worked closely with the authority and the other interested parties for an extended period of time in an attempt to resolve this situation,” she said.

The authority, which is facing accelerated payments on the debt under a previous agreement with JPMorgan, said UBS provided insufficient notice of the termination.

The insurance firm that backs the bonds — National Public Finance Guarantee Corp., formerly MBIA Insurance Corp. — would be required to pay debt service on the bonds if hotel tax and other revenue prove insufficient.

To pay the swap termination fee, the authority would be required to more than halve its $51 million reserve fund, officials said.

That would leave the authority in an even weaker position to meet its accelerated debt service.

“Regardless of exactly how the swap termination payment commitment is met, the end result is a $26.75 million obligation payable by the authority, which will likely result in a decline in the balance of the additional required reserve,” according to Standard & Poor’s analysts James Breeding and Russell Bryce in a report Monday.

The authority may need $5 million from the reserves to make a May 10 debt payment, the rating agency said.

The authority’s debt-service schedule accelerated last year when the insured rating fell below requirements under a standby bond purchase agreement with underwriter JPMorgan.

Required to buy the bonds back under the agreement, JPMorgan was allowed to demand payback on the debt in five years instead of 23.

Annual debt service ballooned to $24 million.

The accelerated payment schedule began in November. At the same time, the Sports Authority was looking for a way to unravel the swap agreement with UBS. Overall debt service is expected to soar this year to $84 million from $62 million in 2009.

Given the latest developments, Standard & Poor’s on Monday affirmed its B underlying rating and negative outlook on the authority’s junior-lien Series 1998B, 1998C, 2001B, 2001C, 2001D, 2001E, and 2001H bonds, and the third-lien series 2004A-3 bonds.

Standard & Poor’s lowered the rating in 2010 due to acceleration of debt service on the Series 2001C, D, and E bonds and the likelihood for a decline in reserve levels due a potential collateral-posting requirement related to interest-rate swap agreements.

Moody’s Investors Service last August lowered the bonds to junk, with ratings of B2 on the junior-lien and B3 on the third-lien variable debt.

The authority’s fixed-rate senior-lien debt retains investment-grade ratings of Ba3 from Moody’s and BBB from Standard & Poor’s.

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