Commentary

Supply Chain Is the Largest Source of Tariff Exposure for Middle Market Borrowers

Services, Consumers, Industrials

Summary

In the May 2025 edition of our Leveraged Finance Spotlight, we included an examination of the exposure of a group of lower-rated industrial and consumer sector middle-market issuers (holding ratings of B (low) or lower) to risk vectors driven by economic tariffs or other headwinds to global trade. In this commentary, we report the results of an expanded analysis, including an additional 72 consumer/industrial products issuers rated B or stronger to complement the original set of 40 low-rated issuers. The combined group represents about 27% of actively rated issuers. We did not include service providers in this analysis as they are likely to be less directly affected by tariffs and trade policy.

Michael Dimler, Senior Vice President, Private Credit, indicates, "that a greater proportion of industrial and consumer-oriented borrowers are exposed to moderate or high risk from disruption through the supply chain compared with the threat of higher cost frictions on finished goods sales."

Key Highlights
-- We conclude that 63% of consumer or industrial issuers faces either moderate or high exposure to supply chain disruptions or inflation.
-- On a regional basis, we observe that European issuers appear to have lower exposure to supply chain risk but slightly higher exposure to risk related to customer proximity.
-- Our data indicate that 34% of issuers appear to face some degree of cyclical demand exposure, and another 19% are focused on products with discretionary demand.