State-Commissioned Report Finds RI Better Off Paying Back 38 Studios' Investors

May 9, 2014

Credit Ian Donnis/File Photo / RIPR

A report commissioned by the Chafee administration has found that even under the best-case scenario, Rhode Island will be better off paying back bondholders who invested in the failed video-game company 38 Studios.

According to the findings from SJ Advisors, released Friday by the state Department of Administration, "Rhode Island debt would be downgraded from AA to the single B category by Standard & Poor’s Rating Services, which is below investment grade (speculative status) and from Aa2 to the Ba category (double B equivalent) by Moody’s Investment Service. This would put Rhode Island as the lowest state bond rating in the nation and would be considered 'Junk Bond' status by the industry. SJ Advisors noted in its conclusions that 'We expect that the rating agency reaction will be swift and severe, 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.' ”

SJ Advisors says it developed models for best- middle and worst-case scenarios. It says that even under the best-case scenario, "the state is financially better off fulfilling its obligations and making the payments for the moral obligation bonds."

In the best-case scenario, the company say not appropriating money for bondholders would cost about $36 million more than debt service. Under the worst-case scenario, SJ Advisors says, the net impact would be $361.8 million.

Rhode Island taxpayers remain on the hook for about $90 million due to the bankruptcy of 38 Studios in 2012. The company had been lured to the state with a $75 million loan guarantee.

Governor Lincoln Chafee and other state leaders have steadily insisted that not paying back bondholers would hurt the state's reputation and impose excessive borrowing costs. The SJ Advisors report echoes that view, saying non-payment could "even taint the business environment."

Many lawmakers oppose repaying 38 Studios' bondholders, in part due to how the state isn't legally obligated to repay moral obligation bonds.

Chafee included a $12.3 million payment related to 38 Studios in his budget for the fiscal year starting July 1. That budget still awaits legislative approval.