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Categorized | Financial

McGraw-Hill reveals $77m S&P settlement

Posted on April 30, 2013

Standard & Poor’s paid almost one month’s operating profit to settle legal claims that it gave inflated credit ratings to two structured investment vehicles on the eve of the credit crisis, its parent company, McGraw-Hill, has revealed.

The $77m payment was disclosed in McGraw-Hill’s latest quarterly earnings, which showed the controversy over S&P’s pre-crisis ratings had not held back the rating agency’s ability to win new business.

    The division recorded a 20 per cent rise in revenues and a 39 per cent surge in operating profit to $259m for the first quarter.

    S&P, with co-defendants Moody’s and Morgan Stanley, settled lawsuits over the Cheyne and Rhinebridge structured investment vehicles last week, lifting the threat of a potentially damaging trial.

    Harold McGraw, chief executive of McGraw-Hill, said the settlement was “very reasonable” as a result of the strength of S&P’s defence. “We are very pleased these have gone away now, and it lightens the burden.”

    S&P is still fighting a dozen lawsuits over pre-crisis ratings, including a $5bn damages claim from the US Department of Justice over what the government claims was S&P’s manipulation of financial models to generate inflated ratings, so as to win business. The company has filed a motion to dismiss the suit.

    “We have a solid record of defending the company and we will continue to do so aggressively,” Mr McGraw said.

    Quarterly earnings highlighted the return of structured finance business as a key driver of revenue growth at S&P. Rating these complex instruments is more lucrative than producing other kinds of credit ratings and the growth of quarterly revenue to $561m came despite a decline in investment-grade corporate debt issuance.

    Overall, McGraw-Hill revenues were up 14 per cent to $1.18bn, while net income was $735m. The bottom line was boosted by a $612m gain on the sale of its education business to Apollo Global Management, completed last month. Adjusted earnings per share of 80 cents were ahead of analysts’ expectations of 73 cents. The company made no changes to its earnings guidance for the rest of the year.

    McGraw-Hill shares, which had risen 2.8 per cent on Monday on news of the latest legal settlements, closed up a further 1.2 per cent on Tuesday.

    Shareholders will vote on Wednesday to rename the company as McGraw Hill Financial.

    The group’s other continuing businesses include S&P Dow Jones indices; S&P Capital IQ, a financial data firm; Platts, the commodities information business; and JD Power & Associates, a market researcher. JD Power was the only division to post a decline in revenue in the quarter.

    “McGraw Hill Financial is focused on providing clients with the essential intelligence they need to make better informed decisions,” said Mr McGraw, chief executive. “Our mission is to be the foremost provider of ratings, benchmarks and analytics in the global capital and commodity markets.”