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Legal Woes Are a Debit to Visa

On April 26, 2005, Standard & Poor's Ratings Services lowered its long-term counterparty credit and senior unsecured debt ratings on Visa International Service Assn. (Visa) to A, from A+. The downgrade reflects what S&P sees as a heightened vulnerability to legal risk, as evidenced by numerous past and ongoing litigations globally. The ratings outlook is negative.

S&P believes Visa's risk profile has significantly changed in the past decade, with its ongoing legal challenges having emerged as a major risk component. The speed, number, and potential severity of events in aggregate elevate business risk to new levels. Concerns about legal risk and, to a lesser extent, changing industry dynamics, reduce the ratings on Visa by one notch. The negative outlook highlights further potential ratings pressure due to the negative effect of current litigations.

DEFENSE, NOT OFFENSE. In an effort to establish, maintain, and expand its strong, globally recognized brand, Visa has defined a set of rules for its members worldwide. Competitors, issuers, merchants, and regulators are increasingly challenging these membership rules globally, but mainly in the U.S., and have taken their complaints to court. The potential risks from these actions are manifold: Financial damage as a result of negative outcomes or settlements; reputation damage, or a decline of its brand value; and a disproportionate appropriation of resources for legal defense, distracting from offensive and business-driven activities.

The ratings on Visa are based on its strong global market-share position and credit-protection mechanisms, which minimize the threat of loss arising from a member's inability to honor his or her settlement obligations to Visa. The ratings are constrained by the rapidly changing industry environment marked by rising legal risk, the consolidation of its member base, and intense competition.

Outlook: The negative outlook reflects a changing business environment in which the payments industry will face greater uncertainty, including heightened litigation risk. Ratings could potentially come under further pressure if the pending litigations fundamentally affect the financial and business profile of the company or its members. At this stage, predictions of litigation outcomes are highly speculative. From Standard & Poor's Ratings Services

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