General Treasurer Frank Caprio

General Treasurer and gubernatorial candidate Frank Caprio came out against the 38 Studios loan guarantee deal in an interview with Bond Buyer today (subscription required). He had cautiously supported the deal last month.

Caprio joins just about every other candidate for office – including his chief rival, Lincoln Chafee – in opposing the $75 million taxpayer guarantee, which is expected to close by the end of this month.

Update: A number of things jump out to me about this. First off, Caprio’s discussion of the bond prospectus for the deal directly contradicts what the R.I. Economic Development Corporation’s Fred Hashway told me on Friday – namely, that there is no prospectus for the deal. What’s going on here?

Second, Caprio’s opposition will pack more punch than Chafee’s because he is the state’s general treasurer, which gives him a fiduciary responsibility to watch over the state’s finances and bond rating. Investors (and the two ratings agencies) are going to be concerned that one of the state’s constitutional officers – the one responsible for the state’s checkbook, who may be its next chief executive – is against this deal.

Third, this will not do much for Caprio’s relationship with Gov. Donald Carcieri.

I’ve asked both Amy Kempe, Carcieri’s spokeswoman, and the EDC for their response to Caprio’s comments. I’ll update if I hear anything.

Update #2: Just got a statement from EDC brushing off Caprio’s criticism and saying the agency is still going forward with the deal. Here it is: “RIEDC has a legal, business and moral obligation to move forward with this business investment opportunity as voted on by the RIEDC Board of Directors and outlined under the executed terms and conditions of the agreement. We are working toward a closing date.”

Update #3: A bit of a whirlwind day after Caprio’s 38 Studios announcement. Check out my analysis in this new story over on the main site.

Excerpts from Caprio’s press release announcing his opposition after the jump.

Frank Caprio moved late Monday to halt the 38 Studios deal, citing concerns about the deal’s long term impact on the state’s bond rating. He listed four major issues with the deal’s structure. …

“Our state’s leaders and EDC are unwilling to stop this deal or restructure it. That’s why I’ve gone directly to the potential investors to stop this deal and to protect our taxpayers,” said Caprio. [ed.: emphasis mine]

Caprio cited four major issues in his conversations with Moody’s and The Bond Buyer.

1. The Deal Lacks Normal Guarantees: The deal lacks the basic requirements that EDC normally expects of small businesses who apply for loans, specifically key person insurance, a personal guaranty by the principals, or bond insurance.

2. Failure to disclose current defaults by the State: The prospectus for the deal fails to disclose that the State is currently failing to honor a guaranty made by the EDC to the State’s Retirement Fund as part of the state’s financing of the American Express building in the 1990s.

3.  Questionable approval by the State Legislature: The nature and use of the bonds as approved by the general assembly were not made clear at the time legislation authorizing the issuance was debated and passed.  No public hearings were held, no testimony from the public was taken.

4. The Deal Jeopardizes the State’s Financial Stature: Passage of a deal that is without adequate gaurantees or other security and of which the public had little or no knowledge, reflects poorly on the state’s financial management practices, and creates a risky moral obligation for the state, decisions which could adversely affect the state’s bond rating, and increase the cost to the state of future debt issuances.

The EDC entered into this transaction before it issued rules and regulations implementing the Jobs Guaranty Program.  A complicated financing with potentially serious ramifications for the state’s credit rating, there is too much at stake for the first project being financed by EDC in this program to be one for a company that will require the expenditure of millions of dollars before it generates anymoney.

“This deal creates a risky moral obligation for the state, which could adversely affect the state’s bond rating and make future state debt issuances more expensive,” said Caprio.

The deal between the EDC and 38 Studios is funded by the sale of moral obligation bonds.  Unlike general obligation bonds, which are backed by the full faith and credit of the state, there is no guaranty that the state will authorize payment of the bonds. The decision to make the funds available is at the discretion of the legislature.

On Monday afternoon Caprio voiced his concerns to Moody’s, one of the two rating agencies who will determine the credit worthiness of the deal, and had a similar conversation with S&P Tuesday morning.  Caprio has asked Moody’s and S&P to withhold any further review of the deal until a new administration is in office. …