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Caprio reverses course on 38 Studios

August 31, 2010

After the state Economic Development Corporation in July approved a $75 million loan guarantee for 38 Studios, Frank Caprio said he would be a cheerleader for the project. Now, though, Caprio has changed his stance — moving to block the deal through his post as state treasurer — while issuing a release through his gubernatorial campaign. Caprio’s switch puts his stance in alignment with independent candidate Lincoln Chafee.

. . . Now, with the EDC planning to move forward with the guaranty without making the necessary changes to make the deal fair for Rhode Island, Caprio is moving to block the issuance of the bonds, voicing his concerns directly to the rating agencies and to potential buyers via the industry’s leading national publication, The Bond Buyer, which published Caprio’s actions in a story today.
“Our state’s leaders and EDC are unwilling to stop this deal or restructure it.  That’s why I’ve gone directly to the potential investors to stop this deal and to protect our taxpayers,” said Caprio.

Caprio cited four major issues in his conversations with Moody’s and The Bond Buyer.

1. The Deal Lacks Normal Guarantees: The deal lacks the basic requirements that EDC normally expects of small businesses who apply for loans, specifically key person insurance, a personal guaranty by the principals, or bond insurance.

2. Failure to disclose current defaults by the State: The prospectus for the deal fails to disclose that the State is currently failing to honor a guaranty made by the EDC to the State’s Retirement Fund as part of the state’s financing of the American Express building in the 1990s.

3.  Questionable approval by the State Legislature: The nature and use of the bonds as approved by the general assembly were not made clear at the time legislation authorizing the issuance was debated and passed.  No public hearings were held, no testimony from the public was taken.

4. The Deal Jeopardizes the State’s Financial Stature: Passage of a deal that is without adequate gaurantees or other security and of which the public had little or no knowledge, reflects poorly on the state’s financial management practices, and creates a risky moral obligation for the state, decisions which could adversely affect the state’s bond rating, and increase the cost to the state of future debt issuances.

The EDC entered into this transaction before it issued rules and regulations implementing the Jobs Guaranty Program.  A complicated financing with potentially serious ramifications for the state’s credit rating, there is too much at stake for the first project being financed by EDC in this program to be one for a company that will require the expenditure of millions of dollars before it generates anymoney.

“This deal creates a risky moral obligation for the state, which could adversely affect the state’s bond rating and make future state debt issuances more expensive,” said Caprio.

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