Gov: We can’t let credit agencies devastate us

The Rhode Island State House.

PROVIDENCE, R.I. (WPRI) — On the same day analysts are set to brief lawmakers about the potential outcomes if the state defaults on its 38 Studios debt, Gov. Lincoln Chafee reiterated the importance of paying the obligation.

“We cannot have the credit agencies devastate us by lowering our ratings. So that’s number one. No one would want to come to do business here if we default on this,” Chafee said. “Secondly, we’re trying to be successful with our lawsuit – which recoups the money for the Rhode Island taxpayer. The lawsuit depends in great part on paying this obligation.”

In 2010, Rhode Island backed a loan for Curt Schilling’s video game company 38 Studios. Four years later, the company is bankrupt and out of business, and the state still owes $87 million on a roughly $90 million debt.

The House Finance Committee Tuesday will hear from SJ Advisors, which says defaulting on the bonds will sink the state into junk bond status. The state hired the Minnesota-based firm last year to analyze whether Rhode Island is better off making the bond payments or defaulting on the obligation.

Two separate bond rating agencies have said if Rhode Island defaults, it would trigger a severe downgrade of the state’s bond rating and make borrowing money for other projects – such as schools and roads – much more expensive.

SJ Advisors said the most likely outcome would be for Moody’s Investors Services to downgrade Rhode Island’s bond rating from AA to B, and for Standard & Poor’s to downgrade it from Aa2 to Ba, which would give Rhode Island the lowest state bond rating in the country.

Chafee, who is not seeking reelection, criticized Republican gubernatorial candidates who have supported not paying the debt.

“The push by Allan Fung and Ken Block to default is disheartening. We hear from them populist rhetoric that lacks any empirical research or credible support. Common sense dictates that you pay your debts however distasteful,” Chafee said.

Block said ongoing legal challenges and scandals continuing to swirl around the 38 Studios deal necessitates a halt to the bond payments.

“38 Studios was a bad deal and a bad investment from the very beginning and now Rhode Island taxpayers are being asked to take the hit for bondholders who should have known better. Taxpayers are essentially being asked to assume all the risk, even though bondholders should have known the state might never stand behind the bonds given the controversial nature of what happened in 2010,” Block said in a statement released Monday.

Unlike general obligation bonds, which the state pledges to repay no matter what, the type of bonds sold as part of the 38 Studios deal were “moral obligation bonds,” which means the state only promised to consider repaying investors if 38 Studios was unable to do so.

During a April 11 appearance on Newsmakers, Fung also said he’s against repaying the debt.

“Right now that $12.5 million payment could be going to a lot of other projects – from the Sakonnet River Bridge, to education, even creating a better business environment. That’s where I would focus those dollars,” Fung told Tim White.

All three Democratic gubernatorial candidates – Angel Taveras, Gina Raimondo and Clay Pell – support repaying the debt.

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