Curt Schilling’s Wayward Pitch Won’t Strike Assured Guaranty Ltd. (AGO)

For all involved, it would have been much better back in 2010 if former Red Sox pitcher Curt Schilling had taken his ball and bat and just gone home.

Despite the fact that no private equity firms in Boston, the hometown of the Sox, would turn over a dime to Schilling for his dicey investment idea, neighboring Rhode Island cheerfully stepped up to the plate. Now, a year after Schilling’s doomed gaming business, 38 Studios, famously deflated, the state of Rhode Island, after much debate, has decided to pay the first of many payments on the $75 million in loan guarantees it provided.

That decision affects the finances not only of the tiny New England state, but also those of Assured Guaranty Ltd. (NYSE:AGO), the monoline insurer that backed the bonds behind that imprudent investment.

A pandemic of possible defaults
This is not the first time Assured Guaranty Ltd. (NYSE:AGO) has had to deal with a possible default on bonds it has insured. As Detroit teeters on the brink of bankruptcy, city managers have tried to prod investors into settling for $0.10 on the dollar. Both Assured and MBIA Inc. (NYSE:MBI) have backed municipal bonds for the city, although as analyst Mark Palmer has pointed out, the risk of default is minimal. That’s because the revenue generated by Assured Guaranty Ltd. (NYSE:AGO)’s utility bonds and MBIA Inc. (NYSE:MBI)’s sewer bonds will likely continue to be paid by the income generated by the continued operation of the electric and sewer systems.

Similarly, Assured Guaranty Ltd. (NYSE:AGO)’s involvement in the backing of Schilling’s 38 Studios bonds wouldn’t have dinged the insurer too badly, even if the vote had gone south. There was, however, strong support for a vote to pay the bonds, and harbingers of trouble to come if that scenario didn’t come to pass. Moody’s stood at the ready to downgrade the state’s credit rating the moment the legislature voted to deny payment, and it has already downgraded the entity that provided the funds in the first place.

Considering the state’s fiscal situation, the vote was gutsy. Rhode Island is in the economic doldrums, and a study by the Rhode Island Public Expenditure Council said that refusing to fund the payment would save the state more than $89 million. At the same time, it noted the dire consequences the state would face if they did renege. Rhode Island’s governor wanted the debt payment made, as well.