Private Credit Is Insulated But Not Immune From Tariff Risk

S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential shifts and reassess our guidance accordingly [see our research here: spglobal.com/ratings].)

• While we expect tariffs and other policy factors will have a limited direct impact on direct lending portfolios, second-order effects could weigh more heavily on middle-market borrower performance.
• A more broad-based impact would accelerate credit estimate (CE) downgrades and elevate general and selective defaults for some struggling entities, reversing recent trends of improving credit quality.
• At least 10% of our credit estimates portfolio may be vulnerable to direct tariff-specific ramifications, irrespective of current CE score.
• In a moderate stress scenario, roughly 14% of current 'b-' scores could face potential downgrades--translating to a 'ccc' distribution that might rival levels experienced at the peak of the COVID-19 pandemic.
• Risk remains primarily credit-specific, as each company will vary in its ability to mitigate and endure different stress factors.

A new era of uncertainty will test resilience of direct lending portfolios. S&P Global Ratings anticipates the immediate impact of the Trump administration’s tariff policy will be contained for direct lending portfolios due to their predominantly domestic focus and emphasis on services. However, second-order effects—such as sustained inflation, weakened consumer spending, reduced corporate investment, recessionary pressures, and overall market unpredictability--could have significant consequences (see "Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth", published May 1, 2025). Since the implementation of April 2 tariffs, coupled with broader policy shifts under the Trump administration, heightened volatility has disrupted financial markets as investors respond to increased geopolitical, trade-related, and economic uncertainties. While most tariffs announced April 2 are currently on a 90-day pause, a universal baseline import tariff of 10% remains in place, with many imported Chinese goods facing an additional 145% levy. We expect tariff policies will continue to evolve (see "Credit Conditions North America Special Update: Tariff Turmoil", published April 17, 2025).

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