Prolonged U.S. Tariffs May Amplify Divergence in Middle Market Credit Quality

The recent shifts in U.S. trade policy continue to dominate headlines, particularly the tariff increases and their potential effects on the global economy. Here are a few implications for private credit:

-- Growing uncertainty surrounding U.S. trade policy increases the specter of disruption to the major economies.

-- Tariffs on imported goods would increase the cost of raw materials and components, posing challenges for lower-rated companies.

-- We do not expect a significant increase in M&A activity among our middle market issuers.

"If proposed U.S. tariffs on Canada, Mexico, and Europe are fully implemented and remain effective for a prolonged time period, we believe this will have a net credit-negative impact especially on the most leveraged middle market borrowers," says Candice Gao, Assistant Vice President of Private Corporate Credit at Morningstar DBRS.