CHICAGO — Oral arguments are expected to take place early next year on CIFG Assurance North America Inc.'s request that a New York State court judge order Assured Guaranty Corp. to cover the policy on $83.3 million of Xenia Iowa Rural Water District bonds as part of its reinsurance agreement.
CIFG filed
A hearing could take place as soon as Feb. 3 before New York County Supreme Court Judge Barbara R. Kapnick. CIFG also has asked the court to dismiss a counterclaim Assured filed in October.
Assured formally decided to exclude the Xenia policy from its pact with CIFG in May. Assured agreed to reinsure $13 billion of CIFG-backed bonds — the bulk of CIFG's public-finance bond portfolio — in a reinsurance agreement executed in January 2009 after CIFG lost its top credit marks.
The dispute centers primarily on the question of whether the bonds were regarded as investment grade when the two companies struck the pact. Assured believes the Xenia policy does not qualify for coverage based on a provision in the reinsurance agreement that allows it to exclude any policy for a bond that was below investment grade as of Oct. 31, 2008.
The bonds were rated investment grade by Standard & Poor's at the time and internally by CIFG, but Assured disputes those ratings because Xenia had already begun to draw on its reserves.
"The court should not permit Assured to rewrite the parties' agreement after the fact, and after learning that a claim would be made, to avoid its clear contractual obligation to reinsure the Xenia Policy," CIFG wrote in its latest filings. "Assured's conduct is in bad faith, it directly contradicts the plain language of the reinsurance agreement, and it deprives CIFG and the Xenia bondholders of precisely the protection that Assured agreed to provide."
Assured seeks a declaratory judgment that the Xenia policy is not eligible for coverage in its counterclaim. Assured contends that CIFG failed to fully disclose the status of Xenia's bonds or misrepresented their status.
CIFG contends that Assured conducted extensive due diligence on each of the public finance policies submitted for reinsurance and cherry-picked those it wanted to reinsure. Assured accepted more than $75 million in premiums, including $265,000 for the Xenia policy.
CIFG and Assured reached a master agreement Oct. 31, 2008, outlining what policies would be reinsured as well as part of a future novation process that is still pending. The reinsurance agreement and a services agreement under which Assured would act as CIFG's agent were formally signed in January 2009.
Xenia began drawing on its reserves in December 2007 to make debt-service payments. Those draws were permitted under its bond covenants as long as the district adhered to a repayment schedule. Xenia disclosed the draws, its plans to replenish the fund, and its overall financial condition in 2007. Xenia's financial condition continued to deteriorate afterward. It filed a material event notice in March 2009 saying it had failed to make its required monthly payment in February to replenish the reserves following a December 2008 draw.
Standard & Poor's in August 2009 stripped the bonds of their investment-grade rating, lowering the credit to BB-plus from BBB due to the district's "deteriorating financial position." The agency said part of the reason it did not act sooner was because the bond resolution permitted the reserve draws.
At the time, Assured continued to act as CIFG's agent and gave no indication it planned to reverse its position on the policy, the lawsuit states. Standard & Poor's lowered Xenia's rating to D following the June default.
Facing insolvency as it struggles with $140 million of debts, the district is tentatively scheduled to release a restructuring plan at its Dec. 30 board meeting. It previously proposed a workout plan that relied on rate increases, the sale of assets, and $45.4 million in debt relief, but its lenders refused.
Some blame Xenia's rapid expansion for its fiscal crisis. The district, which has 9,000 members, took on debts to fund expansion of its water-delivery capacity north to the Minnesota border, and beginning in 2002 waste-treatment facilities to serve customers that have been slow in joining the district, contributing to operating deficits. It serves customers in 11 counties to the north and west of Des Moines. Under Iowa law, the district cannot file for bankruptcy.
