Bottom line: RI must pay 38 Studio bonds



Any elected official in the state of Rhode Island who recommends that we walk away from our 38 Studios debt should have his head examined. As painful as it is, the collapse of 38 Studios means we owe about $105 million to the bondholders who helped finance the ill-fated venture. As legislators deal with restructuring the RI EDC, they are also debating how to repay the loans coming due and, taking a walk on the wild side, questioning if the state should repay them at all.

Governor Chafee, who believes we need to pay the bondholders their money with interest attached, has placed a first payment in his budget for the next fiscal year, which starts July 1st. Chafee’s repayment plan calls for annual payments of $12.5 million for the next seven years, preceded by a first payment of $2.5 million. That would bring our total debt repayment to over $112 million and take eight years to retire.

We now know, thanks to intrepid reporting by WPRI’s Target 12 investigators, who those major bondholders are: major insurance and financial service companies like USAA, the military member insurance giant, and Transamerica, as well as Wells Fargo and First Southwest. USAA and Transamerica purchased almost two-thirds of the $75 million bond notes; USAA alone bought almost $36 million.

Walking away from repayment rests on a spineless and self-destructive legal argument that straddles the difference between a “moral obligation” as opposed to a “general obligation” to repay. As WPRI’s report stated, “The 38 Studios debt was legally classified as moral obligation bonds rather than general-obligation bonds. Governments promise investors they’ll repay general-obligation bonds, but only pledge to consider repaying moral-obligation bonds.” Of course, despite the legal distinction, states always repay moral obligation bonds. To not do so would label them as big time credit risks and charlatans. As has been reported elsewhere, only one state has defaulted on a moral obligation bond: Arkansas and that was in the midst of the Great Depression.

Those who say we should renege, like former Governor Carcieri who helped get us into this mess in the first place, argue that the bondholders accepted risk in buying the bonds and if we don’t pay they can go to their insurance companies for the make good. Rhode Island taxpayers, who aren’t at fault, shouldn’t be burdened by it.

Too bad the world doesn’t work that way. Should Rhode Island default on the obligation using a legal tactic, our reputation in the global financial community would be ruined, our credit rating would plummet, and costs would soar to get anyone to back our bond offerings. We would drive a stake into all efforts to get our state viewed more positively in national rankings and to spur outside investment and economic development.

One thing we can do is to attempt to renegotiate the terms of the repayment, as some are advocating. That should be looked into, although it probably means we would end up paying even more in the end for easier terms on the way through the repayment program. The bottom line is that we have to repay. There is no honest or proper way to get around it, so let’s get it going.

38 Studios’ financing was an inside political deal that violated the loan and legislative processes in the first place and then was badly managed. The process of properly vetting such a risk, which may have stopped the inside wheeling and dealing in its tracks, was strangled by an overwhelming desire to land a video game development company and use it to nurture an industry within our borders. That it was headed by Curt Schilling made it even more attractive for all the wrong reasons. Curt is back on sports radio these days discussing what he always knew best: baseball. The state’s taxpayers were again ill-used by their elected officials and that, unfortunately, is tough luck. We have a process to change that by not reelecting them, but that’s another headache inducing sad story.


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