CHICAGO — The Xenia Rural Water District in Iowa has finalized a long-sought restructuring plan with its bond insurer and USDA Rural Development on $125 million of debt that the struggling agency believes will drive its return to long-term fiscal solvency.
The district has long pressed for relief from the U.S. Department of Agriculture’s Rural Development Agency on $45 million in loans and Assured Guaranty Corp., which backed the district’s $84 million 2006 bond issue and has covered shortfalls in past debt service payments.
Neither creditor will forgive Xenia’s principal, which totals about $125 million, but each has agreed to ease the repayment terms that will lower monthly payments and give the agency breathing room.
As part of the restructuring and forbearance agreement with Assured, Xenia will fully repay Assured for claims made under the bond insurance policy, but the insurer will give the district more time to make good on those payments and will lower the interest rate on the claims. Assured also agreed to waive some expenses it had been seeking reimbursement for as long as no termination events are triggered.
The agreement will help Xenia eventually come into compliance with bond covenants. As part of the pact, Assured’s lawsuit against Xenia seeking a court receiver will be dismissed. The interest rate on the 2006 bonds and debt service remains unchanged.
“Restructuring Xenia’s debt has been a very long and difficult process. The restructuring is now complete,” Lovett said. “I think we were able to obtain a good outcome for Xenia’s customers given the district’s historic financial issues. Now we have to manage the district so it can comply with its new obligations.”
“The holders of the Xenia bonds continued to receive scheduled payments under the AGC municipal bond insurance policy throughout this process and now have the benefit of both a stronger underlying credit and our insurance,” Robert Tucker, a managing director in investor relations and corporate communications at Assured, said in a statement.
Under the restructuring, the USDA will extend the repayment term of Xenia’s $45 capital loan notes and lower its rate resulting in $20 million in savings over the next 40 years. The federal agency said it would continue its close oversight of the district’s operations and its finances.
The loans are on parity with the 2006 bonds and all remaining debts are subordinate. The Iowa Finance Authority has also agreed to restructure its outstanding $1.4 million loan to Xenia, which serves 9,400 customers in central and north central Iowa. Frustrated over the lack of movement on a restructuring after three years of talks, Assured last fall filed a complaint in Iowa courts asking for a receiver to oversee the district. It marked the latest development in Xenia’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 its last two payments due in December and the previous June. It depleted reserves and began tapping insurance coverage to cover shortages in 2010.
The district in 2011 unveiled a five-year restructuring to restore it to fiscal solvency, but it hinged on a debt restructuring. Officials have hiked rates in recent years, but feared steeper increases would drive away customers.
Assured covered about $2.44 million in debt service shortfalls on payments in 2010 and 2011. Assured argued in court filings that a receiver was 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 had warned that the district’s solvency — absent a debt restructuring — was in doubt with its liabilities exceeding assets. Assured had also questioned whether a restructuring could be accomplished given turnover at the district which had seen three general managers and three board chairs depart in recent years.
Standard & Poor’s dropped 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. Under Iowa 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 debt. After CIFG lost its top insurer ratings, it sought to reinsure its policies. It reached a master agreement with Assured in 2008 and Xenia was originally part of the pact. When it became clear the district was nearing default, Assured took the position that the bonds did not qualify as a covered policy. A New York State court judge ordered Assured to honor the coverage in 2011.