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Updated: Wednesday, 16 May 2012, 8:59 AM EDT
Published : Tuesday, 15 May 2012, 12:39 PM EDT
PROVIDENCE, R.I. (WPRI) - 38 Studios defaulted on May 1 when it failed to make a required $1.125 million payment to the R.I. Economic Development Corporation, causing alarm at the State House about the company's finances, House Speaker Gordon Fox confirmed Tuesday.
"They're trying to work through that," Fox told reporters at the State House. 38 Studios is seeking bridge financing to get it through an apparent cash-flow shortfall but has not asked the state to provide funding, he said. The company has also explored using state tax credits to shore up its finances.
The EDC board has scheduled an emergency meeting for 8:30 a.m. Wednesday to discuss "an unexpected occurrence that requires immediate action to protect the public regarding the 38 Studios, LCC financing," and parts of the meeting may be closed, according to a notice filed with the secretary of state's office.
Fox said he was briefed by EDC executive director Keith Stokes about the situation earlier Tuesday but the speaker declined to provide details about what the board will vote to do. "You'd have to ask them," Fox said, adding: "I don't want to give you any more details on that because I'll mess them up."
Company has taken $49.8M
The EDC gave 38 Studios a $75 million taxpayer-backed loan in 2010 with the strong backing of Stokes and then-Gov. Donald Carcieri. In exchange the company moved its headquarters from Massachusetts to Providence in April 2011 and pledged to employ 450 here.
38 Studios had received $49.8 million in cash from the loan as of March 15, according to a disclosure notice the company sent to bondholders and obtained by WPRI.com. It's unclear if the company was unable to make the $1.125 million payment because it's already used up all the cash it received from the loan.
Another $23.4 million from the loan proceeds was put into a Capital Reserve Fund and a Capitalized Interest Account, with the remainder used to pay for floating the bonds. A spokeswoman for the EDC has declined to comment. 38 Studios has not returned messages.
The $1.125 million payment 38 Studios failed to make on May 1 is an “Annual Guaranty Fee” it owes the EDC each year under the terms of the 2010 deal. The documents obtained by WPRI.com say the fee is equal to 1.5% of the average amount of outstanding bonds.
EDC fees differ from bonds
Somewhat confusingly, the Annual Guaranty Fee that 38 Studios owes the EDC each May 1 is separate from the twice-a-year payments made to investors who purchased the $75 million in bonds. For now, those payments are coming out of the Capitalized Interest Account, which was funded with $10.6 million from the $75 million loan.
Starting in 2013, 38 Studios is supposed to pay the bondholders from its game sales; if the company can’t, the governor is required to ask lawmakers to put up taxpayer money to pay them back. Rhode Island taxpayers could owe a maximum of $112.6 million in principal and interest payments on the bonds if 38 Studios can't pay.
38 Studios released its first game – “Kingdoms of Amalur: Reckoning” – in February to positive reviews and decent sales. But the taxpayer-backed loan is funding its other project - “Project Copernicus,” a massively multiplayer online game that was first targeted at a September release but has remained under wraps.
The questions about whether “Copernicus” remains on track grew in recent days after 38 Studios was removed from the list of companies scheduled to present at next month’s Electronic Entertainment Expo in Los Angeles, one of the gaming industry’s biggest events of the year. The EDC hired IBM in 2010 to provide ongoing third-party monitoring of 38 Studios’ progress.
'No regrets' from Fox
Governor Chafee said Tuesday he could offer few details about 38 Studios' financial situation, though he confirmed the state is working with the company to find a solution. Asked whether he thinks the company will survive, he said: "It's too early to really say."
Despite the problems, Fox said he has "no regrets" about pushing through a new $125 million loan program in 2010 partly to lure Schilling's company to Rhode Island. Schilling "seems to know the game industry," he said. "He seems to have a lot of people around him that seem to know what they're doing and from what I've been seeing, they're a great company that's good for Rhode Island."
The disclosure notice showed 38 Studios employed 379 full-time workers as of March 15, with 288 of them in Providence and the rest at its other studio in Maryland. The company also reported 34 full-time contractors and eight interns.
"I think they can succeed," Fox said. "All this financial stuff is appropriately handled by the EDC board. We do the legislation, they do the executing. ... I try not to have second thoughts."
Schilling: 'Pure motives' in RI
During a March appearance on Fox News, Schilling sang the praises of Rhode Island and its leaders for assisting his company with the $75 million loan guarantee. "The growth of our company, 38 Studios, is government ... gone right,” Schilling said, adding that local politicians had "pure motives."
In an August 2010 letter to Rhode Island businesses, Stokes called the 38 Studios loan "the right call at the right time," citing the EDC's "extensive due diligence" on the company and the gaming industry's prospects.
John Robitaille, the former Carcieri aide who finished second in the 2010 gubernatorial race, defended the decision to aid 38 Studios, telling WPRI.com it was necessary to do so because Rhode Island is "an unfriendly environment for business."
Standard & Poor’s affirmed its A rating on the EDC-38 Studios bonds on April 20 with a stable outlook. A spokesman for the agency told WPRI.com its analysts do not comment on rumors. A spokesman for Moody’s Investors Service said his company has not reviewed its rating. The bonds are insured by Assured Guaranty Ltd.
The Rhode Island Statewide Coalition on Tuesday called on Chafee and the EDC to make information publicly available. “There should be no Rhode Island taxpayer bailout of what could be emerging as a colossal financial misadventure,” Donna Perry, the coalition’s executive director, said in a statement.
Copyright WPRI 12
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