Rhode Island’s Credit May Drop on Schilling Debt Coverage

Rhode Island may have its credit grade cut by Moody’s Investors Service after lawmakers debated defaulting on $75 million in debt that brought a company started by former Boston Red Sox pitcher Curt Schilling to Providence.

Moody’s rates the state’s general-obligation debt Aa2, its third highest score. A change would affect $2.1 billion in securities, Moody’s said yesterday in a statement.

State debt tied to 38 Studios LLC, Schilling’s company, was cut two steps to Baa1 from A2 by Moody’s, citing a potential for default next year. The Rhode Island Economic Development Corp. sold the bonds in 2010 to provide an incentive for Schilling to move his video-game company from Massachusetts. The bonds were backed by a state “moral obligation pledge,” Moody’s has said.

“The potential for a decision by the legislature to withhold funds to replenish the debt-service reserve signals potential unwillingness to honor its obligations to bondholders,” Moody’s said yesterday.

The New York-based rating company said a state reserve fund won’t be able to cover interest payments due in May 2014 without additional money provided under the forthcoming budget.

Moody’s said its analysts are focused on the results of budget deliberations during the next few weeks. “Failure to appropriate funds to pay debt service on 38 Studios or any other appropriation-dependent debt which would likely have a multi-notch impact,” the company said.

Weighing Default

Governor Lincoln Chafee, 60, included a $2.5 million payment on the debt in his spending plan for fiscal 2014, which begins July 1, according to the Providence Journal. In debating the plan, lawmakers considered whether to default on the 38 Studios obligations.

“I am confident that we will continue to honor our obligations,” Chafee, who switched from independent to Democrat in May, said in a statement. “We want to send a clear message to the investment community that Rhode Island is a place that will make the difficult but necessary decisions for the long-term health of our state. I believe that the General Assembly will do the right thing to protect the reputation and borrowing ability of Rhode Island.”

The state’s job-creation effort also backed three other companies since December 2011 -- none for more than $4 million, according to the development corporation’s website.

Schilling’s 38 Studios, which took its name from his Red Sox uniform number, entered bankruptcy in May 2012, putting about 400 people out of work and leaving taxpayers on the hook to repay its debts. Schilling, a former All-Star who collected three World Series championship rings during his 23-year career, has said he lost more than $50 million on the venture.

To contact the reporter on this story: Annie Linskey in Boston at alinskey@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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