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Schilling's 38 Studios in a Bloody Mess, With R.I. Investors on the Hook

Curt Schilling once pitched with a bloody sock, endearing him to New England baseball fans. But his video game firm is in a bloody mess, leaving Rhode Island taxpayers and bondholders exposed.

Two weeks ago Schilling's company, 38 Studios LLC, missed a $1.125 million payment that was part of a $75 million loan guarantee the state issued late in 2010 to entice Schilling to move his firm from Maynard, Mass., to downtown Providence.

The Rhode Island Economic Development Corp. board of directors settled nothing during Wednesday’s emergency session to discuss the problem. Schilling and Gov. Lincoln Chafee attended the closed meeting. Schilling, who reportedly asked for additional state help, left hurriedly without comment. The agency said little afterward, although later in the day, executive director Keith Stokes resigned.

Stokes, whose tenure had predated Chafee's election as governor, had championed the deal along with former Gov. Donald Carcieri.

A statement the EDC board released through Chafee’s office on Wednesday said the directors met with 38 Studios representatives “as to the company’s confidential financial status and projections.”

“Members of the board asked many probing questions of the company,” the statement added. The board discussed the matter but did not vote. “The company still has the option to cure the existing default by paying the $1,125,000 guaranty fee that is past due. In the meantime, we will continue to talk with 38 Studios and develop additional information.”

The board will resume the meeting at its regularly scheduled session on Monday. “The members of the board may not discuss the confidential information received and discussed today,” it said.

Representatives of 38 Studios did not return messages seeking comment.

The May 1 payment, according to the bond sale’s official statement, is an “annual guaranty fee” equal to 1.5% of the average amount of outstanding bonds.

The EDC in November 2010 sold the bonds to private investors in three series: $42.5 million at 7.75% and $23.7 million at 6%, both term bonds, and $8.9 million of serials with interest rates ranging from 6% to 7.75%. According to bond documents, maturity dates ranged from 2015 to 2020.

WPRI.com in Providence projects that the total cost of paying off the bonds could reach $112.6 million. It also said the company has already received $49.8 million, or two-thirds, of the loan amount.

The EDC issued the loan as part of a $125 million job-creation guaranty program. The company promised to create 450 jobs. Beginning in 2013, 38 Studios must pay bondholders from its game sales. Assured Guaranty Municipal Corp. is the bond insurer, according to the official statement.

Schilling, who helped the Boston Red Sox win two World Series titles, including one while pitching on a badly injured ankle, founded the company in 2006. It released its first game, “Kingdoms of Amalur: Reckoning,” in February through Electronic Arts Inc. The loan in question is underwriting “Project Copernicus,” which the company has yet to release.

While campaigning for governor in 2010, Chafee criticized the deal as overly generous and having too narrow a business sector. “You know, back then it was so much money directed at one area without as much as an RFP,” Chafee said Tuesday night in East Providence.

Accepting Stokes' resignation, Chafee said Thursday: "I thank Keith for his service to Rhode Island, not only at the helm of the EDC, but also as a former board member of that agency and as the long-time executive director of the Newport County Chamber of Commerce."

The Providence Journal reported that Chafee has asked Colin Kane, unpaid chairman of the Route 195 Redevelopment District Commission, to succeed Stokes.

Moody’s Investors Service cited the risky nature of new companies in the sector when it issued its A2 rating for the bonds, three notches lower than the state’s Aa2 rating at the time, before the sale. “Given the development-stage nature of the company, loan payments from 38 Studios have inherently more risk than other revenue streams that have established track records and predictability,” Moody’s said.

S&P rated the debt A.

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