Leveraged Finance Spotlight: Corporate Outlook Still Cloudy Despite China - U.S. Trade Settlement

This month, Morningstar DBRS takes a deeper dive into the potential industry segment impact of a higher tariff environment and ongoing market uncertainty. Notwithstanding some easing of tensions between the U.S. and a few key trading partners, Morningstar DBRS believes more restrictive trade policy appears likely to remain an overhang on global economic activity.

For our feature story this month, Morningstar DBRS analyzed a group of rated middle market issuers to determine their exposure to the risks presented by tariffs or other restrictions on global trade. Michael Dimler, Senior Vice President, Private Credit, indicates that the review showed "a greater proportion of industrial and consumer issuers are exposed to moderate or high risk from disruption through the supply chain relative to the threat of higher cost frictions on finished goods sales."

Other key highlights include the following:

-- Many issuers appear vulnerable to further margin compression if tariffs materially affect product trade flows and pricing.
-- While the China - U.S. Geneva trade deal should provide some relief to the Chinese economy in the near term, Morningstar DBRS still anticipates a negative shock to the Chinese manufacturing industry and an ongoing threat from additional tariffs.
-- Elevated market volatility may bring some opportunities for the highest quality European investment banks to gain market share in certain businesses, including a flight to quality of deposits.