News Column

Fitch: RI's 38 Studios Moral Obligation Bonds Represent Limited Risk to State's Rating

June 24, 2014



NEW YORK--(BUSINESS WIRE)-- A failure to appropriate for debt service on moral obligation bonds issued on behalf of 38 Studios, a now-bankrupt videogame company, would negatively affect Rhode Island's GO and appropriation-backed ratings (currently 'AA' and 'AA-' with a Stable Outlook) but would not bring the ratings below investment-grade, according to Fitch Ratings.

Last week Rhode Island's legislature approved and the governor signed into law a fiscal 2015 budget which includes appropriation for debt service on moral obligation bonds issued on behalf of 38 Studios. The bonds mature in 2021 and debt service payments will require annual appropriation from the legislature.

Fitch's criteria for considering moral obligation enhancement provided to specific projects uses the project's security as a starting point and then reflect the enhancement provided by notching up from that rating. The 38 Studios moral obligation was a project-specific commitment with limited direct state involvement in the company. Fitch did not rate the 38 Studios transaction, but pursuant to this criteria would not have assigned a rating notched directly off the state's GO rating.

Nevertheless, Fitch recognizes that the bonds, (which were issued by the state's former economic development authority), did benefit from the market perception of a strong state commitment. In the event of non-appropriation, Fitch would take negative rating action to reflect the state's failure to live up to this commitment and the decreased commitment to bondholders that it would suggest.

Since the appropriation-backed ratings incorporate expectations about the state's willingness to pay, they could be subject to more rating volatility in the event of non-appropriation on the 38 Studios bonds. A significant portion of Rhode Island's debt is appropriation-backed debt, including for non-essential projects such as a convention center. Fitch notes that in dealing with distressed municipalities, the state has recently demonstrated a strong commitment to bondholder rights including enacting a statutory lien on property tax revenues in favor of municipal general obligation bondholders.

Fitch's 'AA' GO bond rating for Rhode Island is based on the state's conservative fiscal management, improved financial performance and a manageable debt position, offset by below-average economic growth. The rating incorporates the expectation that Rhode Island will continue to meet the 38 Studios moral obligation commitment.

In both 2013 and 2014, there was significant political debate about whether the state should appropriate for 38 Studios debt service - and in both years, by wide margins and with very public encouragement from the governor, the legislature passed budgets that included full payment. The debate over the last two years has created a level of headline risk, but Fitch does not believe it currently affects the state's commitment.

Additional information is available at 'www.fitchratings.com'.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Eric Kim

Director

+1-212-908-0241

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Marcy Block

Senior Director

+1-212-908-0239

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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