May 16 Against the risk of default, some bonds
issued by Rhode Island on behalf of former Boston Red Sox
pitcher Curt Schilling's failed video game company traded for
the first time in 19 months late this week at weaker prices.
The trades come as lawmakers debate whether Rhode Island
should pay debt service on the bonds, issued in 2010 to lure
Schilling's company, 38 Studios, to Rhode Island from
Massachusetts. The company filed for bankruptcy in 2012.
Some say the state should not have to bear the brunt of a
soured deal that taxpayers never had the opportunity to approve.
The state backed the bonds with its "moral obligation," but not
a more binding legal commitment to pay. The bonds are insured.
Standard & Poor's Ratings Services cut the bonds three
notches to 'BBB' on Monday, simultaneously warning it could also
slash Rhode Island's 'AA' general obligation credit rating by
several notches if lawmakers decide not to allocate funds to
If Rhode Island fell below investment grade, taxpayers could
wind up paying even more because of higher future government
borrowing costs than they would if the state just finished
repaying the original $75 million loan, a recent
state-commissioned report by SJ Advisors found.
After the S&P warning this week, some other Rhode Island
debt saw liquidity for the first time in months. General
obligation bonds maturing in 2020 that had not changed hands
since late January were sold at a higher price on Tuesday.
In three very small trades on Thursday and Friday, 38
Studios bonds maturing in November 2015 were priced between
101.6 and 102.3 cents on the dollar, with a high yield of 4.84
percent. That is cheaper than when they last traded in October
2012, when a large block sold at 104.8 cents with a yield of
about 4.3 percent.
A longer maturity of 38 Studios bonds, which comes due in
2020 and carries a 7.75 percent coupon, traded in early May for
the first time in about 10 months at higher prices.
States historically pay their debt obligations, regardless
of what they are called, said Van Eck Global chief municipal
strategist James Colby.
If Rhode Island fails to pay the 38 Studios moral obligation
bonds, it would "send a resounding message to municipal bond
investors that a cornerstone element of the municipal capital
markets is being tested," he said.
The broader muni market has about $21 billion of
state-issued moral obligation debt outstanding, according to
Moody's Investors Service, which rates about $5.4 billion of
that. Local governments also issue such debt, but totals were
"This might be the first case where the state had the
ability to pay, but just did not for whatever reason, step up
and pay," said Chad Farrington, head of municipal bond research
at Columbia Management Investment Advisers. "That it's even
being talked about is a good reminder to everybody that you need
to know what you're buying."
(Reporting by Hilary Russ. Editing by Andre Grenon)