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McGraw Hill Recoups Justice-Induced Losses as Earnings Rise

McGraw Hill Financial Inc. (MHFI) rose on earnings that increased 42 percent, with shares exceeding the level prior to the U.S. Justice Department’s lawsuit against the owner of the world’s largest credit rater.

McGraw Hill climbed 1.04 percent to $60.10 in New York. The stock traded at the highest level since 2007 and has surpassed the price before the Justice Department’s Feb. 4 action, which sent shares down the most in 25 years. The New York-based company denies the claims.

The stock trades at 16.4 times earnings, down from 17.1 before the lawsuit was filed.

McGraw Hill reported today that earnings increased 42 percent and boosted its 2013 outlook amid higher bond issuance, which has increased demand for ratings.

Second-quarter net income rose to $250 million, up from $177 million, the company said today in a statement distributed by PR Newswire. Earnings excluding certain items were 92 cents a share, topping the average estimate of 82 cents in a Bloomberg survey of seven analysts.

Higher bond sales increased profit as companies took advantage of cheap borrowing costs. Yields on corporate bonds fell to an unprecedented low of 3.09 percent on May 2, according to the Bank of America Merrill Lynch Global Corporate & High Yield Index. Issuance slowed in June as interest rates rose after the Federal Reserve signaled it might reduce its $85 billion of monthly bond purchases.

Raised Outlook

McGraw Hill raised its 2013 adjusted earnings per share guidance to a range of $3.15 to $3.25 from a range of $3.10 to $3.20, according to the statement.

Revenue at S&P climbed 24 percent to $599 million, from $483 million a year earlier, according to data compiled by Bloomberg.

The 125-year-old McGraw Hill has transformed into a financial services provider after selling its publishing division to Apollo Global Management LLC (APO) in March for $2.4 billion. That leaves S&P at the center of the firm, which the U.S. Justice Department sued in February, alleging that it lied about its ratings being free of conflicts of interest because it downplayed credit risks.

Douglas Peterson, president of the ratings unit, will become chief executive officer Nov. 1, succeeding Harold “Terry” McGraw III, who will retain his role as chairman after leading the company since 1998.

The U.S. is seeking as much as $5 billion from McGraw Hill in its lawsuit, alleging the company deliberately understated the risk of bonds backed by loans made to the riskiest borrowers to win business from Wall Street banks.

Shares of Moody’s Corp. (MCO), the second largest ratings agency, traded at $64.56 in New York. Moody’s surged 3.8 percent yesterday after reporting second-quarter profit rose 31 percent.

To contact the reporters on this story: Scott Harrison in New York at sharrison52@bloomberg.net; Matt Robinson in New York at mrobinson55@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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