McGraw-Hill credit rating cut by Moody’s after U.S. sues S&P

McGraw-Hill Cos., the owner of the world’s largest ratings company, was downgraded by its biggest rival after the U.S. government filed a lawsuit that seeks as much as $5 billion in damages.

Moody’s Investors Service cut the debt rating on the New York-based parent of Standard & Poor’s by two levels to Baa2 from A3, and said it may reduce the grade again. The new ranking, two steps above speculative grade, takes into account the sale of McGraw-Hill’s education unit and the lawsuit filed Feb. 4 by the Justice Department, Moody’s said yesterday in a statement after the close of trading in New York.

The government accused S&P of deliberately misstating the risks of mortgage bonds, whose collapse helped trigger the credit crisis. McGraw-Hill climbed for a third day, rising 0.2% to $44.95 in New York trading. The stock had lost as much as 27% this month, wiping out $4.4 billion of market value. Yields on its $800 million of outstanding bonds rose as much as 0.9 percentage point since the lawsuit.

“Rating agencies damaged their brands in 2008 and now it is having consequences,” said Mat McCrum, investment director at Melbourne-based Omega Global Investors Pty, which manages A$3 billion ($3.1 billion). “They tried to get as much cash flow from their brand at the long-term expense of the value of the brand.”

‘Touch of Irony’

Jason Feuchtwanger, a spokesman for the McGraw-Hill, said in an e-mail: “We are focused on standing up McGraw-Hill Financial, a high-growth, high-margin company that produces solid free cash flow. Overall, we have a strong balance sheet and we intend to maintain it going forward.”

The company said in a Feb. 5 statement that the U.S. lawsuit is without merit.

Moody’s downgrade of McGraw-Hill is “a touch of irony,” Jim Reid, a strategist at Deutsche Bank AG in London, said in a client note.

The rating cut follows the U.S. seeking fines from McGraw- Hill of the equivalent of more than five years of profit.

McGraw-Hill agreed to sell the education unit to Apollo Global Management LLC for $2.5 billion in November. After the divestiture, adjusted earnings at the remaining division, to be named McGraw Hill Financial, will be $3.10 to $3.20 a share this year, the firm forecast Feb. 12, an increase of at least 13% from 2012. McGraw-Hill plans to retire about $457 million of short-term debt with the $1.9 billion it gets from the sale.

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