Study: R.I. bonds would be dropped to ‘junk’ status on 38 Studios moral obligation default

An assessment of the 38 Studios LLC moral obligation bond debt service conducted by SJ Advisors concluded that failure to repay the bonds would probably result in a downgrade of Rhode Island’s bond rating to “junk bond” status. More

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38 Studios

Study: R.I. bonds would be dropped to ‘junk’ status on 38 Studios moral obligation default

ACCORDING TO A STUDY by SJ Advisors, a decision by the Rhode Island legislature not to repay the moral obligation debt associated with the collapse of gaming company 38 Studios would result in the state's bonds being downgraded to "junk bond" status, which could cost the state as much as $361.8 million more than the cost of repaying the 38 Studios debt.
Posted 5/9/14

PROVIDENCE – An assessment of the 38 Studios LLC moral obligation bond debt service conducted by SJ Advisors concluded that failure to repay the bonds would probably result in a downgrade of Rhode Island’s bond rating to “junk bond” status.

“We expect that the rating agency reaction will be swift and severe, and that there will be a material and adverse effect on both the interest rates that the state pays when it issues debt and the market value of outstanding Rhode Island bonds,” SJ Advisors noted in the report.

SJ Advisors projected that Standard & Poor’s Rating Services would downgrade Rhode Island debt from AA to B, which is below investment grade, while Moody’s Investment Service would downgrade the state’s bonds from Aa2 to Ba. This would make Rhode Island’s state bond rating the lowest in the country, and Rhode Island-issued debt would be relegated to “junk bond” status, SJ Advisors concluded.

The downgrade would force Rhode Island to issue future bonds at higher interest rates and would affect the value of outstanding bonds, SJ Advisors said, ultimately costing the state more than it would have cost to repay the 38 Studios moral obligation bond.

Even in the best-case scenario envisioned by the SJ Advisors study, non-repayment of the 38 Studios bonds would drive interest rates up about 1.49 percent for a 19-year general obligation bond. Under this scenario, non-repayment would cost the state approximately $36 million more than it would have cost to repay the moral obligation bond, with a net present value cost of about $13.6 million.

In the worst case scenario, interest rates on a typical state GO bond could increase 4.31 percent, and the cost to the state would be $361.8 million more than the cost of repaying the 38 Studios debt, with a net present value of $218.9 million, SJ Advisors concluded.

“We must protect the state’s credit rating, its positive reputation and our access to the capital markets,” said Gov. Lincoln D. Chafee in a statement regarding the SJ Advisors report. “While this cost to taxpayers is distasteful, we are doing everything we can to reduce the size of the burden on our citizens through litigation. Repayment of these bonds is in the best interest to the state’s financial status and its reputation in the marketplace.”

Chafee’s proposed fiscal year 2015 budget included $12.3 million to pay down the nearly $90 million in debt incurred by the failed 38 Studios.

Last week, Rhode Island made its first interest payment on the moral obligation debt, a $2.4 million payment that was approved by the General Assembly last year and appropriated in the budget.

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