By Michael Northcott Friday, 15 February 2013

Moody's downgrades S&P (well, its parent company anyway)

The credit ratings agency famous for downgrading the credit ratings of sovereign nations, Moody's, has decided to downgrade the parent company of its main competitor in the 'ratings agencies' market.

In what could be interpreted as something of a childish move, Moody’s has decided to downgrade the debt rating on McGraw Hill - which owns Moody's arch rival Standard & Poor's - two levels from Baa2 to A3, and stuck its rating outlook on negative. That means it is likely to get even worse in the foreseeable future.

Why have they done such a thing, we hear you ask? OK, we’ll come clean. It isn’t just infantile point scoring: there are a couple of big-boy issues that it is dealing with. 

First, the US government has filed a lawsuit seeking around $5bn in damages against McGraw Hill, claiming that S&P refused to warn investors that the housing market was on the verge of collapse back in 2006. The government says the ratings agency kept it under wraps because it thought revealing the news would be bad for business.

Second, punters are expecting a big loss of earnings and perceived lack of ‘business diversity’, which will come from McGraw-Hill selling its education division for $2.5bn. 

In a statement, S&P has rejected the US government’s case, saying: ‘Hindsight is no basis to take legal action against the good faith opinions of professionals. Claims that we deliberately kept ratings high when we knew they should be lower are simply not true.’

Shares in McGraw-Hill indicate that investors aren’t convinced, however. The share price has fallen 22% in February alone. If things get any worse, that credit rating won’t be far wrong anyway…

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