Iowa’ s Xenia Rural Water District formally shed the remaining bonds from its troubled 2006 issue, ending a saga that threatened the district’s solvency.

CHICAGO – Iowa' s Xenia Rural Water District brought its long financial struggles to a happy ending this month.

The district formally shed the remaining bonds from its troubled 2006 issue, ending a saga that began with an ambitious expansion that led to default and concerns over the district's solvency.

The district's struggles to repay its debts, including the $84 million 2006 issue, came to a head about five years ago and led to a 2013 restructuring agreement with key debtors that gave it more time to make good on its bonds and loans without any principal reduction.

The district's long effort to clean up its balance sheet, improve operations and financial performance, and raise rates paved the way for a $69 million refunding earlier this year, said lead banker Michael Maloney. D.A. Davidson underwrote the refunding, which was rated BBB-plus by S&P Global Ratings.

The refinancing defeased all of the remaining 2006 issue, generated $12.5 million in present value savings, and formally paid off the bondholders on Dec. 1, the original bonds' first call date.

"This refinancing marks 2016 as a transformative year for the district and its membership," said Gary Benjamin, the district's general manager and chief executive officer since 2014. The refinancing resulted in about $500,000 in annual cash flow savings beginning next year.

S&P said its investment-grade rating on the new water revenue refunding capital loan notes reflected "the district's general creditworthiness" and "its strong enterprise risk profile."

The notes are secured by a first-lien pledge on the system's net revenues.

"Xenia's overall financial health has shown a steady rebound as it has completed the terms of the forbearance agreement," according to S&P.

Xenia also has about $43 million in U.S. Dept. of Agriculture rural development loans outstanding, with a fixed monthly payment through 2041.

Given that "Xenia completed the terms of the forbearance agreement and has begun the path toward stronger and more consistent financial performance, we would expect to monitor the district's progress throughout our two-year outlook horizon," S&P added.

S&P expressed confidence in the ability of Xenia's current management to keep the system on track, putting much of the blame for the district's past struggles on prior managers and their aggressive assumptions about rates and growth that proved wrong as the national economy faltered.

"In our view, the potential for fiscal imbalance and a recurrence of extraordinary financial distress is less likely given a relatively level total debt service schedule and the district's indication that the capital improvement program as currently identified does not include plans for additional debt funding," S&P said.

The comments underscore just how far the district has come.

The 2006 bonds refinanced some outstanding debt and paid for an ongoing expansion of facilities, including an expansion of water-delivery capacity north to the Minnesota border. At the time the bonds were issued, S&P gave them an underlying BBB rating. They also carried a triple-A wrap from insurance.

Water revenues fell short of what was needed to cover debt service. The district depleted reserves and began tapping insurance coverage to cover shortages in 2010. S&P dropped the credit to D in 2010. The state auditor released reports warning that the district's solvency was at risk. Under Iowa law, the district could not file for bankruptcy.

Assured Guaranty Corp., which took over from the original insurer, covered about $2.44 million in debt service shortfalls on payments in 2010 and 2011. The district in 2011 unveiled a five-year restructuring to restore its fiscal solvency, but it hinged on a debt restructuring. Officials had been raising water rates, but feared steeper increases would drive away customers.

Assured was among those that questioned whether a restructuring could be accomplished given turnover at the district which had seen three general managers and three board chairs depart. It had sought the appointment of a receiver.

In 2013, the district was able to finalize a restructuring plan with Assured and the USDA Rural Development agency on $125 million of bonds and loans. Under the deal, neither creditor forgave Xenia's principal but each agreed to ease the repayment terms so that monthly payments were lowered.

Rate increases also helped the system dig its way out of its hole. In addition to a 22% hike in 2010, rates since have gone up 6% to 7% annually with the exception of fiscal 2016 when rates went up only 3%.

As part of the restructuring and forbearance, Xenia fully repaid Assured for claims made under the bond insurance policy while Assured lowered the interest rate and waived some expenses it had been seeking.

The forbearance agreement also gave the district a 10-year period to replenish the original debt service reserve bringing the district into compliance with debt covenants. It replenished the reserve ahead of schedule and has repaid the insurer in full.

"S&P Global Ratings understands that all other terms of the forbearance agreement have otherwise been fully satisfied," it wrote.

Xenia provides retail and wholesale service as well as emergency and bulk sales to 11 counties, including Polk County, outside of Des Moines.

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