CHICAGO — Fighting insolvency, the Xenia Rural Water District of Iowa made a partial debt-service payment due last week on $83 million of water revenue bonds — with CIFG Assurance North America Inc. covering the remainder — as the struggling utility prepares to release a restructuring plan later this month.
The district paid $1.8 million toward its principal and interest payment due Dec. 1 on the 2006 bonds, an amount that was $1.26 million shy of the full payment. CIFG, the original insurer of the bonds, said it covered the shortfall in a timely manner.
The debt-service reserve has been drained and "the district has been unable to make required payments to replenish" it, according to a notice posted on the Municipal Securities Rulemaking Board's EMMA website.
"Other nonpayment defaults under the bond resolution are continuing, including failure to comply with the applicable debt-service coverage test" and the district remains in default on other non-bonded debts, the notice reads.
Standard & Poor's earlier this year downgraded the already junk-bond rated credit to D from BB after it failed to make its full June debt-service payment on the 2006 bonds.
The district drained its bond reserve to make all but $69,000 of the $1.88 million interest payment owed in June. CIFG covered that shortfall as well. Xenia has drawn on its reserve account to cover debt-service payments since December 2008.
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.
Two of its largest lenders — the U.S. Department of Agriculture's Rural Development Agency and its bond insurer — refused to forgive the debt, sending Xenia back to the drawing board.
It approved a 22% rate increase in March and has a tentative offer of $110.5 million from the Des Moines Water Works to buy its assets.
The district fell into arrears on $45.6 million in loans from the USDA in September 2009.
The federal agency said it received a payment from the district totaling $1.06 million on Dec. 1 but Xenia's suer remains delinquent on its debts. "The USDA Rural Development's position is that we are not going to write off debt," Darin Leach, spokesman for the Rural Development Agency, said in an e-mail.
Assured Guaranty Corp. is acting as CIFG's agent under a reinsurance agreement executed early last year. In that capacity, Assured has so far refused to forgive any debt.
Assured earlier this year countered Xenia's preferred workout plan with one of its own, crafted with the help of consultant R.W. Beck, which called for a much steeper rate increase and the adoption of a standardized rate structure.
That plan, however, acknowledged that rate hikes alone would not resolve the district's crisis.
CIFG has covered the June and December shortfalls on the Xenia bonds due to a dispute with Assured over whether the district policy qualifies under a reinsurance agreement between the two companies.
CIFG filed a federal lawsuit over the summer charging Assured with breach of contract violations for Assured's failure to cover the Xenia deal.
Assured in May formally decided to exclude the Xenia policy from its pact with CIFG. 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.
Assured has based its position regarding the Xenia policy on a provision in the reinsurance agreement that allows it to exclude from the agreement any policy for a bond that was below investment grade as of Oct. 31, 2008. The district's bonds were rated investment grade at the time by Standard & Poor's and internally by CIFG, but Assured appears to have a dispute with those ratings as Xenia had already begun to draw on its reserves. The litigation is pending.
The district, which is working with Public Financial Management Inc. as its adviser, earlier this year defaulted on loans from Bank of America, prompting the bank to file a lawsuit in September seeking repayment of roughly $7.8 million to cover the loans, interest and legal fees.
Some blame Xenia's rapid expansion for its fiscal crisis. The district, which has 9,000 members, took on its 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.
Xenia also experienced cost overruns on a connection line to an ethanol plant, according to published reports. It serves customers in 11 counties to the north and west of Des Moines.
The district's customer base has grown steadily, at an average annual rate of 5.3%, increasing to about 9,300 at fiscal year-end 2008 from 7,550 at fiscal year-end 2005, according to Standard & Poor's.
Under Iowa law, the district cannot file for bankruptcy.