The Trump administration’s announcement of a broad package of tariffs in April 2025 has reignited activity in the secondary SRT market following a five-year slump from the onset of the coronavirus crisis. However, although secondary deals from syndicated programmes have been offered, trading is still pending given differences between buyers and sellers over the right price among other reasons.
Perhaps more importantly, the uncertainty stemming from geopolitics is complicating decision making, but investors are certain that this is the correction that will finally adjust a long period of very tight spreads.
Terry Lanson, Managing Director at Seer Capital notes: ‘’in an environment of volatility, SRTs tend to exhibit more stable pricing. So far we haven’t seen anything trade since bidders sensed some distress and were seeking bargains, but sellers didn’t bite. Before ’Liberation Day’ sellers likely could have gotten above par for seasoned positions, but we expect that would be less likely now.’’
He continues: ‘’ SRTs don’t price in line with correlation models driven by tranche thickness and spreads of the underlying assets, because the alignment of interest and partnership model between banks and investors adds noticeable value.”
The secondary trades that have been offered in the market come from traditional issuers and they are either syndicated or club deals referencing corporate and SME loans. The drivers aren’t clear yet but margin calls and portfolio re-composition tend to be some of them.
According to an investor: ‘’typically margin calls are one driver of secondary activity. You can either put down more capital with your repo lender but if you can get a better price in the secondary market versus what your repo lender is marking you may opt to sell in secondary. Another common driver is that some funds might sell SRTs to cover losses in other parts of their portfolio.’’
Investors could also rotate to CLO triple-Bs for instance which is a longstanding comparable instrument. ‘’The latter at the moment is pricing at 350bps-375bps while offering 12% subordination. For some multi-strategy investors who put a premium on liquidity this could be a viable option’’ says the same investor.
He continues: ‘’The offers we saw in secondary where at par but it has to move down in some cases to 10% so the price can be in line with the 150bps-200bps widening in IG credit. This would also be in line with the widening in CLO triple-B assets and it would be the widening that investors would be aiming for primary as well.’’
Investors going forward note that they will be targeting disclosed IG pools which wouldn’t be dissimilar to the Covid crisis. Disclosed portfolios allow buyers to understand the sectors that are most exposed to tariffs.
Another option can be granular SME pools since for some buyers they can be less exposed to tariffs and more integrated into local economies but complicated global supply chains and the cost of raw materials have to be taken into consideration.
The focal point here is clearly the impact of the tariff war for corporate defaults. The situation is currently clearly uncertain and volatile but S&P notes that the worsening of global trade tensions, expectations for a global economic slowdown, and increased investor risk-aversion will likely affect the rating agency’s expectations of a continued gradual decline in speculative-grade defaults.
In particular, this means defaults could trend closer to S&P’s downside scenario of 6% in the U.S. and 6.25% in Europe by December, compared to the agency’s baseline forecasts of 3.5% and 3.75%, respectively.
The bulk of the SRT market is backed by European assets and S&P notes that there are mitigating factors to consider for these pools but this will clearly differ depending on the exposure of a particular industry to the Trump administration’s tariffs.
On April 2, 2025, the Trump administration announced that new tariffs of 20% and 10% will be applied to goods from the EU and the U.K, respectively, from April 9, 2025.
Copper, pharmaceuticals, semiconductors, and lumber articles are excluded from these tariffs although specific tariffs may be applied later. The tariffs are on top of the 25% tariffs already announced on auto, aluminium, and steel companies, which are effective from April 3.
S&P states: ‘’We understand that the announced tariffs will apply only to goods, while services are not included. We consider the tariffs to be potentially meaningful for the eurozone considering that exports of goods are equivalent to 34% of the region’s 2024 GDP and that the U.S. was the largest trading partner, accounting for about 20% of the total exports.’’
S&P continues: ‘’We analysed our portfolio of rated companies, and concluded that in Europe the auto sector is going to be the most severely impacted, followed by the metals sector, due to the 25% tariff imposed on aluminium and steel imported to the USA.’’
Yet the mitigating factors apply for other sectors. The most effective of those mitigants according to S&P are existing local production facilities in the U.S, the ability to pass, entirely or partially, the tariffs to customers through price increases, and the possibility to redirect sales to other regions.
The caveat with this analysis though that S&P itself admits and as mentioned by SRT investors is that there are interconnections that can generate significant effects on sales and supply chains that cannot be fully assessed at this stage.
The rating agency is focussing primarily on the direct implication of tariffs on certain industry sectors, while recognizing other indirect effects, for instance on economic growth or financing conditions that may also be relevant.
