Moody's Investors Service late Monday warned of a multinotch downgrade to Rhode Island's Aa2 general obligation rating if state lawmakers refuse to appropriate payment toward $75 million in moral obligation debt related to failed video-game company 38 Studios.
Moody's lowered the 38 Studios bonds to Baa1 from A2 and also placed Rhode Island's Aa3 related appropriation bond ratings and the Job Creation Guarantee Program, the economic development vehicle behind the 38 Studios loan, on review for further downgrade to match the downgrade review on Rhode Island GOs.
The move comes as Rhode Island's legislature is scheduled to debate whether to pay debt for which the state is on the hook after 38 Studios LLC, a video-game company owned by former Boston Red Sox pitcher Curt Schilling, folded last year.
The Rhode Island Economic Development Corp. provided a $75 million loan guarantee in 2010, backed by the state's moral obligation. Interest would drive that total beyond $100 million, according to bankruptcy court documents. The company filed for Chapter 7 liquidation last year.
Moody's cited the uncertainty over whether Rhode Island will pay.
"Our review will focus on whether the requested funds are appropriated in the 2013 legislative session by June 30," the ratings agency said in a news release.
"I am confident that we will continue to honor our obligations. We want to send a clear message to the investment community that Rhode Island is a place that will make the difficult but necessary decisions for the long-term health of our state," Gov. Lincoln Chafee said in a statement immediately after the Moody's action. "I believe that the General Assembly will do the right thing to protect the reputation and borrowing ability of Rhode Island."
Without replenishment, the reserve fund will be insufficient to make the interest payment due on May 1, 2014, according to Moody's.
"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," Moody's said in a statement. "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."
Fitch Ratings and Standard & Poor's each assign AA ratings to Rhode Island's GO bonds.
Two weeks ago, a pair of hearings over possible fallout from not paying the debt were held at the state capitol in Providence.