Rhode Island economic development officials are scrambling to salvage their $75 million investment in Curt Schilling’s video game company 38 Studios LLC, calling an emergency meeting for Wednesday morning after reports that the company defaulted on a $1.12 million loan payment.
Gov. Lincoln Chafee’s office confirmed that he and officials of the Rhode Island Economic Development Corporation began talks over the weekend with 38 Studios executives in an effort to resolve the company’s financial problems, declining further comment.
State officials became alarmed about the financial health of 38 Studios “when a loan-guarantee payment payment of about $1.125 million was not made, which put the company into some default,” Rhode Island House Speaker Gordon D. Fox told the Providence Journal. In 2010, Rhode Island offered $75 million in loan guarantees to Schilling’s company, which moved from Maynard to Providence and promised to create hundreds of jobs.
The crisis follows by three months the release of the first product from 38 Studios, a role-playing video game called “Kingdoms of Amalur: Reckoning,” set in a medieval fantasy world. The game has earned good reviews from industry critics, and has sold about one million units at about $60 each, according to market research company VGChartz.
Michael Pachter, a video game industry analyst for Wedbush Securities in Los Angeles, said that 38 Studios would probably get about half the revenue generated by sales of the game, or about $30 million – enough to enable 38 Studios to make its loan payments. “I cannot believe that they are borderline insolvent,” said Pachter. “That makes no sense to me at all.”
In 2010, Rhode Island set up a $125 million loan guarantee program to attract new businesses to the state. The $75 million loan guarantee to 38 Studios amounted to 60 percent of the total.
The company actually received about $50 million in borrowed funds. Another $23 million went into an account to cover some of the interest on the loan, and into a reserve fund for use in case 38 Studios defaults on the loan. Fees, issuance costs and insurance make up the rest of the $75 million.
The deal requires 38 Studios to pay $5.3 million in interest this year and $12.7 million in interest and principal every year from 2013 to 2020.
The company did not return calls for comment.
Gary Sasse, former director of administration under Gov. Carcieri, had expressed misgivings about the loan back in 2010. Now director of the Institute for Public Leadership at Bryant University in Smithfield, RI, Sasse said that it’s sometimes appropriate for states to offer loan guarantees to businesses, but that the deal with 38 Studios went too far. “We were using a large percentage of the funds on one new enterprise,” Sasse said. “We were putting a lot of our eggs in one basket.”
Sasse resigned from state government shortly before the loan guarantee program was launched. “If I was there,” he said, “I would probably have advised the governor against doing the deal.”