Rhode Island Risks Junk Grade If It Skips Paying 38 Studios Debt

Skipping payments on debt that financed former Red Sox pitcher Curt Schilling’s failed video-game company would cost Rhode Island its investment-grade rank, according to a report commissioned by the state.

The former Rhode Island Economic Development Corp., now called Commerce RI, in 2010 sold $75 million of taxable municipal debt with the state’s moral obligation as part of a plan to lure Schilling’s 38 Studios LLC from Massachusetts.

The video-game maker filed for bankruptcy about two years later, leaving the state on the hook to repay the debt. Even though Assured Guaranty Ltd. insures the 38 Studios bonds, the state would face repercussions in the credit markets.

If Rhode Island fails to pay bondholders, Standard & Poor’s would cut the state’s AA rating, third-highest, to the single-B category, or at least four levels below investment grade, according to the report, compiled by Minneapolis-based SJ Advisors LLC. Moody’s Investors Service would also lower its Aa2 rating, equal to S&P’s grade, to junk, according to the report.

Interest costs on Rhode Island debt would rise by at least $36 million, and by as much as $362 million, if the state chose to skip the bond payments, according to the report. SJ Advisors pegs the likely cost at about $126 million.

Legislators will decide whether to allocate $12.5 million to investors in the fiscal year beginning July 1, after having appropriated funds this budget year.

“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,” Governor Lincoln Chafee, a Democrat, said in a statement. “Repayment of these bonds is in the best interest to the state’s financial status and its reputation in the marketplace.”

The U.S. Securities and Exchange Commission is investigating the financing, Rhode Island is suing the insolvent company and lawmakers are looking into the matter.

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