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Debate over 38 Studios bond default to heat up

May 4, 2014

PROVIDENCE, R.I. (AP) — Rhode Island has shelled out the first appropriated funds for its failed investment in Curt Schilling’s 38 Studios company, but the debate over whether to honor the rest of the debt is expected to ramp up in the General Assembly.

The state sent the bond trustee $2.4 million for an interest-only payment due to bondholders on Thursday. Lawmakers reluctantly approved the funds last session.

But they will soon have to take up whether to appropriate $12.5 million for the next installment. Gov. Lincoln Chafee has included the amount in his spending plan and maintains that a default would seriously harm Rhode Island’s financial reputation and significantly increase future borrowing costs.

The state remains on the hook for some $87 million. Earlier payments came from funds set aside as part of the deal under which Schilling’s startup video game company got a $75 million loan.

The Economic Development Corp. agreed in 2010 to back the loan to help lure the company from Massachusetts to Providence. 38 Studios later went bankrupt.

The EDC, now called the Commerce Corp., is suing the former Red Sox pitcher and 13 others, including some of its own former officials, claiming the board was misled into approving the loan guarantee. The defendants deny the charges.

House Speaker Nicholas Mattiello says he is waiting for the findings of an outside report on the impact of defaulting on the “moral obligation” bonds. Faye Zuckerman, a spokeswoman for Chafee, said the report by S.J. Advisors should be out soon.

One vocal critic of repayment is Rep. Karen MacBeth. The Cumberland Democrat, who is chairwoman of the House Oversight Committee, has introduced legislation for the second year that would prohibit the state from making the payments.

She said the committee will hear testimony on the issue Thursday and is reviewing how the 38 Studios deal came about and whether it was properly vetted.

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