America’s Corporate Borrowers Struggle in the Wake of Trump’s Tariff Blitz

Since Donald Trump’s recent tariff announcements, America’s risky corporate borrowers have faced challenges accessing the bond market. This freeze has had a ripple effect across Wall Street, impacting dealmaking and creating uncertainty in the financial sector.

Lowly-rated companies have found it difficult to sell debt in the US high-yield bond market, which totals $1.4tn. The market turmoil sparked by Trump’s tariff actions has led to a lack of investor appetite for risky deals, resulting in record outflows from high-yield bond funds.

This freeze in the junk bond market poses a threat to private equity firms that often rely on it to finance their acquisitions. It also increases the risk for banks that provide short-term loans for such deals before buyout firms secure longer-term financing in the bond market.

Bob Kricheff, the head of multi-asset credit at Shenkman Capital Management, noted that the current environment has put everything on hold, with no one willing to price deals amidst the uncertainty.

Impact on Deal Making

Trump’s trade agenda has made investors hesitant to back riskier deals, leading to the halting of bond sales for various acquisitions, including HIG’s purchase of Converge Technology Systems and the takeover of TI Fluid Systems by Apollo-backed ABC Technologies.

Banks have been adjusting the terms of loans offered to buyout clients and increasing interest rates to mitigate potential losses. Some banks, such as Citigroup, Morgan Stanley, and JPMorgan Chase, have refrained from funding deals that high-yield investors are hesitant to support in the current market conditions.

With the market turmoil, banks face the risk of losses on short-term loans committed to buyout clients, as the interest rates they provide may not align with market levels during times of stress.

The Private Equity Industry Struggles

The private equity industry, along with the banks that profit from their deals, is grappling with a decline in dealmaking and the looming threat of a recession. Banks are becoming less willing to provide new commitments amidst the volatility, which could lead to existing commitments getting stuck on bank balance sheets.

The market for new investment-grade bonds has also seen a slowdown, with only one new deal pricing between April 2 and the recent pause on tariffs announced by the president.

Market Challenges and Forecasts

Credit spreads, which measure the extra cost for corporate borrowers to borrow compared to US government debt, have surged to the highest level in nearly two years. This spike reflects investor aversion to risk and uncertainty in the market.

Goldman Sachs has raised its forecast for defaults by high-yield and leveraged loan borrowers, indicating potential challenges ahead. The issuance of high-yield bonds and loans this month has been significantly lower than the average since 2021, signaling a freeze in the market.

Adapting to the Market Conditions

In response to the market freeze, some banks are exploring alternative financing options. Citigroup, for example, has paused a high-yield bond and loan fundraising effort through traditional debt managers for Patient Square Capital’s takeover of Patterson Companies, turning to private credit funds instead.

Other buyout firms, like BayPine, are also tapping into private credit for financing. This shift to private credit funds, which offer riskier loans with higher interest rates, reflects the changing landscape of the financial sector in the current market conditions.

As the industry navigates the challenges posed by Trump’s tariff actions and the broader economic uncertainty, adaptation and flexibility in financing strategies will be key to weathering the storm.

Additional reporting by Oliver Barnes