Navigating Tariff Turbulence: Leveraged Loan Risks and Private Credit Opportunities in a Post-Trump Era

The U.S. leveraged credit market is in a tailspin, and it's all because of one man: Donald Trump. His 2025 tariff announcements—ranging from 10% baseline levies to 50% reciprocal tariffs on key trading partners—have sent shockwaves through the financial system. The result? A resurgence of "hung debt," a term that once dominated headlines in 2022 but now threatens to reemerge as a critical risk for banks and investors alike.

The Tariff-Driven Credit Market Crisis

Let's start with the numbers. The average U.S. tariff rate now sits at 18%, the highest since the 1930s. This isn't just a tax on goods—it's a tax on corporate margins, investor confidence, and the delicate balance sheets of leveraged loan underwriters. The April 2025 tariff shocks froze the primary loan market for 19 consecutive days, the longest freeze since the pandemic. Secondary market prices for leveraged loans plummeted, with the Morningstar LSTA Leveraged Loan Index (LLI) dropping 1.8% in a single week.

The problem isn't just tariffs—it's the uncertainty they create. When companies can't predict their cost structures, they delay deals. When deals stall, banks can't sell the debt they underwrite. And when banks can't sell that debt, we get hung debt: high-risk loans stuck on balance sheets, often at a 35–40% discount. The Musk-X acquisition is a prime example. Banks poured $13 billion into that deal, only to find themselves holding a toxic asset as X's valuation cratered. Now, with tariffs adding another layer of volatility, the risk of similar scenarios is rising.

The Rise of Private Credit Arbitrage

Here's where the opportunity lies. Traditional banks are pulling back, but private credit firms are stepping in. In Q1 2024, private credit accounted for 94% of buyout financing by volume—a structural shift that's only accelerating. These firms, unencumbered by the regulatory constraints of banks, are structuring deals with floating-rate yields and more flexible terms. For investors, this creates a goldmine of arbitrage opportunities.

Take the recent $4 billion loan backing Thoma Bravo's acquisition of Boeing's Digital Aviation Solutions business. Private credit firms negotiated terms that allowed the deal to close despite the broader market freeze. Similarly, Clearlake Capital's $7.7 billion buyout of Dunn & Bradstreet was funded by a debt package that bypassed traditional banks entirely. These deals highlight how private credit is now the go-to source for high-risk, high-reward financing.

Risk Management in a Tariff-Driven World

But let's not get ahead of ourselves. Leveraged loans are inherently risky, and tariffs have made them even more so. Here's how to navigate the minefield:

1. Focus on Quality: Not all leveraged credits are created equal. Prioritize companies with strong cash flow resilience and low exposure to tariff-sensitive sectors like consumer durables, autos, and materials. Financial services and select tech firms (e.g., cloud infrastructure providers) are less vulnerable.
2. Diversify Exposure: Avoid overconcentration in sectors hit hardest by tariffs. For example, the materials sector has seen a 72% price decline in leveraged loans since April 2025.
3. Hedge with CDS: Credit default swaps (CDS) are surging to March 2023 levels, reflecting heightened default fears. A small CDS position can offset potential losses in a leveraged loan portfolio.
4. Monitor Private Credit Firms: Companies like Carlyle Group (CG) and Apollo Global Management (APO) are leading the charge in private credit. Their performance will be a barometer for the sector's health.

The Bottom Line: Play Defense and Offense

The leveraged credit market is at a crossroads. On one hand, tariffs and hung debt pose significant risks. On the other, private credit arbitrage offers a path to outsize returns. For investors, the key is to balance caution with opportunism.

If you're a risk-tolerant investor, consider allocating to private credit ETFs or direct deals with strong covenants. If you're more conservative, stick to high-quality leveraged loans and use CDS to hedge against defaults. Either way, the message is clear: in a post-Trump tariff world, the winners will be those who adapt to the new normal.

The market isn't just volatile—it's volatile and unpredictable. But that's where the real money is made. Just don't get stuck holding the hung debt.