MMA's Fabian to Discuss 38 Studios Debt before Rhode Island Panel

Municipal Market Advisors managing director Matt Fabian will make a presentation about the pros and cons of defaulting on moral obligation bonds for 38 Studios to Rhode Island’s House Finance Committee on Thursday.

Rhode Island taxpayers are on the hook for roughly $115 million after 38 Studios, the video-game company founded by former Boston Red Sox pitcher Curt Schilling, filed for Chapter 7 liquidation last year.

The Rhode Island Economic Development Commission provided the company a $75 million loan guarantee in 2010, backed by the state’s moral obligation, to entice the company to move to downtown Providence from Maynard, Mass.

Fabian, a municipal analyst for 18 years, is the lead author MMA’s Weekly Outlook, which the independent research firm publishes out of Concord, Mass.

The presentation will feature no public testimony, he added, because hearings on bills submitted regarding bond payments already included public sessions.

The session will begin at 5:15 p.m. in Room 35 in the basement level of the State House, a spokesman for the state’s General Assembly said Tuesday.

Two bills are pending the General Assembly that would prohibit the state from paying the moral obligation debt.

State officials, including Gov. Lincoln Chafee, General Treasurer Gina Raimondo and Revenue Director Rosemary Booth Gallogly, say the state should pay the debt or risk backlash from the capital markets. Others, including the libertarian-leaning Stephen Hopkins Center for Civil Rights, have advocated a full discourse on all options regarding the debt, including a discussion on the difference between a moral obligation pledge and a general obligation based on full faith and credit.

In his May 6 newsletter, Fabian warned of dire consequences should Rhode Island not pay the debt. "The idea of the state choosing to repudiate here would be both historic and catastrophic," he said. While acknowledging the difficulty of predicting, Fabian said Rhode Island’s general obligation could plummet to as low as BBB, its appropriation security could reasonably drop below investment grade, and its cost of borrowing could rise at least 100 basis points.

Moody’s Investors Service rates Rhode Island’s general obligation bonds Aa2, while Fitch Ratings and Standard & Poor’s assign AA ratings.

Two weeks ago, State Superior Court Judge Michael Silverstein began hearing arguments over a lawsuit by the Economic Development Commission to recoup money from the loan. Schilling’s lawyers are looking to dismiss the suit.

Last year, the U.S. Bankruptcy Court for the District of Delaware in Wilmington transferred the case to Rhode Island Superior Court.

Fallout over the 38 Studios debacle triggered widespread resignations from the EDC board last year, including that of executive director Keith Stokes. The Senate in May confirmed Chafee’s appointment of Marcel Valois as Stokes’ replacement.

Before his current position, Fabian spent 2 ½ years as the lead municipal research analyst for UBS and led a group within UBS Wealth Management Research. He was chairman of the Municipal Analysts Group of New York in 2010-2011 and is on the board of governors of the National Federation of Municipal Analysts.

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