By Ted Nesi
PROVIDENCE, R.I. (WPRI) – While Rhode Island leaders never should have backed a $75 million loan to Curt Schilling’s 38 Studios, Gov. Lincoln Chafee bears the blame for the company’s final collapse in the spring of 2012, according to one leading industry executive.
John Smedley, president of the Sony Corp. gaming division Sony Online Entertainment, argued in a string of tweets sent Monday that the R.I. Economic Development Corporation board of directors made a basic error in 2010 by putting public money on the line for the high-risk creation of a video game.
By Dan McGowan
PROVIDENCE, R.I. (WPRI) – Republican state Sen. Dawson Hodgson formally launched his campaign to become Rhode Island’s next attorney general Tuesday, vowing to protect the public safety and economic interests of all residents while criticizing incumbent Democrat Peter Kilmartin.
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – Rhode Island’s 113 state lawmakers may get a sharp sense of déjà vu Tuesday when they return to Smith Hill for the first time since July.
The House and Senate will convene at the State House at 4 p.m., when House Speaker Gordon Fox and Senate President M. Teresa Paiva Weed will gavel their 2014 sessions to order. But most of the big issues on their radars so far are hardy perennials from prior sessions: pensions, tolls, 38 Studios, taxes and a persistently weak economy.
By Tim White
PROVIDENCE, R.I. (WPRI) – An auction to sell off the intellectual property of defunct video-game company 38 Studios failed to produce any “acceptable offers” for its marquee game and generated only $320,000 in sales for two other assets, according to a court-appointed receiver.
Attorney Richard Land said more than 20 parties expressed interest in the video games and other intellectual property – including programs and artwork – from 38 Studios, resulting in the sale of two games – “Rise of Nations” and “Rise of Legends” – as well as the trademark for Big Huge Games.
“The offers we got were so paltry related to the total cost in developing [Project Copernicus] that it didn’t make sense to sell it for such a small sum,” Land said during a taping of WPRI 12′s Newsmakers. “That’s not to say there isn’t some real value there and we’re continuing to work with interested parties to develop a future with this game and to develop some potential revenue streams with the state of Rhode Island.”
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – A majority of Rhode Island voters continue to think the state is on the wrong track despite a small uptick the number of people feeling more optimistic, an exclusive WPRI 12/Providence Journal poll released Tuesday shows.
The poll also reveals 50% of Rhode Island voters say the state shouldn’t repay roughly $90 million to investors who bought bonds sold in 2010 to benefit Curt Schilling’s bankrupt 38 Studios, while 38% say the state should repay the money and 13% aren’t sure.
By Dan McGowan
PROVIDENCE, R.I. (WPRI) – A lawyer for the R.I. Economic Development Corporation on Friday said the state still expects to collect all of the roughly $90 million taxpayers could be forced to spend to cover the failed investment in Curt Schilling’s bankrupt video-game company.
• Related: Here are 9 takeaways from the big 38 Studios lawsuit ruling (Aug. 28)
By Tim White
PROVIDENCE, R.I. (WPRI) – The court-appointed receiver handling the remains of Curt Schilling’s bankrupt 38 Studios says the company’s intellectual property – like the unfinished game “Project Copernicus” – will be posted for sale by the end of the month.
• Related: Experts doubts RI will fetch much for 38 Studios’ leftover game (Sept. 11)
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – A panel of Rhode Island lawmakers on Wednesday slogged through a second batch of internal documents related to 38 Studios without shedding much new light on how the state’s investment in Curt Schilling’s failed video-game company went so awry.
By Tim White
PROVIDENCE, R.I. (WPRI) – A year and a half since the epic collapse of 38 Studios, the video game company’s most valuable asset is finally about to go up for sale.
The incomplete game “Project Copernicus” and other intellectual property from the ruins of 38 Studios will be posted for sale “soon” through a website, according to court appointed receiver Richard Land.
By Ted Nesi and Tim White
PROVIDENCE, R.I. (WPRI) – The U.S. Securities and Exchange Commission is investigating the $75-million taxpayer-backed loan that the R.I. Economic Development Corporation gave to Curt Schilling’s failed video-game startup 38 Studios, WPRI.com has learned.
• Related: Exclusive: Documents reveal how RI rushed on 38 Studios deal (Nov. 20)
R.I. Superior Court Judge Michael Silverstein handed down a 98-page ruling in the 38 Studios lawsuit on Tuesday, with the headline being that he will allow Rhode Island to move forward with much of its case against 14 individuals and firms involved in crafting the $75-million deal back in 2010.
The full decision from Silverstein is available on WPRI.com [pdf], but for those who don’t want to read all 98 pages, here are some of the key points that emerge from a close reading of the document.
1) This is a complicated legal matter. Obvious, but worth highlighting. The lawsuit has 14 defendants and 16 different counts, with many of the arguments “intertwined,” as the judge put it. Lawyers for the parties filed 1,500 pages of documents and had two days of oral arguments before Judge Silverstein over this motion to dismiss. Much of his 98-page decision Wednesday is taken up with extensive reviews of the arcane provisions of the law and case history around fraud, negligence, standing and other issues. And the actual trial is still at least months away.
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – A R.I. Superior Court judge on Wednesday ruled that significant parts of the state’s lawsuit against some of the architects of the 2010 deal to bring Curt Schilling’s ill-fated video game company to Rhode Island can move forward.
By Dan McGowan
PROVIDENCE, R.I. (WPRI) – The former head of the state Economic Development Corporation indicated the General Assembly likely wouldn’t have created a loan guarantee program without knowing Curt Schilling was interested in moving his video game company to Rhode Island in 2010, according to emails released by the state Wednesday.
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – Gov. Lincoln Chafee on Wednesday signed into law a 2013-14 state budget after a contentious debate over 38 Studios bond payments and tolls, although he expressed concerns about changes lawmakers made to his original proposal – and took a swipe at Treasurer Gina Raimondo.
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – Wall Street is smiling on Rhode Island lawmakers after they agreed to include a controversial $2.5-million payment on the 38 Studios bonds in the 2013-14 state budget.
• Related: Moody’s downgrades 38 Studios bonds as lawmakers waver (June 17)
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – Rhode Island lawmakers approved an $8.2-billion state budget for 2013-14 on Wednesday night that includes $2.5 million to pay the 38 Studios bonds and a $12.9 million pension payment. It passed less than 24 hours after House Speaker Gordon Fox’s initial tax-and-spending plan got torpedoed.
• Related: Fox forced to postpone budget debate after pension rebellion (June 26)
The proposed 38 Studios bond payment for 2013-14 is $2.5 million, which is roughly .03% of the entire $8.2-billion state budget lawmakers will take up at 2 p.m. Yet the debate over whether to make that payment is drawing national attention, Annie Linskey, Brian Chappatta and Michelle Kaske report for Bloomberg News:
Rhode Island stands on the brink of becoming the first state since Reconstruction to renege on its debts, if it doesn’t cover $75 million in bonds that backed ex-Boston Red Sox pitcher Curt Schilling’s failed 38 Studios LLC. …
“There’s a cloud over whether or not they’re going to fully meet this obligation for the remaining eight years,” said Robert Kurtter, a managing director at Moody’s in New York. “If this appropriation is included in the budget but it’s approved so that a couple of votes one way or another could alter the course of this, it might create concern for the rating for future years.” …
Rhode Island’s deliberations are “the sort of thing that you can’t have happen” in the $3.7 trillion municipal-bond market, said Adam Stern, director of municipal research at Breckinridge Capital Advisors in Boston. “Because it’s so affordable for the state, and because of how that deal was issued, it’s a little scary that somebody wouldn’t pay that.”
The budget pairs the 38 Studios bond appropriation with $50,000 to commission a comprehensive study of what the impact would be if Rhode Island doesn’t pay the rest of the nearly $90 million due through 2020. It’s not clear whether that will be enough to convince rank-and-file lawmakers to OK the $2.5 million.
Still, there’s no sign the bond markets are punishing Rhode Island for the debate so far. Bloomberg reports the extra amount investors are demanding to purchase Rhode Island debt has actually fallen since the start of the year, from 0.7 of a percentage point to 0.5 compared with a benchmark municipal-bond index.
• Related: RI lawmakers pushed to repay 38 Studios bondholders (June 6)
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – Rhode Island lawmakers will kick off their biggest debate of the year at 2 p.m. Tuesday, as the House of Representatives takes up a proposed state budget that would spend $8.2 billion during the new fiscal year that starts July 1.
• Related: What’s in the House Finance Committee’s 2013-14 budget (June 18)
By Dan McGowan and Ted Nesi
PROVIDENCE, R.I. (WPRI) – House Speaker Gordon Fox dismissed opposition to the R.I. Economic Development Corporation’s deal with former Red Sox pitcher Curt Schilling’s video game company as “silly season” in September 2010 during a conversation with two national bond-rating agencies.
• Related: RI OK’d Schilling loan without finalizing program rules (July 27)
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – Wall Street gave Rhode Island a sharp rebuke Monday as Moody’s Investors Service downgraded its rating on the bonds sold to benefit Curt Schilling’s defunct 38 Studios, citing a growing resistance among lawmakers toward paying back the bondholders.
By Ted Nesi
PROVIDENCE, R.I. (WPRI) – In a battle pitting Rhode Island against Wall Street, Wall Street will win.
That was the emphatic message Thursday from top aides to Gov. Lincoln Chafee, who warned the state would risk “severe” consequences if lawmakers refuse to pay bondholders roughly $90 million they loaned the R.I. Economic Development Corporation to fund Curt Schilling’s bankrupt video-game company, 38 Studios.
“The governor is emphatically opposed to not paying this obligation,” Richard Licht, Chafee’s director of administration, told reporters. Chafee was a vocal critic of the 38 Studios transaction as a candidate for governor.
“The governor was adamantly opposed to the loan – if we’d listened to him we wouldn’t be here today,” Licht said. “But we are, and it’s better to work with a known risk than an unknown risk that could be much more harmful to the state. … We believe the risk of not paying significantly exceeds the risk of paying.”
Licht’s comments came amid a full-court press by the Chafee administration to ensure wavering state lawmakers don’t balk at including $2.5 million in the 2013-14 budget to cover state taxpayers’ first payment on the 38 Studios bonds, which were sold in 2010 to a number of major investment firms.
‘The good name of Rhode Island’
“This isn’t about the bondholders. This isn’t about an insurance company. This is about the good name of Rhode Island and the credit we have now,” Licht said, pointing to other state policies the financial markets have welcomed, such as the 2011 pension overhaul, the Central Falls bankruptcy and the first-lien bondholder law.
Chafee spokeswoman Christine Hunsinger added that the governor hopes the state’s lawsuit against the architects of the 38 Studios deal, as well as the eventual sale of the company’s intellectual property, could yield money that could be used to help repay the bonds.
The House Finance Committee heard testimony later Thursday from Matt Fabian, managing director at Municipal Market Advisors, a Massachusetts-based consulting firm whose clients include Assured Guaranty, the company that insured the 38 Studios bondholders against losses in the cast of default.
Fabian was the only witness invited by legislative leaders to testify on the issue. A House spokesman said he wasn’t paid to offer his opinions.
“I know there are people who are upset and very angry about this whole thing, and I share this feeling,” House Finance Committee Chairman Helio Melo, D-East Providence, said at the hearing. “There is no appetite whatsoever here to protect the bondholders in any way, shape or form. We are here to protect Rhode Island and the future of Rhode Island, and we need to weigh out some options.”
First time since the 1800s
Fabian told the lawmakers if Rhode Island failed to repay the 38 Studios bonds it would be the first time a U.S. state had “walked away” from a bond obligation since after the Civil War. Others who have defaulted, such as Arkansas in the 1930s, were unable to pay, which is viewed differently, he said. Arkansas eventually repaid the debt.
Fabian pointed out that the original disclosure documents in the 38 Studios deal contained relatively little information about Schilling’s company but provided reams of details about the state’s financial condition, which would have suggested to bondholders that this was Rhode Island’s debt as much as the company’s.
Fabian said he surveyed more than a dozen bond investors to get their opinions on how Rhode Island would be treated if the state defaults. “There is really a wide variety of opinions,” he said. “Some say there could be a minimal impact. Some say there could be a large impact. And some just wave their arms about catastrophe.”
He suggested the state should take a slower approach to making any decision about whether to pay the 38 Studios bonds, perhaps by commissioning an outside study of the potential impacts and seeking to renegotiate the repayment terms with Assured Guaranty or the bondholders.
“The state has done an amazing job improving its reputation with Wall Street and the rating agencies, with pension reform, with changes to the law involving local governments, including Central Falls,” Fabian said, adding: “Why drag your name through the mud just to save a little bit?”
‘A dog-and-pony show’
The committee members listened to Fabian’s comments closely, but more than one expressed skepticism about the lack of hard data about the impact of a default.
“I say we get out of this now, have these insurance companies pay this bill, and then we negotiate with the insurance companies if they want to ‘morally’ come after us,” said Rep. Ray Hull, D-Providence.
Melo replied that the 38 Studios insurance policy was paid for out of the bond proceeds, not by the state.
House Minority Leader Brian Newberry, R-North Smithfield, called the hearing “a dog-and-pony show” designed by top leaders to push rank-and-file members to support repayment. He also noted that Fabian said he could have done a more thorough analysis of the state’s options had they approached him sooner.
Last May, analysts from Moody’s Investors Service disclosed that Chafee, Treasurer Gina Raimondo, House Speaker Gordon Fox and Senate President M. Teresa Paiva Weed had all “expressed to us directly their support for the moral-obligation commitment based on the state’s credit.”
Insurer would fight the state
Licht said the Chafee administration has approached the bond insurer, Assured Guaranty, about what steps it would take if state lawmakers refuse to provide the money to pay the bonds, forcing the firm to cover the cost. “They said they expect the state to pay,” he said. “They will exercise all rights they have.”
“They don’t want to have the floodgates open,” added Peter Marino, Chafee’s Office of Management and Budget director.
Although the 38 Studios debt is a moral-obligation bond, not a standard general-obligation bond, the financial markets will not make a distinction if Rhode Island refuses to pay, he said. General-obligation bonds must be approved by voters in an election, while the moral-obligation bonds for 38 Studios were approved in 2010 by the EDC board of directors at Carcieri’s urging, just weeks after lawmakers gave them the authority to do so.
No state has ever defaulted on a moral-obligation bond, though some municipal governments have and were punished by the rating agencies for doing so, including Vadnais Heights, Minn., and Moberly, Mo. Licht argued that Rhode Island, as a small state with relatively little impact on the bond market, could be penalized.
RI would be ‘test case’
“If the first state ever to default on a moral obligation were California the market conceivably could look at it differently,” Licht said. “But we are a perfect case because Rhode Island is such a small player in the market – we’re not significant enough. If they want to set an example … if they want to say, ‘We want everyone to have pause before they ever do this,’ Rhode Island sets up perfectly.”
“The governor is not going to risk us being a test case,” Licht added.
It’s still unclear when the House Finance Committee will release its amended version of Chafee’s proposed budget and when the panel will vote on it; Melo told WPRI.com he doesn’t expect a vote next week. The new fiscal year starts July 1, and lawmakers usually vote on the budget between late May and June.
This year won’t be the last time lawmakers are asked to vote on paying the 38 Studios bonds. Repayment will require them to approve $12.5 million annually from 2014 through 2020, as well.
“Maybe we should pay this year’s payment and then do our due diligence to come up with a clearer answer,” said Rep. Frank Ferri, D-Cranston.
State bond rating could fall
Licht and Marino acknowledged that they can’t quantify exactly how much a default by the state would wind up costing directly and indirectly, but argued it would likely raise borrowing costs, hurt the state’s credit rating and potentially result in costly litigation by the insurer.
“We know that the consequences will be severe, and we believe – and we can demonstrate – that those consequences could approach $100 million or even exceed it,” Licht said.
Analysts at Moody’s have refused to tell Rhode Island officials what they would do to the state’s credit rating if lawmakers don’t repay the 38 Studios bondholders, citing legal constraints, according to Licht.
Fabian said he is skeptical that the rating agencies would reduce Rhode Island’s credit rating below investment grade if the state defaults. “Rhode Island is a state – it’s not a little city in the Midwest,” he said. But the state could see its current AA rating reduced by two or three notches, he said.
Deal protects investors’ yields
Failing to pay the 38 Studios bonds could also harm the ability to borrow of municipalities and other entities such as T.F. Green Airport’s parent agency. “There would be an assumption that the state would no longer be willing to help them, or could be willing to get in the way of them servicing their own debts,” Fabian said.
The 38 Studios bonds pay higher interest rates – between 6% and 7.75% – than most municipal bonds. Licht said there is no legal way for the state to lower the bond payments because the Carcieri administration’s advisers included a “redemption premium,” which says the investors will receive all the proceeds promised.
As the committee discussed Rhode Island’s options Thursday evening, 38 Studios founder Curt Schilling sent an unrelated message on Twitter, apparently a reference to prospect Braden Shipley in the Major League Baseball draft: “Shipley still out there, love the potential.”
Two groups opposed to repaying the bonds, Occupy Providence and the libertarian-leaning Stephen Hopkins Center for Civil Rights, organized a forum at the State House where experts including Gary Sasse, a top aide to former Gov. Don Carcieri, suggested the state should do more to study the pros and cons of defaulting.
R.I. House Finance Committee Chairman Helio Melo has a unique definition of “neutral.”
In a news advisory issued Tuesday, House leadership announced Melo’s panel will hear a presentation Thursday afternoon from Matt Fabian, managing director of Municipal Market Advisors, about whether taxpayers should repay the 38 Studios bonds. “The presentation is intended to provide insight that a neutral, expert third party can bring to the topic,” the statement said.
But Fabian – the only witness the committee is scheduled to hear from – isn’t necessarily neutral.
Last July, Fabian predicted doom for Rhode Island if taxpayers fail to pay the 38 Studios bondholders, who include USAA and Transamerica. “The market would treat it as tantamount to defaulting,” Fabian told Stateline. Rhode Island, he warned, “would be ostracized.”
By Ted Nesi and Tim White
PROVIDENCE, R.I. (WPRI) - In his first TV interview since losing the 2010 governor’s race, former General Treasurer Frank Caprio told WPRI 12 he regrets his infamous comment that President Obama could take his endorsement and “shove it,” attributing the outburst to the frustrations of a losing campaign in its final weeks.
• Video: Watch the full Newsmakers with Frank Caprio (May 14)
Reuters’ Felix Salmon, one of the most influential finance bloggers in the nation, jumped into the discussion Josh Barro and yours truly were having about Rhode Island officials’ justification for refusing to default on the 38 Studios bonds. While Salmon agrees the state’s pensioners would seem more deserving of repayment than the bondholders, he gently chides Josh and me for a bit of “faux naïveté” regarding what’s going on:
The answer is that yes, moral obligation bonds are effectively general obligations bonds in all but name. The state has found a way of issuing bonds without having to get the approval of the legislature, but they’re still obligations of the state, and the state doesn’t distinguish the two types of obligation. And yes, Rhode Island should be paying the lower interest rate rather than the higher interest rate. But that doesn’t mean that voters should have to approve moral obligation bonds: it could equally mean that voters should stop having to approve general obligation bonds.
That is what all governors really want: to have the legislature and voters stop interfering in their borrowing strategy. And that is the real reason why Chafee is staying current on his moral obligation bonds. He wants the world to see voter approval as an anachronism, and in an ideal world he would love it if moral obligation bonds had the same legal backing — and therefore the same lower yield — as general obligation bonds. That way he’d never need to issue a general obligation bond, or get voter approval for such a thing, ever again. It’s a very attractive vision — and it’s not one he’s going to give up just because Rhode Island is suffering a fiscal nightmare these days.
As someone who spends a lot of time listening to Lincoln Chafee, I’m skeptical that the governor has truly thought through the reasons for drawing a distinction between moral-obligation and general-obligation bonds (or not drawing one). But as Salmon makes clear, this debate has demonstrated that there’s no real difference between the two types of debt when it comes to whether taxpayers will have to cover the liability.
• Related: Chafee reveals RI’s confusion about the 38 Studios bonds (May 1)