The chief executive of McGraw-Hill, the financial publishing company whose businesses include the credit rating agency Standard & Poor’s, predicted that the US government’s $5bn lawsuit against S&P would go the way of 41 similar cases, which have been voluntarily withdrawn or dismissed by the courts.
In his first public comments since the Department of Justice this month accused S&P of fraud over its subprime mortgage-related credit ratings, Harold McGraw took a combative tone against the federal government’s suit.
“We have put the best people on the case to protect our customers and our shareholders, and rest assured we will vigorously defend against these erroneous claims,” he said.
S&P said Tuesday it had hired Courtney Geduldig, a former Republican staff member for the Senate Banking Committee and most recently lobbyist for the Financial Services Forum, to head its policy operations, dealing with Washington and foreign regulators.
Mr McGraw’s remarks to analysts came after McGraw-Hill posted a 76 per cent rise in net income from its ongoing operations, driven by a resurgence in new business at S&P. The agency almost doubled its revenue from rating new debt to $292m in the fourth quarter.
The company said S&P’s analysts always gave their ratings on complex financial products in good faith, even though the sharp US housing downturn meant they turned out to be wrong. The company has seen off 41 cases from aggrieved investors, shareholders and state prosecutors, although some large cases remain, even before the DoJ stepped in.
Thirteen states and the District of Columbia filed copycat suits following the DoJ move, and the company said there could be more. Ken Vittor, McGraw-Hill’s general counsel, said the group would be open to a “reasonable” settlement.
Doug Peterson, S&P chief executive, defended the company’s business model, under which the issuer of the debt pays S&P to rate it. Critics say this model creates a conflict of interest that leads to inflated ratings.
“It is the only business model that provides a level playing field in terms of disclosure,” he said. “Anyone can go to our website and see how we rate a company, country or security, free of charge. That is not the case with the subscriber model, which allows only those that pay to see a rating and promotes selective disclosure.”
The size of the DoJ damages claim has led shareholders to fear the potential impact on the company’s share buyback programme. McGraw-Hill has the scope to buy a further 16.9m shares – about $750m at the current share price – but it did not immediately indicate whether it would go beyond that, as some analysts had hoped.
The group said it would revisit the issue after receiving the proceeds from the sale of its education publishing businesses.
In November 2012, the company announced it would sell its education business to Apollo Global Management for $2.5bn. The deal is expected to close before the end of March.
Overall, including the education business, McGraw-Hill posted a net loss of $216m, or 76 cents a share, compared with a $214m, or 73 cents a share, profit in the fourth quarter of 2011. The company issued earnings guidance for 2013, which at $3.10-$3.20 a share was more conservative than analysts’ forecasts.
The group’s other continuing businesses include S&P Dow Jones indices, whose fourth-quarter profit rose 48 per cent from a year ago to $64m, thanks to the rise in exchange-traded fund assets that track its stock market indices. McGraw-Hill also owns S&P Capital IQ, a financial data firm, JD Power & Associates, a market researcher, and Platts, the commodities information business.
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