Will S&P Missteps Cost McGraw-Hill $5 billion?

The U.S. government is planning to take McGraw-Hill (NYSE:MHP) to court over bond ratings that the company’s Standard & Poor’s unit issued before the financial crisis. Despite the potential for a disastrous result, the company doesn’t seem too concerned, believing the government won’t be able to prove intentional misconduct.

Current standings

McGraw-Hill shares may have slumped since the government issued the civil suit against it, but a number of other figures have been rising. Both profit and income from continuing operations rose in the last quarter, with income nearly doubling from the fourth quarter a year earlier — income rose to $190 million from $113 million, or $0.67 a share from $0.37 a share.

Revenue for the quarter reached $1.23 billion and adjusted earnings per share for the company’s continuing operations reached $0.72. Despite all this positive movement, the company had to post a new loss of $216 million for the quarter. The loss is due in part to a non-cash impairment charge between $450 million and $550 million taken to mark down the value of its education unit, which it sold to Apollo Global Management (NASDAQ:APO).

McGraw-Hill doesn’t expect to be held back by much this year, with its predicted adjusted earnings per share this year to reach between $3.10 and $3.20 for McGraw-Hill Financial. That unit’s growth is expected to be in the high single-digit percentage range for the year, though a successful lawsuit for the government could change that…

The case

The civil lawsuit the government has filed against McGraw-Hill’s S&P is not a minor one. The suit is for $5 billion, which could have a profound impact on the company if it were to lose. The government alleged that S&P inflated mortgage securities ratings.

The company doesn’t seem overly concerned about the case, even given the amount of money at stake — a charge of only around $500 million put the company at a net loss last quarter, so a charge of $5 billion could do a lot more damage.

The reason for McGraw-Hill’s confidence is probably in S&P’s record of having 41 cases of this type dismissed outright or withdrawn by the plaintiff. Still, the company isn’t taking the case lightly, hiring John Keker, who got the man considered to be the mastermind of the Enron fraud only 6 years of in prison. With the company’s record and a top lawyer, it makes sense for the company not to worry too much, though there is still a lot at stake.

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