If lawmakers in the state of Rhode Island decide sometime in the future not to pay down the debt associated with the 38 Studios loan, the entire state could end up getting a bad credit rating, which in turn could affect its ability to borrow for important projects.
According to WPRI, Wall Street ratings agency Standard & Poor’s Ratings Services is seriously concerned about what lawmakers will do, and the agency has put a "negative watch" on Rhode Island’s state bond ratings due to uncertainty related to repayment of the 38 Studios bonds. Standard & Poor’s Ratings Services put its overall AA bond rating for Rhode Island’s general-obligation debt on negative watch, and did the same for its AA- bond rating on the state’s appropriation debt and its A rating on the state’s other moral-obligation debt, the agency said in a statement Monday.
S&P also downgraded its rating on the $75 million in 38 Studios bonds themselves from A to BBB, which is basically one step up above junk status, and put the debt from the transaction on a negative watch.
"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."
"The negative CreditWatch action reflects our view that broad-based support for repayment of this debt is not clear," Henry Henderson, a credit analyst at S&P, said in the statement.
The S&P statement went on to note that the ratings agency "would likely take negative rating action, lowering [general obligation], appropriation, and moral obligation debt by multiple notches" if lawmakers refuse to put roughly $12.5 million into the next state budget to make the next two payments to the 38 Studios bondholders.
The bonds sold by the EDC for the 38 Studios loans are moral-obligation bonds, meaning that the state only promised to consider repaying investors if 38 Studios was unable to do so. Some lawmakers have suggested the state should refuse to pay and at least one Republican candidate running for Governor. Gov. Lincoln Chafee thinks the loan should be paid back. An independent study commissioned by the Chafee administration suggested that Rhode Island’s state bond rating would likely be dropped to “junk” status if lawmakers refuse to repay the 38 Studios bonds, and would ultimately cost the state anywhere from $36 million to $362 million.
S&P also warned that $38.4 million in bonds that the EDC sold on behalf of the I-195 Redevelopment District Commission last year to buy the old highway land "contains an acceleration provision if the rating drops below ‘A-’ or the equivalent from another rating agency," and that such a move "could be an additional source of credit pressure if acceleration of these bonds is triggered."
S&P said that it might "revise the [state's bond] outlook back to stable if, in our view, there is consistent support for all of the state’s debt."
Analysts from SJ Advisors, the firm commissioned by the Chafee administration, are scheduled to brief lawmakers on their findings this week.