May 9 (Reuters) - 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 Friday.
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 SJ Advisors.
“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 report said.
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 refunding transactions.
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 payments.
“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)