Caprio reverses course, asks bond raters to put brakes on EDC-38 Studios deal

(Updated, 5:15 p.m.)

PROVIDENCE – R.I. General Treasurer Frank T. Caprio said Tuesday he is attempting to block the state’s $75 million loan guarantee promised to Curt Schilling’s video game company, urging the rating agencies reviewing the deal to hold off until a new administration is in office.

Caprio, the Democratic gubernatorial candidate, said he voiced concerns about the loan guarantee to Moody’s Investors Service on Monday and to Standard & Poor’s on Tuesday morning. Both agencies have been commissioned by the state and Schilling’s 38 Studios to issue bond ratings on the deal for institutional investors.

He also raised questions in an article Tuesday in a bond industry publication The Bond Buyer. Caprio said he was hoping to attract the attention of potential investors.

In a statement, Caprio warned that the deal jeopardizes the state’s “financial stature” by creating a “risky moral obligation for the state” that could lower the state’s bond rating.

“I am not going to stand by and watch us gamble taxpayer dollars on a bad deal when there are thousands of small businesses in need of more access to capital,” he added. “Our state’s leaders and EDC are unwilling to stop this deal or restructure it. That’s why I’ve gone directly to the potential investors to stop this deal and to protect our taxpayers.”

Caprio has shifted his stance on the $75 million loan guarantee since it was approved by the Economic Development Corporation last month. After the vote, he told WRNI that he would be a cheerleader for the deal.

But earlier this month, he sent a letter to the EDC outlining recommended changes to the arrangement, including giving the state an equity stake in the software company.

The controversial loan guarantee has become an issue in the gubernatorial race, in which Caprio is running against independent Lincoln Chafee, Republicans John Robitaille and Victor Moffitt and Moderate Party candidate Ken Block, who last week filed a request for public documents on the guarantee.

All the candidates have raised questions about the agreement, in which the state will be on the hook for up to $75 million in loans if 38 Studios defaults. The deal is contingent on the company bringing hundreds of jobs to Rhode Island, with penalties if specific targets are not met. In addition, 38 Studios is to pay the EDC nearly $5 million over the next three years for facilitating the deal.

In addition, if the company is successful, it will make payments over the next seven years of a minimum of $15.25 million, potentially rising to $18.8 million.

In a statement on Tuesday, Caprio cited four concerns he discussed with Moody’s:

• The deal lacks the basic requirements that EDC normally expects of small businesses who apply for loans, specifically key person insurance, a personal guaranty by the principals, or bond insurance.
• The prospectus for the deal fails to disclose that the state is currently failing to honor a guaranty made by the EDC to the state’s retirement fund as part of the state’s financing of the American Express building in the 1990s.
• The nature and use of the bonds as approved by the General Assembly were not made clear at the time legislation authorizing the issuance — the Job Creation Guaranty Act — was debated and passed. No public hearings were held, no testimony from the public was taken.
• Passage of a deal that is without adequate gaurantees or other security and of which the public had little or no knowledge, reflects poorly on the state’s financial management practices, and creates a risky moral obligation for the state, decisions which could adversely affect the state’s bond rating, and increase the cost to the state of future debt issuances.

“This deal creates a risky moral obligation for the state, which could adversely affect the state’s bond rating and make future state debt issuances more expensive,” Caprio said in his statement.

Governor Donald L. Caricieri, who has backed the 38 Studios deal, fired back late Tuesday afternoon.

“Businesses and the bond market should not be subject to political posturing. The attitudes and positions taken by Mr. Caprio and Mr. Chafee serve only to undermine the positive economic development steps the state has taken in recent years,” the governor said in a statement.

“The General Assembly overwhelmingly supported the Job Creation Guaranty Act, passing unanimously in the Senate, and 66 – 1 in the House,” he continued. “The concept of a Jobs Guaranty Program was something the EDC had long supported as a complement to the Industrial Recreational Building Authority (IRBA). While IRBA provides loan guarantees for bricks and mortar investment, the Job Creation Guaranty Program provides loan guarantees for intellectual property-based investments, including the interactive video gaming industry.

“Further, the RI EDC Board, after months of due diligence, voted nearly unanimously to move forward with the 38 Studios deal.

“It is a gross overstatement to imply that the Job Creation Guaranty Act reflects poorly on the state’s financial management or could have an adverse impact on the state’s bond rating. The fact is that a loan guarantee bond of this size or type has no impact on the state’s general obligation or its bond rating.

“The EDC has entered into a good faith agreement with 38 Studios, after months of due diligence and analysis.”

In response to Caprio’s challenge, an EDC spokeswoman had this to say: “RIEDC has a legal, business and moral obligation to move forward with this business investment opportunity as voted on by the RIEDC Board of Directors and outlined under the executed terms and conditions of the agreement. We are working toward a closing date.”