May 9 Rhode Island would be downgraded to junk
status if the state fails to pay debt service costs on bonds it
backed for ex-Red Sox pitcher Curt Schilling's now-defunct video
game company, according to a state-commissioned analysis on
State lawmakers are wrestling with whether to set aside the
nearly $12.5 million owed on the bonds in the budget for fiscal
2015, which begins July 1.
Some balked at making a first $2.4 million payment on May 1,
but they eventually decided to appropriate the funds. The state
commissioned an independent analysis to study what would happen
if it decided not to honor the obligation in the future.
The state can choose whether to pay the debt service costs
on the bonds, which are insured. That's because when Rhode
Island's economic development agency issued the $75 million of
bonds in 2010 on behalf of Schilling's company, it put its
"moral obligation" - but no legal obligation - behind them.
Schilling's company, 38 Studios, filed for bankruptcy in 2012.
But not paying is an option that would likely hammer Rhode
Island with consequences, according to the study, conducted by
"We expect that the rating agency reaction will be swift and
severe, that the state's bonds will be reduced to non-investment
grade... 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," the
Total debt service costs from fiscal 2015 through 2021, when
the bonds mature, is about $87 million, or about $12.7 million
per year, the report said.
Not paying the debt service would actually cost the state
more than paying it, because a dramatic downgrade by credit
rating agencies would likely cause the state's future borrowing
costs to soar. It would also impact the state's existing
variable rate debt and could limit potential savings from
Overall, it would cost the state between $36 million and
nearly $362 million more to not pay the 38 Studios debt.
And a dramatic downgrade to junk could cause the state's
outstanding bonds to lose between $212 million and $255 million
in value altogether, the report said.
"We must protect the state's credit rating, its positive
reputation and our access to the capital markets," Governor
Lincoln Chafee said in a statement. He included about $12.4
million in his fiscal 2015 budget proposal to cover the
"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," he said.
Former Governor Donald Carcieri, who left office in January
2011, supported the deal with Schilling as a way to lure 38
Studios to relocate to Rhode Island from Maynard, Massachusetts.
The state is currently rated double-A by Standard & Poor's
Ratings Services and Aa2 by Moody's Investors Service.
(Reporting by Hilary Russ; Editing by Chizu Nomiyama)