Trump’s Tariff Threat Already Spooks the Junk Debt Market

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(Bloomberg) — Donald Trump’s team may have been opposed to the idea of ​​a gradual collection of import tariffs across the country, but the bankers financing the companies in his firing line are busy.

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With the president-elect set to be inaugurated next week, some European businesses in threatened industries have stepped up borrowing arrangements to get ahead of any punitive measures. Some lenders are considering how they will be affected by the yet-to-be-disclosed tariffs. Private equity funds, which make loans to high-risk companies, are being questioned by investors about their exposure to risky borrowers.

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Sectors under consideration include auto parts, metals, medical devices and energy infrastructure. But Trump’s unpredictability and his taste for drama mean no one knows what to expect from the self-proclaimed “tariff man”.

Such is the uncertainty that three people involved in debt settlement agreements in the European financial market, who asked not to be identified because they are not authorized to speak publicly, said they were rushing to get it done before Trump took office. on Jan. 20. Another businessman at a top Wall Street firm said he was 100% committed to cashing out before opening.

Although most of the tax-driven recovery problems occurred in the European debt market – which supports many of the continent’s risky companies in exposed sectors – there are also fears about the backlash of Trump’s tax in the US if it causes inflation and deflation. puts pressure on the Federal Reserve to keep borrowing costs high.

“If Trump comes out and says he wants significant tariffs on all imports, it’s not just a question of which sectors will be affected, but what the impact is on the picture,” said Adam Darling, manager of a high-yield bond fund. at Jupiter Fund Management Plc in London. “There is a risk that a wider liability will come in if he does anything extreme.”

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The broader landscape of corporate borrowers is currently very favorable, with the premium they are paying for safe benchmark interest rates lower than they have been for years. That has led to a stampede of refinancing deals around the world, and the tax question has become more of a sticking point for European industrial companies looking to recoup their interest costs – especially as lenders begin to demand more transparency about how much damage they can expect.

Europe’s mortgage loan market has started a full year since at least 2017 in volume, Bloomberg data shows. Of the 28 categories, 19 are prices and borrowers are hunting for a reduction in the rate of 75 points.

The desire to act before Trump’s arrival is understandable. Even if the proposal for a more phased approach to price delivery has been accepted by the markets, predicting it has been a fool’s errand in the past. He has promised more extreme measures than his first term, including tariffs of up to 20% on all imports, and 60% on Chinese products.

“The question about the tax is being asked by investors at road shows,” said Marina Cohen, high-yield portfolio manager at Amundi SA, Europe’s largest fund manager. “If there is an impact, we want to know how companies are going to deal with that.”

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Dutch producer Hunter Douglas held a call with creditors last week to discuss a renegotiation of the loan deal led by JPMorgan Chase & Co. It took about two hours instead of the usual half hour or so, because lenders were questioning the company about the impact of taxes on its bottom line, according to people with knowledge of the situation.

About 80% of Hunter Douglas’ goods, including window coverings and architectural products, are made in Mexico for the US market, the people said. Although the management team could not clarify what will happen with the tariffs, they added that they still got the agreement they wanted. A JPMorgan spokeswoman declined to comment. Hunter Douglas did not immediately respond to a request for comment.

Some lenders say it’s been difficult to get meaningful disclosures even from borrowers who were hurt by Trump’s spending for the first time. One solution has been to prepare their inventory prior to launch.

“We’ve been diversifying our portfolio since September when a Trump victory seemed likely,” said Zachary Swabe, high-yield portfolio manager at UBS Asset Management. “So, we’ve been controlling our exposure to cars and chemicals as a starting point, and we’ve been investing in pet industries that could be included in Trade Wars 2.0, like health care.”

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A slight pullback is already coming from junk bond prices. Investors are reducing their exposure to over-indebted European companies with short-term loans, particularly in the auto parts sector. Standard Profil Automotive GmbH’s bonds have fallen since Trump’s election, though much of that has come from Europe’s already weak auto market.

For Catherine Braganza, senior credit analyst at Insight Investment, the biggest immediate victims are likely to be large borrowers in Europe, at least in the early days after the tax shock – a view that confirms the increase in the initial price on the continent.

“Come Monday, there are many chances that the prices will be announced,” he said. “And that will protect and benefit high-yield US companies,” usually the kind of manufacturing businesses that have to compete fiercely with overseas imports. “Only European-focused companies will have a bad time.”

Nevertheless, Braganza also pointed out that it is impossible to predict what the magnitude of the effects of inflation will be after six months, and that the cost of long-term debt will return to 5% or thereabouts.

“It’s a very cautious debt,” says Jupiter’s Darling. “Payments are still another risk when the market is very strong, and very expensive and there are big risks that can be very meaningful.”

Other places to stay in Credit:

• Goldman Downgrades Complex Credit Swap After Internal Risk Review

• Rakuten’s Mikitani wants to sell bonds to Japanese investors

• Blackstone Private Credit Fund Begins to Conquer Europe’s Wealthy

• Ares Amasses €30 Billion Pool of European Private Credit Fund

• Bankers Prepare Debt Up to £3 Billion in Reckitt Homecare Sale

—Courtesy of Amedeo Goria and Silas Brown.

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