CHICAGO — Iowa’s Xenia Rural Water District has proposed a five-year restructuring plan that calls for investors who hold $83 million of revenue bonds to receive full payment. However, it hinges on the willingness of other creditors to “share in the pain” of restoring the district to fiscal solvency by forgiving some debt, said interim executive director Marc DeLong.

Under the proposal, bondholders would continue to receive their principal and interest as scheduled. District revenues fell short of meeting the June and December 2010 debt service payments owed on its 2006 water revenue bonds but CIFG Assurance North America Inc. covered the shortfalls.

The plan asks CIFG to forgo any effort to recoup the $1.33 million it provided to fully meet the scheduled payments. DeLong said the district expects it won’t be able to fully cover the upcoming June payment, which would prompt the trustee to ask the insurer to cover the remainder. The workout proposal also asks Assured Guaranty, which is acting as CIFG’s agent under a 2009 reinsurance agreement, to forgive $650,000 in legal fees.

To pare down its other debts, Xenia is asking the U.S. Department of Agriculture’s Rural Development Agency to refinance its existing loans at a lower rate of 2.875%. 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.

The plan asks the Iowa Finance Authority to reamortize existing loans of $1.4 million over a 15-year period with no interest and requests that Bank of America accept $1.6 million, which represents $19.73 cents on the dollar, for $8.1 million of notes. Bank of America last September filed a lawsuit against the district demanding repayment.

The plan is far from final and subject to the approval of all creditors and some customers.

“It’s a challenging set of circumstances and it’s a work in progress that asks the parties to share in the pain,” DeLong said. “It’s the best plan we could come up for the parties that have an interest in returning Xenia to a going concern.”

The board approved the workout plan last week and held a public discussion Tuesday.

The USDA in Iowa and CIFG declined to comment on the proposal and Assured did not provide a comment by press time. Bank of America did not comment directly on the Xenia plan, but spokeswoman Diane Wagner said in a statement: “We have been working with the company and continue to work with the company to help them resolve their financial issues.”

The plan calls for the replenishment of reserves by 2015 on the USDA loans and the 2006 bonds to bring the district back into compliance with loan agreements and bond documents. The district would contribute $478,000 annually between 2011 and 2015 to replenish the USDA reserves and $1 million annually on the 2006 bonds.

The water district proposes to sell off a series of assets to cover the costs of the Bank of America settlement, to replenish reserves, and finance $12 million in capital improvements characterized as critical. The district would sell for about $2.35 million a wastewater treatment plant in Worth County that was financed with proceeds of the Bank of America notes. Another $2 million would be raised from the sale of land, construction equipment, vehicles, and other assets.

To generate additional revenue to further support the workout plan, the district would raise water rates. The plan relies on the district’s three ethanol plant customers agreeing to renegotiate some fixed costs established by contract. The owner of one plant, Flint Hills Resources, has rejected the proposal, putting the overall plan at risk of failing or forcing a 17% rate increase.

Customers already saw a 22% increase last year and a 6% increase in 2009. If all parties agree to the workout plan, the proposed rate increase this year would be limited to 5%. The district fears it would lose customers if too high a rate increase is needed.

The district, which serves about 9,400 customers, is hoping state lawmakers pass legislation that would allow the utility to file bankruptcy. State law currently prohibits such a move. DeLong said the district was not seeking bankruptcy as an option but the legislation could be “a potential lever that could help bring everyone to the table.”

On the expense side, the district would outsource some services and purchasing. The district would also adhere to improved financial reporting procedures.

Standard & Poor’s last year steeply downgraded the already junk-rated credit to D from BB after the district failed to make its full June 2010 debt-service payment. 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.

A dispute between CIFG and Assured is also the subject of litigation. CIFG filed a federal lawsuit last year charging Assured with breach of contract violations for Assured’s failure to cover the Xenia deal. Assured last year decided to exclude the Xenia policy from its reinsurance agreement.

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