The news that 38 Studios LLC, the video-game company founded by former Boston Red Sox pitcher Curt Schilling, has laid off his entire staff — and possibly leaving Rhode Island taxpayers with a $75 million bill through a loan guarantee — emphasizes the risk economic development deals pose for issuers, observers say.
Schilling on Thursday dismissed more than 300 workers, mostly in Providence. The firm also had an office in Timonium, Md.
Late Friday, Gov. Lincoln Chafee called for a forensic audit of the company. "Absolutely," he said, acknowledging the difficulty in obtaining company records. "We need to get in there quickly," he said at a press conference. Chafee and revenue director Rosemary Booth Gallogly will explore emergency procurement procedures to expedite the audit.
Neither Schilling nor 38 Studios officials returned messages seeking comment.
The Rhode Island Economic Development Corp. had backed the $75 million of bonds sold in 2010 with a moral obligation pledge by the state to replenish the capital reserve fund, should it have to be used to make debt service payments. The EDC did so to lure Schilling, who had promised 450 jobs for the Ocean State, to move his company from Maynard, Mass.
Moody's Investors Service, which one day earlier affirmed its A2 rating on the bonds, said Friday that the apparent shutdown of the company would not affect how it rates the debt.
"What happens with the company is unrelated to the way we view the credit, as backed by the moral obligation pledge and the state's pledge to replenish," Emily Raimes, a Moody's vice president and senior analyst, said in an interview.
The type of risk involved, in this case with a video-game company, factors into the rating, according to Raimes. "Usually moral obligation credits are two or three levels below what we issue for general obligation. This one was three levels lower, in particular due to the type of company," she added.
Marcia Van Wagner wrote the report for Moody's, with Raimes and managing director Robert Kurtter assisting.
Moody's rates the state's GO bonds Aa2, while Fitch Ratings and Standard & Poor's assign AA. The total debt service on the bonds, $12.75 million, is manageable within Rhode Island's $3 billion annual general fund budget, Moody's said.
According to analysts, the mechanics and timing necessary to replenish the debt service are also important. The first debt payment for which the company is responsible is the May 1, 2013, interest payment of roughly $2.6 million because a capitalized interest account covers interest payments through Nov. 1. The first principal payment is due Nov. 1, 2013.
38 Studios on May 1 missed an annual guarantee fee payment of $1.125 million, setting off the furor. A payment in mid-month cleared on the second try.
The Rhode Island mess doesn't surprise urban politics author Heywood Sanders, who cited an inherent conflict between the needs of political leaders to take credit for creating jobs in a bad economy and market forces.
"I see this stuff all the time," said Sanders, a professor at the University of Texas at San Antonio whose book, "Convention Center Follies," is due out soon. "Especially in the last two years, I've seen classic examples of going to the muni market without fundamental understanding of the realities."
Sanders pointed to hotel projects in Baltimore and bankrupt Jefferson County, Ala., as well as flood-ravaged Cedar Rapids, Iowa, which backed a new hotel and convention center complex with GO bonds. "That's full faith and credit for a hotel that runs a real risk of stinking to high heaven, although I can appreciate the imperative in Cedar Rapids," he said.
That Schilling's celebrity status may have mesmerized members of the Rhode Island EDC "does not speak much to the sagacity of the Rhode Island economic folks," Sanders said.
Fallout has occurred within the EDC.
Two weeks ago, EDC chairman Keith Stokes resigned. Vice chairwoman Helena Foulkes, an executive vice president at CVS Caremark Corp., quit the agency's board Thursday after discussing with Chafee his plans for the board. "I think it is best at this time I resign," she said.
Foulkes was not on the board when it voted for the 38 Studios loan package.