Moody's Investors Service has downgraded Rhode Island Economic Development Corporation's Job Creation Guarantee Program (38 Studios LLC) to Baa1 from A2. At the same time, Moody's placed the Job Creation Guarantee rating under review for possible further downgrade. Moody's has also placed the state of Rhode Island's Aa2/negative general obligation and Aa3/negative related appropriation bond ratings under review for downgrade.

SUMMARY RATING RATIONALE

The downgrade of the 38 Studios bonds and the review of all the state's general obligation and appropriation debt reflects the considerable uncertainty surrounding the state legislature's willingness to appropriate funds requested in Governor Chafee's budget to replenish the capital reserve fund for the 38 Studios bonds. Without replenishment, the reserve fund will be insufficient to make the interest payment due on May 1, 2014.

The potential for a decision by the legislature to withhold funds to replenish the debt service reserve signals potential unwillingness to honor its obligations to bondholders. Selectivity regarding which obligations to honor leads us to question our confidence in the full faith and credit of the state and its willingness to honor its other debt obligations compared to otherwise similarly-rated states.

Our review will focus on whether the requested funds are appropriated in the 2013 legislative session by June 30 and, if so, the degree of support the appropriation reflects.

WHAT COULD MAKE THE RATING GO UP

*For RIEDC Job Creation Guarantee Program debt: the failure of the business venture supported by the state's moral obligation caps the rating at the new level.

*For the state:

* Maintenance of stronger reserve levels

*Sustained economic improvement at least in line with national average based on various metrics including job growth

*Restoration and maintenance of structural budget balance

*Resolution of pension-related litigation in the state's favor

WHAT COULD MAKE THE RATING GO DOWN

* For RIEDC Job Creation Guarantee Program debt, the state GO and lease  appropriation debt: Failure to appropriate funds to pay debt service on 38 Studios or any other appropriation-dependent debt which would likely have a multi-notch impact.

:*For the state:

* Failure to honor its legal or moral obligations to bondholders

* Mounting combined debt and pension liability burdens with no plan to address them

*Deterioration of state's reserve and balance sheet position

* Persistent economic weakness indicated by lack of employment recovery when the rest of the nation rebounds

*Increased liquidity pressure reflected in narrower cash margins, increased cash flow borrowing, or a shift toward tactics such as delayed vendor or other payments to gain short-term liquidity relief

*Continued significant reliance on one-time budget solutions, particularly deficit financing

*Resolution of pension litigation in employees' favor

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