S&P Warns RI Of Slipping Credit If The State Balks On 38 Studios' Debt

May 12, 2014

Standard & Poor's Rating Services has put Rhode Island's credit on watch with negative implications due to ongoing debate about paying back bondholders who invested in the failed video game company 38 Studios.

In an advisory released Monday, S&P said it was lowering the rating on bonds issued by the Economic Development Corporation for 38 Studios in 2010 from A to BBB.

"The downgrade on the series of moral obligation bonds issued for the 38 Studios project reflects our view that continued debate about funding appropriations sufficient to repay principal and interest on the bonds indicates diminished support for this appropriation and a higher degree of risk relating to the repayment of these bonds," S&P says.

S&P says it was also putting its AA rating on Rhode Island's general obligation bonds, its AA- rating on RI appropriation debt, and its A rating for other moral obligation-backed bonds on credit watch with negative implications.

Some lawmakers have sounded highly skeptical notes about including a $12.3 million payment for 38 Studos bonds in the budget for the fiscal year starting July 1. Republican gubernatorial candidate Ken Block is opposing repaying the bonds, while Governor Lincoln Chafee, state Treasurer Gina Raimondo, and Senate president Teresa Paiva Weed all support paying the money back.

While S&P notes that moral obligation bonds are not backed by the state's pledge of full faith and credit, it goes on to say that in the event of a failure to repay 38 Studios bonds, "we would likely take negative rating action, lowering GO [general obligation], appropriation and moral obligation debt by multiple notches."

SJ Advisors of Minnesota, after being hired by the state, last week warned that not paying back 38 Studios bondholders would be costlier than paying the debt.

S&P says it expects to resolve its watch on Rhode Island credit when the state budget is finalized for the budget year starting July 1.