Moody’s Investors Service removed Rhode Island’s general obligation and appropriation-dependent debt from review for downgrade after the state passed an $8.2 billion budget that included a $2.5 million bond payment for 38 Studios debt.

As lawmakers debated paying the moral obligation debt on bonds related to failed video-game company 38 Studios, Moody’s on June 17 warned of a GO downgrade, possibly several notches, from Aa2.

Last week, Rhode Island’s House and Senate approved bond payment and the budget, which Chafee is expected to sign. Chafee and other state leaders said the state could have risked a backlash in the capital markets by defaulting.

“I am pleased that, despite some lively debate, the General Assembly has ultimately chosen to do the right thing and live up to our debts,” Chafee said in a statement late Monday. “This sends a clear message to the investment community that Rhode Island is a state that will continue to honor its obligations.

“With that in mind, Moody’s action demonstrates that those beyond our borders will continue to take notice of our efforts to make decisions in the interest of the long-term fiscal health of our state.”

Critics accused Moody’s of effectively dictating public policy, and some said Rhode Island could save more by defaulting, even with the higher borrowing costs associated with a lower rating.

“Ultimately, coloer heads prevailed,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.

Moody’s also affirmed its Baa1 rating on 38 Studios bonds, which it downgraded two notches and placed on review two weeks ago. The Rhode Island Economic Development Corp. issued $75 million of bonds in 2010, backed by the state’s moral obligation, to backstop the move of former Boston Red Sox pitcher Curt Schilling from Maynard, Mass., to downtown Providence.

Fitch Ratings and Standard & Poor’s rate Rhode Island GO bonds AA.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.