Rhode Island EDC Paid $40K to Bond Agencies for 38 Studios

Rhode Island EDC Paid $40K to Bond Agencies for 38 Studios

The Rhode Island Economic Development Corporation paid $35,920 to its bond rating agencies -- Standard and Poor's and Moody's -- as well as over $5,000 in materials printing and shipping fees  -- in 2010 for analytical and professional services for the $75 million Job Creation Guaranty Program Taxable Revenue Bonds for 38 Studios.  

Pursuant to an Access for Public Records Act request for information on what the agency paid its bond rating agencies since 2010, GoLocal has learned that in addition to the collateral fees, the EDC paid Moody's $19,600 for "professional services" and Standard and Poor's $16,320 for "analytical services" -- and underwrote the terms of agreement from the sale of the bonds themselves.

"It should be noted that the funds used to pay the bond ratings agencies outlined (in the enclosures) were from the proceeds of the 38 studios bond sale." said EDC Spokeswoman Melissa Czerwein. 

GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST

Bond Ratings Agencies Gave Favorable Ratings to 38 Bonds at Outset

On September 24, 2010, after the approval of the $75 million loan to 38 Studios in July, the EDC announced that the bond ratings agencies gave "favorable scores" to the 38 studios investment -- the same month the video game company signed a lease for the former Blue Cross building in downtown Providence.

"The Rhode Island Economic Development Corporation announced that rating agencies Standard & Poor’s and Moody’s issued favorable ratings on bonds for the state’s loan guarantee agreement with 38 Studios. The strong ratings will ensure that the interest rates on the bonds will be within the interest rate cap approved by the RIEDC Board of Directors for 38 Studios. Standard & Poor’s issued an “A” rating. Moody’s rated the bonds at “A2,"  wrote the EDC in a release. 

It continued, "This rating level is within the range for state moral obligation investments. “The positive ratings by Standard & Poor and Moody’s are a strong indication that the market recognizes the growth potential of 38 Studios and the strength of the interactive gaming and digital media industries,” said Governor Donald L. Carcieri. “In our view, these ratings will reflect positively on this investment. The favorable evaluation confirms the RIEDC board’s assessment in approving this opportunity,” said RIEDC Executive Director Keith Stokes. “The ratings and the recent announcement of 38 Studios’ new headquarters location in Providence are critical performance milestones that get us closer to creating 450 high-wage, high-skilled jobs in Rhode Island.”

The loan officially closed on November 3, 2010. 38 Studios set up shop in Providence in 2011 -- and after releasing its first game in February 2012, ultimately ended up in default on the loan in May of 2012, when it laid off its entire workforce, leaving the question of who was responsible for paying off the bonds up for debate. 

Moody's Downgrades 38 Studios Bond Ratings in June

The 2013 General Assembly session saw oftentime contentious battles as to whether or not the State had to honor the bond obligation.  In April 2013, GoLocal's Stephen Beale reported that defaulting on the bonds would not necessarily hurt the state's finances.

The General Assembly ultimately voted to include a payment of $2.5 million on the 38 Studios bonds in Rhode Island's fiscal year 2014 budget, however Moody's had already downgraded the EDC's Job Creation Guaranteed Program for 38 Studios to a Baa1 rating on June 17, prior to the vote by legislators.  

On July 1, Moody's issued the following statement regarding the status of the EDC

"Moody's Investors Service has concluded the review of Rhode Island's general obligation and appropriation-dependent debt. Moody's confirmed the Baa1 rating assigned June 17 to Rhode Island Economic Development Corporation's (RIEDC) Job Creation Guarantee Program (38 Studios LLC) and confirmed ratings on the state's Aa2 general obligation debt and the notched ratings on the state's appropriation-dependent debt."

The release from Moody's also contained the following outlook on the state's general obligation bonds.

"The negative outlook on the state's GO and related (notched) debt reflects the state's narrow liquidity margins, below-average economic performance, and persistent budget gaps. While the pension reforms enacted in the fall of 2011 remove some budgetary pressure, the legal status of those reforms remains unsettled. A court decision against the state could result in significant costs. The negative outlook also now reflects uncertainty regarding the state's willingness to honor its 38 Studios obligation, which raises questions about its overall commitment to fulfill its pledges and the meaning of the full faith and credit of the state."

The last credit action taken by Standard and Poor's is listed for April 22, 2011, at which point the agency gave the obligation another "A" rating and stable outlook.

The House Oversight Committee met last week where it loooked into background documents provided by the EDC pertaining to the video company deal, The committee is scheduled to hold more hearings on 38 Studios in the coming months.