October 21, 2014
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Question of repaying 38 Studios bondholders raised, as panel considers EDC legislation

Seven bills regarding the Rhode Island Economic Development Corporation (EDC) were pitched to the House Finance Committee Tuesday, as local politicians say they don’t think Rhode Island taxpayers should be responsible for the loan granted to 38 Studios, especially since the state is insured.

Bondholders, who remain unidentified, are owed $112.6 million, with $75 million for the loan, and $37.6 million in interest over 10 years for the entertainment and IP development company founded by former Boston Red Sox pitcher Curt Schilling. Aside from money used in reserve funds, more than $89 million is owed.

While the EDC provided lawmakers with a two-page letter from John Pagliarini, the agency’s chief of staff, no representatives from the EDC were in attendance. Rep. Brian Newberry (R-Dist. 48 North Smithfield, Burrillville), who introduced legislation on the issue, said he felt it was disrespectful that no one from EDC was there.

“It’s an outrage,” he said.

Rep. Charlene Lima (D-Dist. 14, Cranston), who also introduced legislation, said the issue is a “black eye” to Rhode Island. Her bill would prevent the paying of the bonds until there’s full disclosure as to who the bondholders are. One of the biggest problems at hand, she said, is the lack of transparency, and hurled a verbal fastball at the issue.

“If they want their money, let them, at minimum, have the courage to come forward and identify themselves,” she said, also noting that the bondholders were supposed to be submitting written reports to EDC but failed to do so. “They did not fulfill their end of the bargain. They did not keep to the contract, therefore the state of Rhode Island has no obligation to pay these bonds or the interest on these bonds. Don’t pay them. Let them come forward and sue the state.”

Rep. Karen MacBeth (D-Dist. 52, Cumberland), along with Cumberland resident Brian Kelly, drafted legislation that would prohibit the state from paying bondholders. MacBeth said the moral obligation is to the people of the state, not the insurance company. In turn, she feels the insurance company should foot the bill.

“The state of Rhode Island cannot afford to put this burden on the backs of the people of this state,” said MacBeth. “Let us not continue to make another bad decision.”

She also pointed out that Gov. Lincoln Chafee is now saying Rhode Island should pay the bondholders, which contradicts comments he made in the past. She offered him some advice when she said, “Don’t squander our tax dollars we are insured to have paid.”

Rep. K. Joseph Shekarchi (D-Dist. 23, Warwick) presented another bill, which would not impact EDC from doing business; rather, it would prohibit the EDC from issuing loan guarantees. He feels this action would prevent future loan guarantee problems while protecting taxpayers.

“I want to look forward,” he said. “Respectfully, I like EDC – there are good people who work there, but they don’t have the expertise to give a loan guarantee to a private company … we gave, in essence, a credit card to 38 Studios and said, ‘Go ahead, do your business and if you get in trouble, you can use our credit card.’ There was very little due diligence … it’s a severe wasting of dollars.”

All bills were held for further study.


Comments
3 comments on this item

The trustee bank was required to register all the original bondholders and could provide the same to the General Assembly if pushed. There were between 4 and 6 original bondholders. The issues were lightly traded up till May, 2011 so a few other investors showed up after the first offering. Then the market seems to have frozen a full year before the final act.

EDC issued $50 million in bonds for RIAC in 2008. Financial projections show $70 million in revenues in 2012 against $40 million in expenses leaving a $30 million cushion for debt repayments etc. That did not happen. 2012 revenues and 2012 expenses were each about $50 million and booked loss was about $8 million. If General Assembly bolts on 38 Studios this will put great heat on RIAC.

Amazing that the Providence Journal did not cover this story.

Richard has about 4x more insight on this issue than the average member of the GA.

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