To pay or not to pay?

The debate over whether Rhode Island should pay the more than $100 million of moral obligation debt related to the 38 Studios fiasco, which lawmakers are debating, triggered spirited discussion Thursday at the state capitol in Providence.

“The consequences of default are knowable, and we should find out what they are before we do anything,” Bob Cusack, WhaleRock Point Partners LLC portfolio manager and former public finance investment banker with First Boston Corp., said during an afternoon debate sponsored by the Stephen Hopkins Center for Civil Rights and Occupy Providence.

“A state reneging on a moral obligation is a big deal. That’s why this is newsworthy,” said Cusack. “The two groups that matter are the rating agencies and the large institutional buyers of our bonds. Let’s find out. Let’s talk to our top portfolio managers and say, ‘Will you buy our bonds if we default’?”

Later in the day Thursday, Municipal Market Advisors managing director Matt Fabian was to discuss the pros and cons of defaulting before the House Finance Committee.

38 Studios, the video-game company owned by former Boston Red Sox pitcher Curt Schilling, filed for Chapter 7 bankruptcy last year. The state’s Economic Development Corp. had provided a $75 million loan guarantee, backed by the state’s moral obligation, to the company to lure it to downtown Providence from Maynard, Mass.

That debt has since risen to about $110 million, if interest is incorporated, for bonds the EDC issued in 2010.

“Personally, I don’t think the fallout [from default] would be very big,” Cusack added. “The biggest single determinant of our credit rating has been pension reform. The markets look very favorably on Rhode Island because of that.”

Fitch Ratings and Standard & Poor’s rate Rhode Island’s general obligation bonds AA, while Moody’s Investors Service assigns an Aa2 rating.

Gov. Lincoln Chafee and General Treasurer Gina Raimondo say the state should pay the debt or face backlash from the capital markets. Chafee’s proposed budget has earmarked $2.5 million in repayments during fiscal 2014.

The EDC, meanwhile, is suing 38 Studios in Rhode Island Superior Court, where Judge Michael Silverstein is hearing the case. Agency lawyers are arguing that Schilling withheld information about his company’s finances when he sought the funding.

That court also has jurisdiction over the bankruptcy sale of 38 Studios assets, after the U.S. Bankruptcy Court for the District of Delaware in Wilmington reassigned the case. Schilling had filed the Chapter 7 petition in Wilmington in June 2012.

Legislation is pending that would prohibit the state from paying the debt.

“It’s a very complicated issue. Pay back or not pay back? It’s not that simple,” said Mark Higgins, dean of the University of Rhode Island’s College of Business Administration.

Moderate Party chairman and gubernatorial candidate Ken Block wants Rhode Island not to pay while a lawsuit and investigations are pending.

Rep. Karen MacBeth, D-Cumberland, sponsor of a bill prohibiting the payments, questioned why a Finance Committee statement announcing the meeting called Fabian a “neutral, expert third party.”

MMA’s client list includes Assured Guaranty Municipal Corp., which is the bond insurer for 38 Studios. “I don’t see him being neutral,” she said on a radio talk show hosted by former Providence Mayor Vincent “Buddy” Cianci.

“MMA is an independent data and research provider on the municipal market. Our 300 clients value us because of that independence,” Fabian said in an e-mailed statement Thursday.

“We cover the market with candor, and that often means we may discuss a negative piece of information about one of our clients. But that’s why they appreciate us: We cover the industry as it is, not as a particular client wants it to be perceived.”

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