CHICAGO — Frustrated over a lack of movement on a proposed restructuring, Assured Guaranty Corp. is asking an Iowa court to name a receiver to oversee the Xenia Rural Water District which has struggled to repay $81 million of outstanding revenue bonds insured by the company.
Assured's request — which Xenia is fighting — is the latest development in the district's battle to remain afloat. The district's water revenues had long fell short of what was needed to cover debt service on the 2006 bonds although it did make a June payment and expects to cover its Dec. 1 payment. It depleted reserves and began tapping insurance coverage to cover shortages in 2010.
The district last year unveiled a five-year restructuring to restore it to fiscal solvency, but it hinged on the willingness of some creditors to forgive portions of their debt holdings. While making bondholders whole, it did ask the insurer to forgive some payments already made along with some fees.
Xenia also needs the U.S. Department of Agriculture's Rural Development Agency to refinance its existing loans at a lower rate. The district has defaulted on its USDA loans, which total $45.6 million. The loans are on parity with the 2006 bonds and all remaining debts are subordinate.
Assured initiated its request for the appointment of a receiver in July in the Dallas County District Court and in more recent filings laid out its case. Xenia is fighting Assured's move and fears it's aimed at taking over the district and installing its own governance that would in turn raise rates. District officials have hiked rates in recent years and are considering a 7% increase next year, but fear steeper increases will drive away customers.
An attorney representing Xenia — Wade Hauser of Ahlers & Cooney PC — declined to comment on Assured's filings.
Assured denies it wants to seize control of the district and argues it's simply pursing its options under Iowa law and that the appointed trustee would have control. Assured has covered about $2.44 million in debt service shortfalls on payments in 2010 and 2011. "For more than three years, AGC has worked conscientiously with Xenia to develop a restructuring plan that would allow Xenia to meet its obligations to its creditors. Unfortunately, due to the lack of significant progress towards achieving a resolution that restores Xenia's fiscal solvency and respects the rights of its creditors, AGC must take this action at this time," the company said.
Sources attributed the stalled restructuring plan to the USDA's failure so far to sign off on the refinancing. "USDA Rural Development has been in consultation with Xenia regarding its loans. Our focus is on finding a solution that ensures continued service to Xenia's customers and repayment of taxpayer dollars to the maximum extent possible," spokesman Darin Leach said Friday.
In its October filing, Assured argues that a receiver is warranted because of Xenia's default on its bond payments, failure to replenish reserves, and refusal to raise rates to a level needed to cover debt service.
Both the district's past leaders and the state auditor have warned that the district's solvency — absent a debt restructuring — is in doubt. The district's current liabilities exceed assets by $2.4 million.
The district made its $1.8 million June 1 debt service payment and its $1 million payment owed to the USDA from income and expects to fully cover its $3.16 million December debt service payment and $1.8 million USDA payment, sources said.
It's unclear whether future payments can be made without help from Assured and Xenia is not expected in the near-term to reimburse Assured for past payments or cover insurer expenses it owes. The district also remains in default of its bond resolution for failing to replenish reserves or make sinking fund payments.
Assured's filing also raises doubts over the district's ability to achieve a restructuring given the failed negotiations so far. "There are significant uncertainties regarding the district's ability to continue its operations and to satisfy its obligations to its creditors on a timely basis," Assured argued.
Assured puts a good share of the blame on steady turnover at the district which has seen three general managers and three board chairs depart in recent years. It is currently seeking a general manager.
Assured also seeks to sway the court in its favor by stressing the potential impact on general investor sentiment, saying that a failure to force Xenia to meet its contractual obligations "will result in uncertainties and market disruptions" hurting market access for similar municipal issuers.
Assured is seeking the appointment of a receiver under a 1972 state law that permits such a remedy in the case of a revenue bond default. Xenia's lawyer said he knows of no other case in which the law has been applied, so rulings in the pending case could set a precedent. "There's never been a case so there is no precedent," Hauser said.
Assured's filings acknowledged that courts have sometimes required a formal finding of insolvency before imposing a receiver but it argues that the Iowa statute requires no such finding. It also stresses the district's own past admissions of its insolvency.
Standard & Poor's downgraded the credit to D in 2010. Some blame Xenia's rapid expansion for its fiscal crisis. It took on debt to fund expansion of its water-delivery capacity north to the Minnesota border, and beginning in 2002 to build waste-treatment facilities serving customers that have been slow to join the district, contributing to operating deficits. The district serves 9,400 customers. Under state law, the district cannot file for bankruptcy.
The Xenia bonds were also the subject of a dispute between Assured and CIFG Assurance North America Inc. which initially insured the bonds. After CIFG lost its top insurer ratings, it sought to reinsure its policies. It reached a master agreement with in 2008 with Assured and Xenia was originally part of the pact, but when it became clear the district was nearing default, Assured took the position that the bonds did not qualify as a covered policy. CIFG filed a lawsuit in an effort to force Assured to honor the agreement. A New York State court judge ordered Assured to honor the coverage last year and Assured did not appeal.
No court date has been set on Assured's request.