McGraw Hill Financial Inc. said it's negotiating a possible settlement of government investigations into how its Standard & Poor's unit graded commercial mortgage-backed securities and recorded a $60 million charge to cover the costs.
The charge pared the company's third-quarter net income to $188 million, a 17.5% decline from a year earlier, the company said today in a statement. Earnings excluding certain items including a separate $46 million charge partially tied to staff buyouts were $1.02 a share, exceeding the average estimate of 94 cents in a Bloomberg survey of eight analysts.
The owner of the world's biggest credit rater is booking the costs as it negotiates a potential settlement amid probes by the U.S. Securities and Exchange Commission as well as states attorneys general in New York and Massachusetts into S&P's handling of securities tied to loans on properties such as malls and office towers. Shares rose to a record after the company posted a 10% sales increase to $1.26 billion.
"Revenue growth is primarily the result of strong market demand for ratings associated with bond issuance, bank loans and new entities," Doug Peterson, McGraw Hill's chief executive officer, said on a conference call with analysts.
Sales from grading debt deals rose 12% to $604 million, the company said. The increase came even as corporate-bond issuance in the U.S. fell to $325 billion in the three months ended Sept. 30, from $390 billion a year earlier, according to data compiled by Bloomberg.
S&P is in "active discussions to resolve matters pending" before the SEC and related investigations in New York and Massachusetts, according to the statement. The amount of the charge may change because a definitive settlement hasn’t been reached, the company said.
New York Attorney General Eric Schneiderman is investigating S&P to determine whether it failed to follow its own methodology in rating the debt, two people with knowledge of the matter said this month. S&P said in July it received a notice from the SEC that the regulator may seek an enforcement action related to the six CMBS ratings in 2011. Massachusetts Attorney General Martha Coakley also is looking into how the firm rated such securities, people familiar with the matter said last year.
The company lowered its annual forecast for adjusted diluted earnings per share to a range of $3.78 to $3.83 from a previous outlook of $3.80 to $3.90. The new guidance excludes results from McGraw Hill Construction, which has been reclassified as a discontinued operation, it said. McGraw Hill agreed to sell the unit to private-equity firm Symphony Technology Group for $320 million, according to a Sept. 22 statement.
