Welcome to Global Credit Insights. Every month, we bring you the top research insights from Morningstar DBRS, the leading provider of credit ratings and thought leadership on corporate and sovereign entities, financial institutions, and project and structured finance transactions.
Rating more than 4,000 issuers and 60,000 securities, Morningstar DBRS is one of the top four credit rating agencies in the world. To learn more, visit dbrs.morningstar.com.
Leveraged Finance Spotlight: Erratic Trade Policy Messaging Puts Markets on Edge
- Most of our rated private middle-market issuers have sufficient cushion to absorb a moderate stress, such as a 100-basis point margin compression or a similar increase in borrowing costs.
- Tariffs on imported goods could drive at least a short-term increase in cost of raw materials and components to the end-user, posing challenges for lower-rated companies less able to pass costs on to their customers. Companies may be forced to absorb the increased costs, which could lead to deteriorating operating cash flows and weakened credit metrics.
- Private capital fundraising and private debt fundraising have moderated but remain solid. Nevertheless, headwinds are on the horizon with an uncertain M&A environment, which could lead to a slowdown in debt fundraising, and a dearth of good quality investments amid fierce competition.
Unpredictable Protectionism: The Global Fallout of U.S. Trade Policy
- While all regions of the world will likely be worse off, we find that Asia and Europe are more exposed to the tariff shock. Many economies in the Americas and the Middle East are comparatively insulated.
- In the near term, policy uncertainty itself will likely weaken demand for global goods and services, as households and firms around the world pull back on spending and investing until there is greater visibility on future tariff rates and the broader policy landscape.
- If the effective U.S. tariff rate remains high, this will likely reduce and reorient global trade flows as firms aim to reduce production costs. We expect the resulting reorganization of trade to lead to overall efficiency losses, which will translate into higher prices for consumers.
Canadian Industrial Real Estate on Front Lines of Trade War
- While the imposition of tariffs presents challenges, our rated Industrials are currently positioned to withstand a modest negative impact on their respective credit risk profiles resulting from a temporary moderate level of deterioration in the operating environment.
- However, the longer the tariffs are in place, the more significant the deterioration in credit risk profiles, which will put downward pressure on credit ratings, particularly for those companies with significant exposure to Canadian industrial real estate.
- Well-laddered lease maturity profiles, favorable renewal spreads, and a diversified tenant mix can help insulate industrial real estate owner-operators from the impact of tariffs.
United States‘ DOGE Is Putting Private Sector Contractors on Edge
- We expect DOGE to exert pressure on activities it deems nonessential or not sufficiently aligned with the rapidly evolving policy direction of the current administration.
- We view both IT and software contractors at risk as federal agencies become more cautious about spending. Additionally, we view the environmental consulting projects as most vulnerable, particularly those that conflict with the current administration's energy agenda, which is firmly moving away from support of non-fossil fuel energy development.
- Although we don’t expect significant credit rating implications in the near term, we expect issuers to experience a decline in revenue visibility and more volatility from contract cancellations or realignments compared with historical periods, which may have a negative effect on credit quality.
Trade War Not All Bad News for Euro Area Banks—At First
- A less favorable Euro Area operating environment could weaken bank asset quality over time, especially if slower growth increases corporate defaults and results in higher unemployment.
- Banks that have higher concentration in industries or geographies disproportionately affected by tariffs and slower growth could see a more sizable increase in nonperforming loans or be forced to make higher provisions.
- Even so, EA banks are well placed to confront the challenging environment with strong fundamentals, having improved their balance sheets, built provisions, and accumulated strong capital positions.
EU: Sharply Higher Tariffs on U.S. Auto Imports Affect EU Countries and Carmakers in an Uneven Manner
- The impact of tariffs is set to differ considerably across EU economies with Germany, Sweden, Slovakia, Hungary and the Czech Republic likely to be the most impacted countries even though we do not anticipate a credit impact in the short-term.
- In terms of automotive companies, U.S. tariff hikes will primarily affect premium producers such as BMW AG, Mercedes-Benz Group AG and, to a lesser extent, Volkswagen AG.
- However, these companies’ focus on the premium automotive market provides them with some pricing power to pass on tariff-related cost increases to consumers. Moreover, while it would be very difficult for these companies to absorb these higher tariffs on a sustained basis, their typically strong financial profiles provide them with flexibility to manage such headwinds over the immediate term.
U.S. RMBS Frontline Perspectives: Mortgage Rates Inch Lower, Housing Mixed, While RMBS Volumes Up
- Mortgage Rates Inch Lower as Latest Industry Metrics Diverge and Home Prices Gain: Benchmark Treasury yields have settled into lower end of the 2025 range so far with the 10-year Treasury yield down about 18 bps since February to 4.06% currently as risk-off takes hold. Mortgage rates have continued to follow suit, with the 30-year mortgage rate inching lower to 6.65%, down 11 bps over the same period.
- Latest Macro Data Still Mixed: The March jobs report showed the unemployment rate rising to 4.2%, and the key nonfarm payrolls came in at +228,000, both higher than February levels.
- At $15 billion, March RMBS Pricings Record the Highest Monthly Volume of the Year So Far: RMBS deal pricings in March finished just above $15 billion, making March the biggest month of the year in terms of volume so far.
Trade Tariffs Will Weigh on European Structured Finance
- Credit: The retreating average bid for LCD’s European high-yield flow-name bonds hints that the tariff tensions have started weighing on high-yield bond prices and capped trading volumes. The average spread has widened both for LCD’s U.S. and EU high-yield flow name bonds, pointing towards tighter credit conditions and shifting investor behavior.
- Nonperforming Loans: The haste in applying tariffs will likely have a negative impact on European NPL ratios, but as long as they remain low in absolute terms, we do not expect a significant increase in volumes of new NPLs on an aggregated basis.
- Mortgage-Backed Securities: Tariffs could cause the macroeconomic environment to deteriorate, giving rise to higher unemployment. This in turn could dampen the housing market across Europe, which in places has chronic undersupply of new dwellings.
U.S. Tariffs on Imports From China: Eye-For-An-Eye Tactics Blind Some U.S. Retailers
- We anticipate that U.S. retailers, particularly those that source a material portion of their merchandise directly and/or indirectly from China, could find decoupling from their Chinese suppliers challenging in the near term for three reasons: 1. China produces a substantial share of the world's high-value consumer products, such as video game consoles, portable computers, and smart phones; 2. China is frequently the U.S.' cheapest supplier of several consumer products; and 3. the Trump administration's high tariffs on other countries in Asia, including Cambodia, Vietnam, Bangladesh, and Taiwan, will also limit U.S. retailers' ability to source merchandise from countries in the region.
- As a result, some U.S. retailers may be unable or unwilling to shift their sourcing away from China, at least not in the near term.
Very Strong Intrinsic Assessment for the EIB, EIF and ESM Compensates for Negative Credit Rating Action on France
- Morningstar DBRS' decision to change the trend on France's AA (high) Long-Term Issuer Rating from Stable to Negative on 21st of March 2025, does not affect the creditworthiness of the European Investment Bank, the European Investment Fund, and the European Stability Mechanism, all rated AAA, with a Stable trend.
- While a potential downgrade of France could have an impact on the Support Assessment of these entities, the AAA level of their Intrinsic Assessments would compensate for a future deterioration in the SA that could arise from a downgrade of France.
