Trump’s Tariff Threat Is Already Panicking the Junk Debt Market

This content was published on January 17, 2025 - 12:00

6 minutes

(Bloomberg) — Donald Trump’s team may have been batting around the idea of a gradual ratcheting up of import tariffs on much of the world, but bankers who finance the companies in his firing line are in a frenzy nonetheless.

As the president-elect’s inauguration looms next week, some European businesses in threatened industries have accelerated borrowing plans to get ahead of any punitive measures. Others are being grilled by lenders on how they’ll be impacted by as-yet undisclosed tariffs. Private credit funds, who make loans to riskier midsized companies, are being questioned by investors about their exposure to vulnerable borrowers.

Sectors under scrutiny include auto parts, metals, medical supplies and energy infrastructure. But Trump’s unpredictability and taste for drama means no one really knows what to expect from the self-proclaimed “tariff man.”

Such is the uncertainty that three people involved in loan-repricing deals in the European leveraged-finance market, who wanted to stay anonymous because they weren’t authorized to speak publicly, said they’d been racing to get them done before Trump takes power on Jan. 20. One banker at a top Wall Street firm said it was 100% committed to getting transactions out before the inauguration.

While most of the tariff-driven scramble to refinance has taken place in the European junk debt market — which funds many of the continent’s riskier companies in exposed sectors — there are also fears about blowback from Trump’s import taxes in the US if it creates inflation and puts pressure on the Federal Reserve to keep borrowing costs higher.

“If Trump comes out and says he wants significant tariffs on all imports, it’s not just going to be a question of which sectors will be impacted, but how it impacts the macro picture,” said Adam Darling, a high-yield bond fund manager at Jupiter Fund Management Plc in London. “There’s a risk that broad credit will implode if he does anything extreme.”

The wider environment for corporate borrowers is hugely favorable right now, with the premium they pay over the safest benchmark interest rates lower than it’s been for years. That’s led to a stampede of refinancing deals globally, and the tariff question has been an extra spur for European industrial companies looking to reprice their interest costs — especially with lenders starting to demand more transparency around how much damage to expect.

Europe’s leveraged-loan market has had its busiest start to a year since at least 2017 by volume, Bloomberg data shows. Out of 28 tranches, 19 are repricings and borrowers are hunting average margin cuts of 75 basis points.

The desire to act ahead of Trump’s arrival is understandable. Even though the suggestion of a more staged approach to bringing in tariffs was welcomed by markets, pre-guessing him has been a fool’s errand in the past. He has promised much more extreme measures than his first term, including an up to 20% levy on all imported goods, and 60% on Chinese products.

“The question around tariffs is being asked by investors on roadshows,” said Marina Cohen, high-yield portfolio manager at Amundi SA, Europe’s largest fund manager. “If there’s a potential impact, we want to know how companies would tackle that.”

Dutch manufacturer Hunter Douglas held a call with creditors last week to discuss repricing a loan deal led by JPMorgan Chase & Co. It took about two hours rather than the usual half an hour or so, partly because lenders were pelting the company with questions about the effect of tariffs on its bottom line, according to people with knowledge of the situation.

About 80% of Hunter Douglas’ goods, which include window coverings and architectural products, are made in Mexico for the US market, the same people said. Even though the management team couldn’t quantify what was going to happen with tariffs, they added, it still got the deal it wanted. A JPMorgan spokesperson declined to comment. Hunter Douglas didn’t immediately respond to a request for comment.

Some lenders say it’s been hard to get meaningful disclosure even from borrowers who were hurt by Trump’s tariffs the first time around. One solution has just been to tweak their holdings in advance of the inauguration.

“We’ve been shifting our portfolio since September when a Trump victory looked more likely,” said Zachary Swabe, a high-yield portfolio manager at UBS Asset Management. “So, we’ve been managing our autos and chemicals exposure as a starting point, and have been putting capital in domestic industries that might be insulated from Trade Wars 2.0, like healthcare.”

The partial retreat is already showing up in junk bond prices. Investors are cutting their exposure to overindebted European companies with short-maturity loans, particularly in the auto parts sector. Standard Profil Automotive GmbH bonds have plunged since Trump was elected, although much of that stems from an already weak European car market.

For Catherine Braganza, senior credit analyst at Insight Investment, the biggest immediate victims will probably be high-yield borrowers in Europe, at least in the early days after a tariff shock — a view that further justifies the surge of preemptive repricing on the continent.

“Come Monday, there is a high probability of tariffs being announced,” she said. “And that will be protectionist and benefit US high-yield companies,” often the kind of manufacturing businesses that have to compete hardest with overseas imports. “Only Europe-focused companies may have a bad time.”

Still, Braganza pointed out too that it’s impossible to predict what the magnitude of the inflationary repercussions will be after six months, and whether longer-term debt costs will head back to 5% or thereabouts.

“We are extremely cautious credit,” said Jupiter’s Darling. “Tariffs are yet another risk when the market is very bullish, and very expensive and there are macro risks out there that could be very meaningful.”

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