Assured Guaranty Corp. won’t seek to appeal a New York State court’s ruling that it must honor coverage of defaulted debt issued by the Xenia Rural Water District in Iowa.

The court ordered on June 15 that Assured would have to pony up the cash to reinsure the $83.3 million of bonds that were originally wrapped by defunct bond insurer CIFG Assurance NA.

The decision was open to appeal but Assured said it believes it is “in the best interests of our policyholders and Assured Guaranty to resolve our reinsurance dispute with CIFG and end our litigation,” spokesperson Ashweeta Durani said Wednesday morning.

The issue stemmed from a January 2009 agreement in which Assured agreed to reinsure more than $11 billion of investment-grade, CIFG-backed bonds.

Xenia’s water bonds carried the requisite BBB ratings from Standard & Poor’s, but the district had dipped into reserves as early as December 2007. That move, Assured argued — first in May 2010, and later in court — rendered the rating improper and the bonds ineligible for reinsurance.

The court rejected that argument and ordered Assured to re-compensate CIFG.

Mike Knopf, general counsel at CIFG, had no additional comment but said his company is happy the problem has found resolution.

The next step, according to Assured’s news release Wednesday, is for Assured to replace the CIFG guarantee with a wrap from Assured, a process known as novation.

“AGC will reinsure CIFG for 100% of the Xenia policy,” the Wednesday press release stated, “and CIFG and AGC will seek to novate the Xenia policy to AGC according to the terms and procedures adopted by CIFG and AGC with respect to the novation of other CIFG policies covered by the reinsurance agreement.”

The novation would take CIFG out of the equation entirely and should increase the wrapped bonds’ credit rating to reflect Assured Guaranty’s financial strength, currently rated Aa3 by Moody’s Investors Service and AA-plus by Standard & Poor’s.

Xenia’s rating was dropped to D, indicating default, after it failed to make coupon payments in June 2010. The junk rating was later withdrawn altogether.

However, the district was able to cover its most recent debt-service payment in June 2011, on its own. The full payments may indicate a willingness to prioritize debtholders even as Xenia’s financial position worsened last year, moving it closer to insolvency.

Assured Guaranty Corp. had $3.562 billion of claims-paying resources as of March 31, according to a first-quarter financial supplement. Its muni-only insurer sibling, Assured Guaranty Municipal Corp., held another $6.546 billion of claims-paying resources.

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