Moody's lowers McGraw-Hill to Baa2, says outlook negative

SAN FRANCISCO Thu Feb 14, 2013 9:31pm EST

SAN FRANCISCO Feb 14 (Reuters) - Moody's Investors Service said on Thursday it lowered the McGraw-Hill Companies Inc's senior unsecured rating to Baa2 from A3, because of litigation risks after high-profile lawsuits filed against the company and its Standard & Poor's Financial Services LLC subsidiary.

In one of its most ambitious lawsuits tied to the financial crisis, the U.S. government is seeking $5 billion, accusing Standard & Poor's of a scheme to defraud investors.

McGraw-Hill earlier this week fired back at the lawsuit, saying the government had no case. The company said the rating agency had a record of successfully defending itself against suits like the one by the U.S. Department of Justice accusing it of duping investors by presenting its ratings on mortgage products as objective.

The government contends S&P inflated ratings and understated risks as the housing bubble started to burst to gain more business from investment banks that issued mortgage securities.

McGraw-Hill also is fending off legal challenges from several states.

Moody's, which is a competitor of Standard & Poor's, said in a note its downgrade concluded a review for downgrade initiated in September 2011 and reflected concerns about "heightened litigation risks" in light of the recent civil lawsuits.

Moody's also cited the "loss of earnings and business diversity" from the expected completion of the $2.5 billion sale of McGraw-Hill Education to investment funds managed by affiliates of Apollo Global Management LLC.

Moody's said McGraw-Hill's Prime-2 short-term rating for commercial paper was not affected by its action, adding that its ratings outlook on the company was negative.

The outlook "reflects the potential for additional adverse litigation and regulatory developments and the resulting uncertainty created for McGraw-Hill's operations and financial position."

"An upgrade is unlikely in the foreseeable future given the ongoing litigation and regulatory risk," Moody's said. "The rating outlook could be changed to stable if litigation and regulatory risk diminishes, provided that McGraw-Hill also maintains solid market positions in its businesses, a conservative leverage profile, good free cash flow, and a strong liquidity position.

Moody's also said: "A significant decline in operating performance and cash flow generation, substantial acquisitions or shareholder distributions, or a deterioration of the company's liquidity position could create downward rating pressure. Adverse litigation or regulatory developments could create material downward rating pressure."

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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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