Phoenix Says Bond Insurers Rolled It

PHOENIX (CN) - Phoenix says three municipal bond insurers charged it $20 million more for bond insurance than corporate bond issuers with higher risks of default. The city claims that Ambac Financial Group, MBIA and Financial Guaranty Insurance overcharged it through a "discriminatory dual rating system."

"Municipalities have been forced to pay enormous amounts in bond insurance premiums simply so that they can enjoy the same credit rating on their bonds as private sector bond issuers with equivalent or greater default risks," Phoenix says in its federal complaint.

Municipal and corporate bonds are rated to indicate their credit quality and the bond issuers' default risk. But municipalities' borrowing costs are higher because the dual rating system forces cities to pay high premiums for bond insurance, while "similarly situated (from a default risk perspective) or even more risky corporate bond issuers pay little or nothing in bond insurance premiums," according to the complaint.

Phoenix claims the insurers charged it "the highest bond insurance premiums they felt they could get away with while not being undersold by competitor insurers in the pre-bond issuance bond insurance premium-setting auction process," rather than of pricing the premiums on the city's default risk.

The city says the insurers did not follow rate charts or tables in, and did not file premium rate schedules with the Arizona Department of Insurance. It adds that bond insurance premiums are often negotiated and therefore are not default risk-based.

Phoenix says the bond insurers have profited for years from premium price discrimination.

The city seeks damages and interest for unfair trade, discrimination and unjust enrichment. Its lead counsel is Brad Holm and Scott G. Anderson with Holm, Wright, Hyde & Hays.

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