McGraw-Hill is focusing on higher-margin businesses including its S&P bond-rating unit while repurchasing stock to raise earnings per share, according to a company statement on Feb. 12. It will swing to a net cash position from about $495 million of debt, according to data compiled by Bloomberg.
“The company’s liquidity position will improve meaningfully” on completion of the education unit’s sale as McGraw-Hill repays commercial paper borrowings with the net proceeds and maintains a “sizable” cash balance, Moody’s analysts John E. Puchalla and John Diaz said in the statement.
Lawmakers targeted the credit-grading business in the 2010 Dodd-Frank Act after the collapse of top-ranked mortgage-backed securities contributed to $2.1 trillion in losses at the world’s largest banks. Reports from the U.S. Senate Permanent Subcommittee on Investigations and the Financial Crisis Inquiry Commission cited failures by S&P, Moody’s and Fitch Ratings as a cause of the financial crisis, which began in August 2007.
S&P rated more than $2.8 trillion of residential mortgage- backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the complaint filed in federal court in Los Angeles.
The collapse in value of securities that packaged home loans from the riskiest borrowers led to a credit seizure starting in 2007 that sent the world’s largest economy into its longest recession since 1933 as defaults soared and home values plummeted.
Bond and credit-default swap prices for McGraw-Hill imply a Baa3 rating for the company, one step lower than the new grade, according to Moody’s Corp.’s capital markets research group. The New York-based company is the parent of the second-largest ratings business.
Fitch downgraded McGraw-Hill’s debt rating one level to BBB+ from A- on Feb. 7, citing the lawsuit filed by the Justice Department and the potential for more suits against the company as well as the potential impact they may have on S&P’s operations. S&P ranks Moody’s at BBB+, three levels above speculative grade.
“It’s like the ratings companies are eating each other,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd., which manages about $163 billion in assets. “What’s being questioned now is the very reason for the existence of these agencies.”