S&P Global: Private Credit Faces Tariff Headwinds as Trump Policies Create New Risks

What's New

According to S&P Global Ratings' latest scenario analysis, private credit portfolios face mounting pressure from the Trump administration's tariff policies, with at least 10% of middle-market companies directly vulnerable to trade disruptions. While the immediate impact may be contained due to the sector's domestic focus, second-order effects including sustained inflation, weakened consumer spending, and market volatility could create significant challenges for highly leveraged borrowers.

Why It Matters

Private credit has emerged as a $1.7 trillion market serving middle-market companies that traditional banks won't touch. These firms are typically smaller, more leveraged, and less able to absorb cost shocks—making them canaries in the coal mine for broader economic stress. With floating-rate loans tied to Fed policy, any tariff-driven inflation that keeps rates elevated could trigger a wave of defaults in an already strained sector.

Big Picture Drivers

• Trade disruption: Universal 10% baseline tariff with 145% levy on Chinese goods creates supply chain chaos for import-dependent companies

• Interest rate pressure: Tariff-driven inflation could force Fed to maintain higher rates, crushing borrowers already paying elevated costs on floating-rate debt

• Policy uncertainty: Immigration restrictions and federal spending cuts through DOGE add additional headwinds beyond trade policy

• Market concentration: Nearly 40% of credit estimates concentrated in software, healthcare services, and professional services—sectors vulnerable to economic slowdown

• Leverage vulnerability: 15% of portfolio companies already in 'ccc' distressed category, particularly exposed to nonpayment risk

By The Numbers

• 335 companies (10%+ of S&P's 3,100 credit estimates) face direct tariff exposure through cross-border sales or supply chains

• 14%-21% of 'b-' rated companies could face downgrades under moderate to severe stress scenarios

• 25%-31% potential increase in distressed 'ccc' category distribution from current 15% baseline

• 77% of credit estimate universe currently rated 'b-', representing the bulk of potential downgrades

• 70 companies (2% of portfolio) exposed to federal contract cuts through DOGE efficiency initiatives

Key Trends to Watch

• Default acceleration as troubled borrowers seek debt extensions and payment-in-kind terms while sponsor support becomes more selective.

• Spread widening continues as investor risk appetite wanes and lenders demand higher premiums for middle-market exposure.

• Supply chain reshoring accelerates as companies move operations from China to Mexico, Canada, and other Asian markets like Vietnam and Cambodia.

• Credit downgrades increase gradually through second half of 2025 as tariff impacts become more evident in company financials.

The Wrap

Private credit's resilience will depend on the Fed's ability to cut rates and revive M&A activity, providing exits for stressed borrowers. While the sector's domestic focus offers some protection, the interconnected nature of trade and finance means no corner of credit markets can fully escape tariff turbulence. Lenders who maintained strict underwriting standards will likely gain market share as competitors retreat from riskier lending.