(Editor's Note: 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:\u8239?spglobal.com/ratings].)
Key Takeaways
- Tariff impacts will vary by sector in U.S. structured finance, based largely on whether the effects are direct or more indirect in nature, among other factors.
- Despite some deterioration in collateral performance, overall ratings performance for U.S. structured finance (excluding CMBS) under the current economic base case should remain relatively stable, with certain sectors having limited negative rating movements.
Tariff-related market shifts have added both uncertainty and volatility to S&P Global Ratings' current U.S. economic base-case forecast (see "Economic Outlook U.S. Q2 2025: Losing Steam Amid Shifting Policies," published March 25, 2025), which in turn will impact U.S. structured finance (SF) collateral performance. We expect these impacts to vary across U.S. SF sectors, based largely on whether the effects are direct or more indirect in nature, among other factors (such as already existing stress). We discuss the impacts to each sector below.
CLO
Spreads have increased across the capital stack of U.S. collateralized loan obligation (CLO) notes in early April (both new issue pricings as well as secondary spreads) as new issuance volumes have slowed. Underlying loan prices have experienced volatility as weighted average loan prices across U.S. broadly syndicated loan (BSL) CLO portfolios have dropped by about 1.5 points during the first half of April. We find the CLO exposures to industry groups that are consumer/retail- and auto/transportation-related have experienced above-average declines in loan prices during this time (total related exposure of just over 10%). Additionally, we find loans from 'B-' and 'CCC' category rated issuers experienced above-average loan price declines during this time.
Even before the loan price volatility in early April, we noted an uptick in 'CCC' rated credits and default exposure, as well as a slight decline in average loan prices across our CLO Index of reinvesting transactions. Volatility in loan prices may be a silver lining for reinvesting CLOs as it may give managers an opportunity to build par; however, post-reinvestment CLOs may be in a tough spot if the lower market values make it difficult to redeem the CLO. Transactions that remain outstanding for extended periods due to low market values are more exposed to downgrade risk for the junior CLO notes. As of mid-April, we have a handful of mostly junior notes from older transactions on CreditWatch negative.
Chart 1 shows BSL CLO exposures by Corporate Industry Sector (GICS).
Chart 1
ABS
Even prior to the initial announcement of widespread tariffs, consumers were facing strain from higher interest rates, higher debt levels, inflation/affordability issues, and the resumption of student loan payments, among other factors. Thus, for most consumer asset-backed securities (ABS) products, we believe the main transmission channels for any potential deterioration in collateral performance will stem from tariff-related impact on macroeconomic factors such as rising unemployment, higher interest rates, lower economic growth, and increased inflation. All of these may negatively impact a consumer's ability to meet debt payment obligations in the future.
In the case of autos, for example, higher new car prices will further strain affordability and decrease demand, while used auto values may increase due to tightening supply.
Chart 2
For equipment ABS, the primary risk to lessees in the construction and agricultural sectors arises from higher production costs (such as lumber or potash) and weaker demand for export products (in the case of retaliatory tariffs). Mitigants include diversification of lessees, historic and expected government support of impacted agricultural sectors, and limited construction sector concentrations in pools (typically on the order of 20%).
Certain commercial ABS segments may face greater challenges and experience weakening, particularly cross-border trucking from Canada and Mexico related to lumber and auto and related components. However, the sector is generally highly diversified and has historically been cyclical, closely aligning with the overall U.S. economy. On a positive note, the sector could benefit from potentially lower fuel costs resulting from the incoming administration's favorable stance on domestic oil and gas production.
Within the railcar/container lease ABS sector, impacts will be muted in the near term as underlying container/railcar leases tend to be multi-year. However, both the portion of any pool exposed to the "spot market" in that weaker economic environment and leases coming up for renewal might be negatively impacted. The container sector also bears monitoring if global trade volumes see material negative impacts, and as a result, lower container usage and lease rates. On the positive side, an inflationary (and high-interest-rate environment) may support lease rate and residual value on the asset, partially mitigating the potential weakening demand.
Solar and whole business ABS, as with consumer ABS sectors like autos and cards, would likely be indirectly impacted through macroeconomic factors such as rising unemployment, lower GDP, higher interest rates, and increased inflation.
CMBS
Commercial mortgage-backed securities (CMBS) collateral and ratings performance across the capital stack was already under stress largely due to underperforming office assets and regional malls. Tariff-related market shifts add another source of uncertainty. Accounting for the already stressed consumer and a base-case forecast for low economic growth, the current environment appears somewhat negative for industrial (e-commerce), lodging (consumer spending and tourism), retail, and, to a lesser degree, multifamily fundamentals. (For more information, see "U.S. CMBS Update Q1 2025: Issuance Remains Robust Amid Rising Leverage And Lingering Credit Issues," published April 10, 2025.)
RMBS
The impact of tariffs upon residential mortgage-backed securities (RMBS) is anticipated to be largely indirect/secondary, with mixed implications. If the economy faces a significant downturn due to tariffs and counter-tariffs, borrowers, particularly those in weaker financial positions, may struggle with affordability and payment management. However, the prevalence of fixed-rate mortgages is expected to provide some relief, as these loans will help stabilize monthly payments despite elevated mortgage rates. On the positive side, tariffs may constrain new housing development due to increased costs, which could support existing home prices.
Ratings Performance For U.S. Structured Finance Should Broadly Remain Stable
Overall ratings performance for U.S. structured finance (excluding CMBS) under the current economic base case should remain relatively stable, with certain sectors seeing limited negative rating movements. While collateral performance may weaken in certain sectors, the direct impact of tariffs upon ratings is expected to be limited.
Related Research
- U.S. CMBS Update Q1 2025: Issuance Remains Robust Amid Rising Leverage And Lingering Credit Issues, April 10, 2025
- Economic Outlook U.S. Q2 2025: Losing Steam Amid Shifting Policies, March 25, 2025
This report does not constitute a rating action.
| Primary Contacts: | Winston W Chang, New York + 1 (212) 438 8123; winston.chang@spglobal.com |
| Tom Schopflocher, New York + 1 (212) 438 6722; tom.schopflocher@spglobal.com | |
| James M Manzi, CFA, Washington D.C. + 1 (202) 383 2028; james.manzi@spglobal.com |
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