Chicago Mulls Borrowing That Puerto Rico Rejected as Too Risky

[WestVirginiaRebel]

Bloomberg:

Chicago is considering selling a type of debt that’s fallen out of favor in other municipalities because it saddles taxpayers with higher costs by delaying payments.

 

Mayor Rahm Emanuel proposed issuing $500 million of bonds this week in an ordinance that would permit the use of capital appreciation bonds, where borrowers postpone interest and principal payments into one big sum at the end of the term. Emanuel’s pitch also allows for the more common current interest bonds, which the city said it expects to use.

 

Chicago is struggling to plug its deficit and $20 billion of unfunded pension liabilities. Emanuel’s move would give the third-most-populous city a means of borrowing without having to face the costs right away.

 

“Given where Chicago is at, it does seem like it’s a way to kind of push off debt payments out longer, which from a credit standpoint is not favorable,” said Michael Johnson, managing partner at Gurtin Fixed Income Management, which oversees $9.5 billion of munis in Solana Beach, California. “It’s probably not the best idea for them right now.”

 

Texas restricted the use of CABs in June and California has limited them since 2013. The Puerto Rico Electric Power Authority dismissed a bondholder plan last week to restructure its debt using capital appreciation bonds, citing the disproportionate risks.

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What could go wrong?