Even as an analyst appointed by Rhode Island Gov. Lincoln Chafee prepared to brief lawmakers on its findings about what would happen if the state fails to make payment on the 38 Studios loan debt, the Governor is taking his case to the public airways. Speaking to WPRI, Chafee reiterated his position on defaulting on the 38 Studios loan deal bonds.
"We cannot have the credit agencies devastate us by lowering our ratings," Chafee said. "So that’s number one. No one would want to come to do business here if we default on this. Secondly, we’re trying to be successful with our lawsuit – which recoups the money for the Rhode Island taxpayer. The lawsuit depends in great part on paying this obligation."
In 2010, Rhode Island backed a $75 million loan for Curt Schilling’s 38 Studios. Four years later, the company is bankrupt and out of business, being sued by the state and leaving its principal backers – Rhode Island – an estimated $87 million on a roughly $90 million debt.
The House Finance Committee heard testimony from SJ Advisors on Tuesday, whose report concluded that defaulting on the bonds that raised the capital for the 38 Studios deal would sink the state into junk bond status and generally hurt its credit rating. The state hired the Minnesota-based firm last year to analyze the pros and cons of not paying off the loan.
Two separate bond rating agencies said this week that if Rhode Island defaults, it would trigger a severe downgrade of the state’s bond rating and make borrowing money for other projects much more expensive.
SJ Advisors said the most likely outcome would be for Moody’s Investors Services to downgrade Rhode Island’s bond rating from AA to B, and for Standard & Poor’s to downgrade it from Aa2 to Ba, which would give Rhode Island the lowest state bond rating in the country.
Chafee, who is not seeking reelection, still criticized Republican gubernatorial candidates who have supported not paying the debt.
"The push by Allan Fung and Ken Block to default is disheartening. We hear from them populist rhetoric that lacks any empirical research or credible support. Common sense dictates that you pay your debts however distasteful," Chafee said.
"38 Studios was a bad deal and a bad investment from the very beginning and now Rhode Island taxpayers are being asked to take the hit for bondholders who should have known better. Taxpayers are essentially being asked to assume all the risk, even though bondholders should have known the state might never stand behind the bonds given the controversial nature of what happened in 2010," Block said in a statement released Monday.
All three Democratic gubernatorial candidates – Angel Taveras, Gina Raimondo and Clay Pell – support repaying the debt.