Waiting game continues on 38 Studios

October 7th, 2010 at 11:51 am by under News and Politics

It’s been a busy two weeks here at WPRI – with investigations, exclusive polls and last night’s debate – but I’ve been doing my best to stay on top of what’s happening with the 38 Studios deal.

It’s also been two weeks since the video game company picked its new location in Providence and the EDC got two favorable bond ratings for the $75 million loan guarantee. That cleared the way for underwriters Barclays and Wells Fargo to close the transaction by selling the bonds to private investors.

The formal signal that the process is coming to a close will be when the EDC sends the investors what’s known as the “private placement memorandum,” or PPM – the official document with all the legal fine print about the loan. That had been expected to be done by late last week, but EDC spokesman Michael Blazek told me today the document hasn’t been finalized and mailed yet.

Although I don’t know what the holdup is, I don’t have any reason to think things have gone awry – though originally the deal was supposed to close back in August.

The 38 Studios deal remains unpopular, with more than half of voters opposed to it in both our WPRI/Fleming poll and in this week’s Brown University poll. Among the four candidates for governor, Republican John Robitaille is the only one who supports it, and he defended it vigorously at last night’s debate.

“I think it’s awful what these men have done,” he said of his three opponents. “They are putting up a ‘keep out’ sign [to businesses eying Rhode Island], as I said earlier. The deal is not what they’re saying it is.”

Democrat Frank Caprio criticized the agreement once again – “What we need to do is put this on hold immediately,” he said – but pressed by Tim White, he also sounded resigned to the loan going through: “I will try and make the deal the best deal for Rhode Island.” Similarly, Moderate Party founder Ken Block said, “A deal is a deal,” and would need to be honored.

Lincoln Chafee didn’t say anything about trying to go back on the deal, but did issue a veiled threat to Gov. Donald Carcieri: “I guess the best I can advise Governor Carcieri is to pay up on his insurance premiums, because there is an avenue for those aggrieved to come after someone for fiduciary irresponsibility. I suppose that is the last recourse, but it’s unfortunate the governor hasn’t listened, and especially in light of the performance of the EDC under his tenure.”

For all the sound and fury, I assume the transaction will close as expected, the $75 million will be borrowed, and the money will start getting paid out under the schedule agreed by the EDC and the company. (A schedule, I might add, that you’ve only read about on WPRI.com!)

Meanwhile, I finally got a chance to read the rating documents from Moody’s and Standard & Poor’s. Unsurprisingly, both agencies based their favorable ratings primarily on the state’s pledge to appropriate tax money to cover any inability by 30 Studios to make its bond payments.

One way to look at how risky the two agencies considered the deal is to compare the spread between the state’s basic bond rating (its “general obligation” rating) and the rating given to 38 Studios.

S&P rated the 38 Studios loan ‘A,’ only one notch below the state’s ‘AA’ general-obligation rating. Moody’s was more concerned, pegging the 38 Studios transaction three notices below the state’s GO rating, because “loan payments from 38 Studios have inherently more risk than other revenue streams that have established track records and predictability.”

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One Response to “Waiting game continues on 38 Studios”

  1. [...] and behold, while reading the Moody’s rating document on the 38 Studios deal – which is dated four days after the e-mail I received disputing the [...]