The Trump Administration's wide-ranging–and ever-changing–tariff strategies have already impacted the securitization market adversely. If kept in place, warn the credit-rating agencies, they will negatively impact virtually all sectors, with any benefits likely to be temporary.
"The disruption prompted several transactions that KBRA was in the process of rating—totaling approximately $17.5 billion—to be placed on hold," the rating agency said in an April 11 report. "These deals joined a growing number of transactions that were forced to reprice and amid widening spreads."
KBRA said it would be premature to revise its securitization issuance forecasts, but it is increasingly likely that issuance will be dampened, with trade finance and diamond finance securitizations as examples of those most at risk. The longer tariffs last, however, the more negative the outlook becomes for securitizations across the board, as the economy slows and credit risk increases.
A growing number of transactions ... were forced to reprice and amid widening spreads.
That impact could occur quickly, analysts said. Fitch Ratings projected in an April 16 special report that the escalating trade war will dramatically reduce U.S. growth to 0.4% by Q4, with its 2025 growth projection falling to 1.2%, down from the rating agency's earlier forecast of 2.1%.
CLO hopes diminished
The volatility in loan prices may benefit reinvesting CLOs by giving managers an opportunity to buy during price declines and get closer to par.
Early in the year, market participants anticipated the new administration's deregulation fueling more M&A and new loans, resulting in another booming year for CLOs. Then on April 1, President Trump announced 25% tariffs on steel and 10% tariffs on aluminum, starting a period of erratic announcements of new tariffs–only to delay them. S&P Global reported April 17 that the weighted average loan prices across U.S. broadly syndicated loan portfolios dropped by 1.5 points in the first half of the month, and that CLO exposures related to consumer/retail and auto/transport industry groups experienced above average declines in loan prices.
"Additionally, we find loans from 'B-' and 'CCC' category rated issuers experienced above-average loan price declines during this time," the rating agency said.
The volatility in loan prices may benefit reinvesting CLOs by giving managers an opportunity to buy during price declines and get closer to par, S&P said. Lower market values, however, may hinder post-reinvestment CLOs' redemptions.
Transactions that take longer to redeem due to low market values are likelier to see their junior notes downgraded, S&P said, adding that as of mid-April, the rating agency had "a handful of mostly junior notes from older transactions on CreditWatch negative."
KBRA said at least two CLOs it was expecting to rate in early Q2 were put on hold or delayed, and that the 90-day pause on so-called reciprocal tariffs, announced April 9, could temporarily reignite transactions. Some CLOs have since entered the market, including deals managed by AB Private Credit Investors and Investcorp Credit Management.
Consumer ABS to track macroeconomic impact
How asset-backed securities (ABS) pooling consumer loans hold up will depend largely on tariffs' impact on macroeconomic factors affecting consumers' ability to repay their debts, such as rising unemployment, and higher interest rates and inflation.
"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," S&P said.
Higher prices would increase payment burdens for borrowers or longer loan terms, negatives for new securitizations whose loan-pool terms are already at record highs, according to Moody's ratings. On the other hand, higher used car prices will benefit existing deals by improving recovery rates on defaulted loans and lease residual values at expirations.
Inflation could also benefit auto ABS by increasing demand for vehicles already on dealers' lots and supporting higher recovery values.
The rating agency said, however, that "increased auto insurance premiums owing to rising auto parts prices from tariffs would be negative for performance in outstanding and new auto ABS over time."
Inflation could also benefit auto ABS by increasing demand for vehicles already on dealers' lots and supporting higher recovery values.
"These positive effects may be short-lived if vehicles become unaffordable, and consumers postpone purchases for longer time periods or certain consumers exit the market entirely due to rising unemployment," KBRA said.
Unsecured consumer debt, such as credit cards, isn't directly tied to tariffed goods, said KBRA, but higher priced goods may increase reliance on unsecured debt, elevating overall household debt, which along with rising unemployment and interest rates could increase delinquencies and charge offs.
"Additionally, weaker collateral performance could negatively affect funding costs or investor appetite for unsecured ABS, potentially leading to higher yields or wider spreads," KBRA said.
Tariffs threaten CMBS recovery
Tariffs can adversely impact commercial real estate (CRE) when economic activity slows and corporates pull back spending and delay leasing plans, KBRA said, while the higher cost of materials pressures property net cash flows and prompts builders to push off developments. Some relief may come, however, if a slowing economy prompts the Federal Reserve to lower interest rates faster than expected, fueling more originations.
"The CMBS distress rate across KBRA-rated transactions stands at 9.8%, and any additional stress on the sector will pressure performance, particularly for transactions that have already experienced credit deterioration," KBRA said.
GSEs to the RMBS rescue?
KBRA said prolonged tariffs should negatively impact RMBS origination, securitization and performance of existing transactions, stressing borrowers' balance sheets and increasing delinquencies and defaults. Particularly at risk, it added, are mortgages for nonowner-occupied, short-term rentals due to their reliance on leisure travel.
"We expect the government-sponsored enterprises (GSE) and PLS servicers to combat increased delinquency and default rates with the tools developed and successfully deployed during COVID, including payment forbearance and/ or temporary/permanent rate modifications," KBRA said.
