- Associated Press - Friday, May 9, 2014

PROVIDENCE, R.I. (AP) - Defaulting on the debt related to 38 Studios’ bankruptcy would sink Rhode Island’s bond rating to junk status and could harm the state’s overall business climate, an independent analyst predicted in a report released Friday.

The report from Minnesota-based SJ Advisors said default would bring increased borrowing costs and harm to the state’s reputation, and could lead to a “contagion effect impacting other Rhode Island issuers and even taint the business environment.”

The firm believes the most likely scenario with a default would have the state paying nearly $126 million more than the cost of honoring the debt. Even under the best-case scenario, the state would pay $36 million more.

The General Assembly called for the outside analysis last year as it reluctantly approved the first payment, from state funds, to bondholders who financed the 38 Studios deal. The $2.4 million payment was due May 1.

But some lawmakers say taxpayers shouldn’t foot the bill for what was a colossally bad transaction. They have been pushing default on the remaining $87 million that Rhode Island owes under the deal that gave 38 Studios a $75 million state-backed loan. The loan was financed by so-called moral obligation bonds, for which there is no legal repayment requirement.

Senate President Teresa Paiva Weed, D-Newport, said Friday the state should honor the debt.

“The responsible course of action is to repay the state’s obligation while pursuing litigation and every means to recoup costs on behalf of the taxpayers,” she said in a statement.

The state’s economic development agency is suing 38 Studios founder and former Red Sox pitcher Curt Schilling and others over the collapse of his video game company. It says the board was misled into approving the deal that helped lure the company from Massachusetts to Providence.

House Speaker Nicholas Mattiello, D-Cranston, hasn’t yet taken a position on repaying.

“This report provides House members with some good information that will help us to formulate a fact-based decision on the bond repayment,” he said in a statement. “The report will be considered, along with the examination of various aspects of this issue by the House Finance and Oversight committees.”

John Simmons, executive director of the business-backed Rhode Island Public Expenditure Council, testified before House Oversight on Thursday that a default would cost the state more than the 38 Studios debt.

Gov. Lincoln Chafee’s administration conducted an analysis last year that similarly concluded a default would harm the state’s financial reputation and lead to significantly higher borrowing costs. He insists the state must make good on the debt, no matter how distasteful it is.

The state is paying up to $75,000 for the SJ Advisors report.