Schilling-bond refunding hastened by lowest yields

THE LOWEST MUNICIPAL yields in a generation may help Rhode Island cut the cost of repaying $75 million it borrowed to lure former Boston Red Sox pitcher Curt Schilling’s now-bankrupt video-game company from Massachusetts.
Posted 7/23/12

NEW YORK - The lowest municipal yields in a generation may help Rhode Island cut the cost of repaying $75 million it borrowed to lure former Boston Red Sox pitcher Curt Schilling’s now-bankrupt videogame company from Massachusetts.

While a federal bankruptcy court prepares for the liquidation of 38 Studios LLC, state officials are discussing refinancing the taxable securities to cut interest rates, now as high as 7.75 percent, said Rosemary Booth Gallogly, director of Rhode Island’s revenue department. Rhode Island has the second- highest jobless rate among U.S. states at 10.9 percent and an economy that may slip back into recession.

“We’ll only do this if it ends up costing less money,” Gallogly, 53, who was retained by Governor Lincoln Chafee, said in an interview. “I’m not going to say it’s going to be easy. There’s a lot of controversy surrounding this one.”

Even the worst-rated states and cities are refinancing debt, putting municipal-bond issuance on a pace for a record annual increase with $195 billion of long-term, fixed-rate securities sold this year through July 13. That’s 73 percent more than for the same period in 2011, data compiled by Bloomberg show. About 64 percent of the sales have been for refunding, the most since 1993, according to Bank of America Merrill Lynch.

A2 rating

The 38 Studios debt is rated A2 by Moody’s Investors Service, its sixth-highest grade. The ranking reflects the state’s pledge to back the bonds, and not the bankrupt enterprise, according to a report from Moody’s in May, after the company missed a loan payment and fired its workforce. The state is expected to make good on its “moral obligation commitment” to cover the debt service if the company can’t, Moody’s said.

“As far as bondholders are concerned, it’s a pretty clean story,” said Triet Nguyen, managing partner at Axios Advisors LLC, an independent municipal-research company. “The EDC and the state are on the hook,” he said, referring to the state Economic Development Corp., which sold the securities.

“There are not a lot of ways to get out of it,” Nguyen said.

The demise of 38 Studios, which produced the game Kingdoms of Amalur: Reckoning before collapsing, shows the peril states and cities take on by borrowing to aid business ventures. Schilling, 45, promised in 2010 to bring hundreds of jobs to Providence when he moved his company there from Maynard, Mass. The bankruptcy left Rhode Island on the hook for $75 million in debt that the company was supposed to repay.

Collapse fallout

The fallout has been widespread. Schilling, who collected three World Series championship rings during his 23-year career, and Chafee, who opposed the 38 Studios deal as an independent candidate for governor in 2010, engaged in a war of words over whether the governor contributed to the company’s collapse.

The sudden shutdown and liquidation of the game maker prompted federal and state probes and led to disarray in the economic-development agency. Schilling last month said in a radio interview that he put more than $50 million into the venture and that he had to tell his family the fortune he made from baseball is gone.

Schilling didn’t respond to an e-mailed request for comment on the situation forwarded to him by Katie Leighton, his publicist.

Robert Flanders, a former state Supreme Court judge who oversaw the bankruptcy of Central Falls, Rhode Island, has joined calls in the state for Chafee to explore defaulting on the bonds and forcing investors to take a loss.

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