If Rhode Island chooses to default on moral obligation debt related to failed video-game company 38 Studios, the state's bond ratings would probably fall to junk, said a report commissioned by the Rhode Island Department of Administration.

Consulting firm SJ Advisors of Eden Prairie, Minn., said Friday that Standard & Poor's would lower Rhode Island general obligation bonds to B from AA and Moody's Investors Service would drop them to Ba from Aa2, should state lawmakers renege on the payment.

Fitch Ratings also rates the bonds, at AA.

"We expect that the rating agency reaction will be swift and severe, and that there will be a material and adverse effect on both the interest rates that the state pays when it issues debt and the market value of outstanding Rhode Island bonds," the firm noted in its conclusions.

38 Studios, owned by former Boston Red Sox pitcher Curt Schilling, received a $75 million loan guarantee in 2010 from the Rhode Island Economic Development Corp. to move to Providence from Maynard, Mass.

The company in 2012 filed for liquidation under Chapter 7 of the bankruptcy code, leaving Rhode Island on the hook for $75 million in bond principal, plus $38 million of interest.

Fallout included the resignation of several EDC board members including executive director Keith Stokes, and a rebranding of the agency as Commerce RI.

Heated debate engulfed Rhode island's legislature last year and created a buzz in the capital markets before lawmakers approved an initial $2.5 million payment on the 38 Studios debt. Moody's last year threatened to downgrade Rhode Island, essentially saying a moral obligation bond is tantamount to a GO.

SJ Advisors was hired in the aftermath of last year's debate.

Gov. Lincoln Chafee included the scheduled $12.5 million payment in his budget request for fiscal 2015.

"We must protect the state's credit rating, its positive reputation and our access to the capital markets," Chafee said in a statement Friday.

SJ Advisors created its assessment model to show the best, middle and worst-case scenarios. The firm said even in best case, Rhode Island is better off paying the debt.

Additional borrowing costs from not paying could cost anywhere from $36 million to $362 million, the report said, though the "middle" scenario is more probable, where the net cost would be $126 million extra, with net present value $72 million.

According to the firm, non-appropriation would result in "a series of cascading events that would lead to increased costs associated with the state's debt."

They also include damage to the state's moral-obligation reliability; a spike in interest rates; diminished refunding opportunities because of higher yields; contagion; and decreased value of Rhode Island bonds.

"Rhode Island has enhanced its financial management practices and has made great strides in developing a strong reputation in the market. All that work will disappear in an instant, should the state fail to meet its fundamental obligations," said Department of Administration Director Richard Licht.

Anthony Figliola, the vice president of Empire Government Strategies in Uniondale, N.Y., offered a simple take: "If they don't pay, their ratings go down and interests go up."

Earlier in the week, House lawmakers Michael Chippendale, R-Foster, and Karen MacBeth, D-Cumberland — both serve on the House Committee on Oversight and MacBeth is the new chairwoman — said they received threatening letters over their desire to investigate possible criminal activity related to the original financing.

Chippendale sought police protection after receiving a two-sentence letter that read: "You have a beautiful family. Stop poking around for their sake."

He told television station WPRI: "We've hit a nerve. Obviously they are not happy with some of the paths we are following."

MacBeth said she received a similar letter. The State Police are investigating.

MacBeth has said she wants to issue subpoenas to key players connected to the 38 Studios deal, including Gordon Fox, who resigned as House speaker in March after agents from the U.S. attorney's office, Federal Bureau of Investigation, Internal Revenue Service, U.S. attorney's office and the Rhode Island State Police raided his East Side Providence home and State House office.

MacBeth, whom new Speaker Nicholas Mattiello, D-Cranston, appointed as Oversight chair, has suggested that Rhode Island consider not making the payment and then negotiating with bond insurer Assured Guaranty Municipal Corp. for a better price.

In addition, Secretary of State Ralph Mollis has begun investigating possible lobbying violations related to 38 Studios.

On Thursday night, the head of a policy group told that Rhode Island would face a serious backlash in the capital markets if it didn't pony up.

"We are small in the marketplace and we are ripe for punishment or penalty if we do not make that payment," John Simmons, the executive director of the business-based Rhode Island Public Expenditure Council, told the House Committee on Oversight. "If it was California, there might be a difference, but it's Rhode Island."

No state has defaulted on a bond since Arkansas in 1933.

Brian Bishop, spokesman for the libertarian think tank Stephen Hopkins Center for Civil Rights, called the issue "very serious" and said lawmakers should seriously consider not paying what he termed an appropriation.

"If you basically believe in business as usual and we really don't want the state to be a laughing stock at the water coolers in New York City, then I would think that your decision would be to pay it reluctantly and with a lot of upsetness," he said. "[But] you are not defaulting if you choose not to pay this."

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