Trump’s tariffs threat could hit private credit borrowers
Donald Trump is set to become the president of the United States once again and although the removal of uncertainty has been welcomed by many alternative asset managers, some are cautious about what potential policies will mean for private credit investors.
“If protectionist policies are enacted, international investors will need to consider the potential impact on global corporates as it relates to non-dollar assets, stability of supply chains and risk-adjusted capital allocations to ensure there is adequate coverage for tariffs (if rolled out) and the degree to which trade policy, currency implications and increased legislation could impact operating margins,” commented Maggie Arvedlund, chief executive of Turning Rock Partners.
“All asset-backed players will undoubtedly be re-underwriting their portfolios to assess winners and losers under new international trade regimes,” she added.
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While a Trump administration is expected to be more light touch on regulation, the president-elect could pursue protectionist policies and implement increased tariffs.
Analysts at S&P Global Ratings said in a recent note that they believe “a universal tariff and sharply higher tariffs on Chinese imports could mean an increase in US inflation, and a drag on GDP growth”.
This in turn will affect many industries, such as tech, due to higher input costs and margin pressures. Companies like port operators or transportation leasing companies can also be hurt, as well as utilities and power companies, retail and restaurants, consumer products, healthcare and building materials, the analysts at S&P said.
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Michelle Russell-Dowe, co-head of private debt and credit alternatives at Schroders Capital agrees that tariffs will likely increase the potential for supply-side inflation, which is not something that Fed policy can easily influence.
“Inflation alongside a ‘normalising cycle’ is an odd concept, this will likely result in a higher terminal Fed Funds rate than what was previously anticipated,” she said. “This likely means income realised along the forward curve post-election should be higher than expectations for income pre-election. The tariffs are likely to create price increases for US consumers (and possibly global consumers), and this is likely a negative for the weaker or ‘financially insecure’ consumer groups, especially weaker or younger consumers. Deportation is also likely to increase labour costs.”
Although Ana Arsov, global head of private credit at Moody’s Ratings still expects a few rate cuts in 2024 and 2025, she said that the pace or magnitude of the cuts could slow down if inflation resurges.
However, she added that she expects the private credit market to continue to grow, particularly due to changes in regulations.
“Given that the US is the largest private credit market for the deployment of funds in private credit, US regulations are crucial,” she said. “Although it is still early and we lack full visibility of future policies, we believe that the private credit market is likely to grow further, regardless of the geographic exposures of the funds.”
For Russell-Dowe it is also likely that the yield curve will steepen.
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“It’s likely an increasingly steep yield curve will not be the result Trump desires, and this is likely to result in rhetoric around dissatisfaction with the Fed,” she said. “The impact of rising 10-year yields means debt that finances off that point in the yield curve will have a greater challenge refinancing – commercial mortgage loans to name one.
“US residential mortgage rates are also likely to increase, continuing to push housing out of reach for first time buyers (a political challenge). Higher 30-year rates mean pensions get more fully funded and more US pension plans de-risk as demand for debt increases. These factors demand a short duration positioning today and a cautious approach to maturing debt, and the potential for additional strain on CMBS/CRE. Prepayment speeds are likely to be slower than expected on more recently originated mortgages.”
