Ratings Agencies Aren’t Going Away Any Time Soon: Moody’s Corporation (MCO), The McGraw-Hill Companies, Inc. (MHP)

While reading through earnings calls over the past week, I have noticed a theme: companies from all industries are still very concerned with what the ratings agencies think of them.  Below are a few quotes that stood out to me.

“We are working very closely with the rating agencies to make sure they are comfortable.” – Bob Benmosche, CEO of American International Group Inc (NYSE: AIG), Q4 2012 Earnings Call

“We have reviewed the plan with the rating agencies . . .” – Liam McGee, CEO of Hartford Financial Services Group Inc (NYSE: HIG), Q4 Earnings Call

“In addition, we presented a comprehensive overview of our strategy to the rating agencies. . .” – Michael S. Taff, CFO of Flowserve Corporation (NYSE: FLS), Q4 2012 Earnings Call

“As we were finalizing our budget for 2013 and working with the rating agencies, it became apparent that in order to maintain investment grade ratings, we need to reduce investment.” – Glen Post, CEO of CenturyLink, Inc. (NYSE: CTL), Q4 2012 Earnings Call

Recently the US Justice Department filed a lawsuit against S&P, and several state attorneys general are reported to also be contemplating lawsuits.  The Justice Department suit is seeking damages of $5 billion from S&P alone.  They have not ruled out lawsuits against other ratings agencies as well.  As a result, both Moody’s Corporation (NYSE:MCO) and The McGraw-Hill Companies, Inc. (NYSE:MHP) (the parent company of S&P) have had a rough February, down 12% and 20%, respectively, thus far.

The McGraw-Hill Companies, Inc. (NYSE:MHP) has lost roughly $5 billion in market cap this month, which means the stock market is pricing in the DoJ winning the lawsuit and the company having to pay out the entire sum immediately with no lingering damage to their future earnings.  I don’t believe the first part of that statement is feasible.  During their recent earnings call, McGraw-Hill laid out a compelling legal defense against the charges levied by the DoJ.  I think these defenses will, at the very least, prevent the entire amount the DoJ is asking for from being levied against S&P.  As with all high-profile lawsuits, this will probably be tied up in court for years to come, delaying any payments.  Also, McGraw-Hill was confident enough in their defense that they decided not to settle this case and instead go to court.