A failure to appropriate for debt service on moral obligation bonds issued on behalf of bankrupt video-game company 38 Studios would not drag Rhode Island's general obligation and appropriation-backed ratings below investment grade, said Fitch Ratings.
Fitch's June 24 statement acknowledges that a default would harm Rhode Island's rating. Its insistence, though, that the ratings would not drop to junk counter some of the conclusions in a state-sponsored report by SJ Advisors of Eden Prairie, Minn., that the Ocean State's rating could drop below Puerto Rico GOs.
Fitch and Standard & Poor's rate Rhode Island GOs AA, while Moody's Investors Service assigns an Aa2 rating.
Last week Rhode Island's legislature approved and a fiscal 2015 budget that Gov. Lincoln Chafee signed right away. It includes appropriation for debt service on moral obligation bonds issued on behalf of 38 Studios, owned by former Boston Red Sox pitcher Curt Schilling. The bonds mature in 2021 and debt service payments will require annual appropriation from the legislature.
Payment of the bonds passed overwhelmingly in both branches of the legislature, but debate was heated.
Fitch said its criteria for considering moral obligation enhancement provided to specific projects uses the project's security as a starting point and then reflect the enhancement provided by notching up from that rating. "The 38 Studios moral obligation was a project-specific commitment with limited direct state involvement in the company," Fitch said in a statement. Fitch did not rate the 38 Studios transaction, but "pursuant to this criteria would not have assigned a rating notched directly off the state's GO rating," it said.
Nevertheless, Fitch said it recognizes that the bonds, which the Rhode Island Economic Development Corp. (now Rhode Island Commerce Corp.) issued in 2010, did benefit from the market perception of a strong state commitment. In the event of non-appropriation, Fitch would take negative rating action to reflect the state's failure to live up to this commitment and the decreased commitment to bondholders that it would suggest.
