Leveraged Finance Spotlight: Erratic Trade Policy Messaging Puts Markets on Edge

Since the January 2025 edition of the Leveraged Finance Spotlight, we've observed an increase in the market's perception of financial uncertainty, driven by mixed messages on U.S. trade policy and rising geopolitical belligerence. Aligned with the uncertainty theme, we highlight the following featured commentary in this edition:

Are Middle-Market Issuers Prepared for More Financial Stress?
Michael Dimler, Senior Vice President, Private Credit, concludes that "most of our rated issuers have sufficient cushion to absorb a moderate stress, such as a 100-basis point margin compression or a similar increase in borrowing costs. However, we would expect to see significant downward migration in credit quality in the event of a more severe contraction in profitability and cash flow."

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

Investment Fund Ratings Stability Expected As Private Debt Fundraising Outperforms
"Our ratings universe has high-quality fund managers with a proven track record through varying market cycles," says Manna Cheung, Vice President, U.S. Structured Credit Ratings, Funds. "Nevertheless, we remain cautious as we have seen challenging or underperforming ramp-up of portfolios by weaker fund managers, which would lead to potential negative rating performance."

Catch up on these topics and more thought leadership from across Morningstar and around the globe in this month's edition.