S&P Drops Iowa Water District to Deeper Junk

CHICAGO — Standard & Poor’s Thursday downgraded the already junk-bond rated Xenia Rural Water District in Iowa to D from BB after it failed to make its full June debt-service payment on $83 million of outstanding bonds from a 2006 issue.

The district drained its debt service reserve to make all but $69,000 of the $1.88 million interest payment owed in June. A request to cover the shortfall has been submitted to CIFG Assurance North America Inc., which insures the bonds.

The district has drawn on the reserve to cover debt service payments since December 2008, but exhausted it with the most recent payment.

“Given the current financial situation, we understand that the district is looking at various options to address budget situations,” Standard & Poor’s wrote.

Facing insolvency as it struggles with $140 million of debt, the district is pushing a workout plan that relies on a rate increase and the sale of assets to raise revenue and provide $45.4 million in debt relief. The district approved a 22% rate increase in March and has a tentative offer of $110.5 million from the Des Moines Water Works to buy its assets.

However, the plan hinges on the more uncertain gamble that its two largest lenders — the U.S. Department of Agriculture’s Rural Development Agency and the insurer of its 2006 municipal bond issue — will together forgive $45 million of debt.

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