Standard & Poor's placed its AA rating on Rhode Island's general obligation bonds on credit watch with negative implications Monday, citing uncertainty over whether it will continue to pay 38 Studios' moral obligation debt.

Although the state's full faith and credit pledge does not apply to moral obligation bonds, S&P would probably take negative action should Rhode Island not pay, according to Henderson, who said S&P would resolve the matter when the state finalizes its budget. "We could revise the outlook back to stable if, in our view, there is consistent support for all of the state's debt," he wrote.

S&P also placed on watch its AA-minus rating on Rhode Island's appropriation debt, and its A rating on the state's other moral obligation-backed bonds.

The agency said a failure to appropriate for the 38 Studios bonds could lead to a multi-notch downgrade for GO and other debt.

Standard & Poor's also downgraded the 38 Studios bonds Monday. The Rhode Island Economic Development Corp.'s job creation guaranty bonds Series 2010, issued for the 38 Studios project, were dropped to BBB from A and that rating is also on credit watch with negative implications.

"The downgrade on the series of moral obligation bonds issued for the 38 Studios project reflects our view that continued debate about funding appropriations sufficient to repay principal and interest on the bonds indicates diminished support for this appropriation and a higher degree of risk relating to the repayment of these bonds," said S&P credit analyst Henry Henderson. "The negative credit watch action reflects our view that broad-based support for repayment of this debt is not clear."

Rhode Island backed the debt to lure 38 Studios, the video-game company owned by former Boston Red Sox pitcher Curt Schilling, to Rhode Island, only to see the company go belly-up.

On Friday, a report by SJ Advisors of Eden Prairie, Minn., commissioned by a state agency, said Rhode Island's bond ratings could fall to junk if does not pay this year's scheduled $12.5 million 38 Studios bond payment.

Gov. Lincoln Chafee has requested that amount in the proposed fiscal 2015 budget as part of a repayment plan.

The report was the result of a study legislators included in the current year's state budget.

Representatives from SJ Advisors are scheduled to speak Tuesday afternoon before the House Finance Committee, following the House Democrats' post-session caucus. There will be no public testimony.

Rhode Island, said S&P, has a series of appropriation debt -the $38.4 million Rhode Island Economic Development Corp.'s I-195 redevelopment district project Series 2013 bonds - that contains an acceleration provision should its rating drop below A-minus or the equivalent from another rating company. This could generate additional credit pressure if triggered.

The EDC was reorganized as RI Commerce Corp. after the 38 Studios fiasco.

Schilling's company received the loan guarantee 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.

Lawmakers last year debated heatedly whether to honor the debt before agreeing to make an initial $2.5 million payment. Moody's Investors Service threatened a downgrade at the time, essentially calling a moral obligation debt the equivalent of a general obligation.

Chafee's predecessor, Donald Carcieri, championed the loan with help from former House Speaker Gordon Fox. Fox resigned in March after law enforcement officials raided is Providence home and State House office.

The new chairwoman of the House oversight panel, Rep. Karen MacBeth, D-Cumberland, wants to subpoena Fox regarding 38 Studios. She and Michael Chippendale, R-Foster, recently said they received threatening letters over their desire to investigate the financing.

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