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)

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