Updated May 25 at 7:25pm

On GA decision, Moody’s declines to downgrade R.I. debt

Moody’s Investors Service announced that it will not downgrade Rhode Island’s Aa2 general obligation debt rating in light of the General Assembly’s decision not to default on its 38 Studios LLC bonds. More

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On GA decision, Moody’s declines to downgrade R.I. debt

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NEW YORK – Moody’s Investors Service announced that it will not downgrade Rhode Island’s Aa2 general obligation debt rating in light of the General Assembly’s decision not to default on its 38 Studios LLC bonds.

Having commenced a review of the state’s debt rating last month when some lawmakers called for Rhode Island to renege on the 38 Studios debt, Moody’s is now returning its outlook for the state to negative. It also confirmed a Baa1 rating on 38 Studios bonds.

The state House of Representatives passed an initial $2.5 million payment on the bonds last week by a 53-19 vote, assuaging concerns that it would refuse to pay. Rhode Island would have been the first state since the post-Civil War Confederacy to renege on bonds. Moody’s cited the subsequent passage of the overall 2014 budget in the General Assembly as the reason for concluding its review.

Gov. Lincoln D. Chafee, who had urged lawmakers not to default on the bonds, said in a statement Tuesday that the Moody’s announcement “demonstrates that those beyond our borders will continue to take notice of our efforts to make decisions in the interest of the long-term fiscal health of our state.”

Nonetheless, Moody’s emphasized that there was still a negative outlook on Rhode Island’s general obligation debt. The service offered several explanations, including uncertainty about the state pension reforms, budget gaps and poor general economic performance. The report added that the negative outlook “also now reflects uncertainty regarding the state’s willingness to honor its 38 Studios obligation, which raises questions about its overall commitment to fulfill its pledges and the meaning of the full faith and credit of the state.”

The $2.5 million payment was the first piece of $75 million overall that Rhode Island still must pay back to 38 Studios bondholders. The financing had incentivized the videogame company led by former Boston Red Sox pitcher Curt Schilling to move to Providence in 2010, where it promised to create hundreds of jobs for the local economy. Instead, the company went bankrupt last year, putting hundreds out of work and leaving Rhode Island with a massive bill.

In response, a handful of lawmakers voiced their opposition to repaying state bonds with taxpayer dollars for a failed company. But Moody’s warned that such a refusal could precipitate a ratings cut, which might in turn force borrowing costs higher on the rest of Rhode Island’s $2 billion in outstanding debt. In undertaking a review of the state’s credit rating, Moody’s said it would keep an eye on the legislature’s passage of the $2.5 million payment as well as the margin of victory, indicating that a narrow passage could affect the decision.

The 38 Studios bonds were originally sold by the R.I. Economic Development Corporation and protected by Rhode Island’s “moral obligation pledge,” meaning that the state is not technically obligated to honor them.

A criminal investigation into the 38 Studios collapse is underway, and Chafee is suing Schilling and others involved in the ordeal.

Moodys Investor Service, Lincoln D. Chafee, Moody's, 38 Studios, 38 studios llc, 38 studios debt

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