Moody’s told RI will pay off 38 Studios bonds; Foulkes resigns

Governor Chafee, Treasurer Gina Raimondo and the state legislature’s top two Democrats have promised Moody’s Investors Service that state taxpayers will bail out investors who purchased bonds to finance 38 Studios, the rating agency disclosed Thursday.

“Gov. Chafee, Treasurer Raimondo, Senate President Teresa Paiva-Weed and House Speaker Gordon Fox have recently expressed to us directly their support for the moral obligation commitment based on the state’s credit,” Moody’s analyst Marcia Van Wagner said in a research note.

Separately, Helen Foulkes announced her resignation as vice chair of the R.I. Economic Development Corporation’s board. Foulkes, a well-respected executive vice president at CVS Caremark, was put on the board by Chafee after she served on his transition team.

“I have discussed with the governor his plans for the board at the EDC, and I think it is best at this time I resign,” Foulkes said Thursday afternoon in a statement distributed by CVS. “I wish him good luck in this very difficult challenge.” Foulkes declined a request for an interview.

Foulkes’ resignation is another blow to the reeling EDC, which lost its executive director last week when Keith Stokes, the architect and chief cheerleader for the 38 Studios deal, resigned after the company’s financial troubles emerged. William Parsons is serving as its interim leader for now.

The EDC sold “moral obligation bonds” in 2010 to finance 38 Studios. “While they are endeavoring to resolve the situation with Studio 38 [sic] so as to avoid the need for further state support, if it is necessary to pay the bonds they will ensure that the state’s moral obligation pledge is fulfilled,” Van Wagner continued.

Moral obligation bonds are different from the more familiar general obligation bonds because with the former a state only pledges to ask lawmakers to appropriate taxpayer money to pay bondholders, while with the latter the state promises to pay. Rhode Island “has historically lived up to its moral obligation pledge, and we expect would do so in this case,” Van Wagner said.

The EDC borrowed $30 million in 1993 on behalf of biopharmaceutical company Alpha Beta Technologies, and the state paid off bondholders in full after Alpha Beta defaulted in 1999, partly by selling off a facility now used by Alexion Pharmaceuticals, Van Wagner noted.

The state also stepped in after defaults by the Fairmont Foundry and a project financed by the R.I. Industrial Recreational Building Authority, but in 2005 Governor Carcieri declined to seek money to deal with a bad real-estate investment made by the state pension guaranteed by EDC, Van Wagner said.

Under the EDC’s 2010 agreement with 38 Studios, the company promised to use revenue from its games to pay off the $75 million in EDC bonds, plus interest, by 2020. The total bill for principal and interest is $112.6 million, though $23.4 million was set aside from the bond proceeds in case the company couldn’t pay.

Moral obligation bonds are commonly “used to support debt issued for essential public purposes, such as public hospitals, universities, housing projects, or schools,” although they are sometimes issued for economic-development projects such as the 38 Studios relocation deal, Van Wagner wrote.

If 38 Studios defaults, Chafee will be forced to ask lawmakers for money to pay bondholders during next year’s legislative session, according to Moody’s. The bondholders are supposed to receive interest payments each May 1 and principal-plus-interest payments each Nov. 1 starting next year. The initial payments are interest-only and are being paid for with proceeds from the original bond sale.

“Once the appropriation request is submitted [by the governor] to the legislature, the state’s legal obligation has been met and the legislature may decide not to appropriate the funds,” Van Wagner explained. Some analysts have suggested the General Assembly should consider defaulting on the bonds altogether.

More coverage of the 38 Studios crisis:

(graphic: Moody’s Investors Service)

19 thoughts on “Moody’s told RI will pay off 38 Studios bonds; Foulkes resigns

  1. Pretty easy solution. State tax payers will NOT need to pay off the debt. The State employeer retirement fund can be used then repaid later. wink wink nudge nudge

  2. Is this not sick? After what they just did to state workers, whose contracts mean nothing. They will pay these “moral” obligation bonds? Who are the greedy pigs at the trough?

    • Steve Employees have to be paid for the services they completed, pensions are future potential payments they are not guaranteed. This is money that already has been loaned to the state and needs to be paid back. If the bondholders are not paid back Rhode Island will have a very difficult time borrowing money in the future.
      The problem with you public sector employees, is you listen to your union leadership who tells you how to vote and none of you have a clue about money. Rhode Island public sector employees have to be borderline retarded.

      • Ed the talking horses A** speaks again. This guy is very funny or a complete dope. I have a friend who is a state employee, Engineer, PE. Graduated from Stanford. Now Ed tell me how dumb he is and how smart you are.

      • Ed, how borderline retarded are you? (terrible Phrase, but yours) These moral obligation bonds do not have the full faith and backing of the state of RI. Not paying them will do absolutely nothing to RI credit rating. Another Know it all dope. By the way I am a retired Providence fire captain with a Masters degree in organic Chemistry. Want to find out just who is borderline?

  3. It’s time for new leadership in state government. I urge everyone to vote out all incumbents next election cycle.

    • I concur. But Twiggy, you and I both know with numbnuts like Steve D being told how to vote by his public sector union leadership that will never happen.

      • Any more insults? The true measure of a man’s intelligence is his ability to argue points, without relying on childish insults. This will be my last post directed to this neanderthal.(whoops I did it)LOL.

      • Ed says he lives in Houston! As I recall Houston is riddled with crime, illegal’s and without a course correction, the city of Houston is headed for a $115 million budget deficit in the coming fiscal year and on its way to spending $7.7 billion more than it takes in over the next 20 years, according to draft numbers presented Wednesday.
        ed – worry and insult your own!!

  4. I second all that Steve D wrote. Fox and friends decides to pay the millionaire bond holders and honor a moral obligation, while breaking contracts with workers. Whatever happened to “we just can’t afford it,” and “unsustainable.”

    There will BE NO negotiations when the state loses the pension lawsuit. The GA better pass legislation to escrow the funds to pay retirees–the bill will eventually come due.

    • Snow the cities will not lose the pension law suits, the state better get with the program and start playing hardball with you public sector unions pukes and show you that the taxpayers are in charge not rejects like YOU!

      • I can’t fathom for the life of me how nobody but the taxpayer saw this coming. This was a bad deal from the start but it was “forward, over the cliff” with the idiots who approved it. Here’s another bad investment: go look at the new train station in North Kingstown and count the tumble weeds rolling through it.

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