SEC Sends McGraw Hill Wells Notice Tied to CMBS Ratings
McGraw Hill Financial Inc. (MHFI) said it received a notice from the U.S. Securities and Exchange Commission that the regulator may seek an enforcement action tied to six commercial-mortgage backed securities that its Standard & Poor’s division graded in 2011.
S&P, the world’s largest credit grader, has been cooperating with the SEC, which sent the Wells notice on July 22, McGraw Hill said in a regulatory filing yesterday. The alleged violations relate to the CMBS rankings and “public disclosure made by S&P regarding those ratings thereafter.”
McGraw Hill’s market share for rating bonds backed by commercial mortgages has declined since the firm pulled assigned grades on a $1.5 billion offering in July 2011. New York-based S&P is cutting about a third of its staff in the division, a person with knowledge of the matter said last week.
Catherine Mathis, a spokeswoman for McGraw Hill, declined to comment beyond the regulatory filing. Florence Harmon, a spokeswoman for the SEC, also declined to comment.
The SEC may pursue actions including a cease-and-desist order, civil money penalties or a suspension or revocation of the firm’s ratings accreditation, according to the regulatory filing.
McGraw Hill Financial shares have climbed 6.3 percent this year to $83.11.
S&P rated six commercial-mortgage bond deals in 2011, according to a report from Morgan Stanley. They included three that pooled loans from borrowers across the U.S. and three tied to a single borrower, such as a $1 billion transaction linked to retail properties acquired by Blackstone Group LP.
S&P pulled assigned grades three years ago on the offering from Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C), prompting the banks to abandon the deal after it was placed with investors. S&P yanked the rankings after discovering potential discrepancies in how its methodology was being applied, the company said at the time.
The credit grader then halted rating any new commercial-mortgage bonds, saying it had to review a potential problem in its model. That August, the company said the conflict had turned out not to be significant and it would resume grading deals.
The disruption kept S&P out of the commercial-mortgage backed securities market for more than a year before it revised its criteria in 2012.
McGraw Hill is also facing a U.S. Department of Justice lawsuit, filed in February 2013, which alleges that S&P inflated grades on residential-mortgage bonds to win business from Wall Street banks. The government is alleging the company deliberately understated the risk of securities backed by loans made to the riskiest borrowers.
S&P said it will defend itself “vigorously” against the Justice Department’s “meritless” claims.
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