Industry Credit Outlook Midyear Update 2025

Europe is squeezed between U.S. and China

Since April 3, light vehicle (LV) imports into the U.S. (about 50% of vehicle sold in the states) have been subject to tariffs.

LVs assembled outside North America are subject to 25% tariff on import value (10% for the U.K.), while those assembled in the region have their non-U.S. content tariffed 25%, provided they are USMCA compliant.

The latter is offset up to 3.75% of the vehicle MSRP (declining to 2.5% as from by 2026). Mitigation strategies so far are held back by expectations of a better tariff deal and offsets.

Average, effective U.S. import tariffs have increased sharply. The resulting higher input costs will directly hinder leisure manufacturers. Elevated interest rates and strained consumers will pressure demand for high-price leisure products like boats, motorcycles, and powersports.

We lowered our 2025 U.S. RevPAR forecast by 100 basis points to 0%-2%. So far, lowend leisure and government-related travel have slowed the most. If businesses pause various forms of investments, the indirect effect of tariffs may reduce business and group travel volumes.

Tariff-induced inflation and unemployment will increase. This will likely weigh on leisure and entertainment spending. However, effects will vary by sector depending on price and whether a purchase is discretionary and easily deferrable.

Europe’s energy transition is less affordable. This is because the economics of power supply decarbonization is more challenging than anticipated for offshore wind and power grids. This slows the energy transition and weighs on credit quality as capital expenditure (capex) increases while EBITDA’s catchup pace hinges on regulation’s supportiveness.

The U.S. administration’s view on tax benefits has changed. The U.S. administration’s changes to tax benefits have weakened the economics of renewable newbuilds for European utilities. The administration’s stance against offshore wind has hindered the already-fragile expansion plans by European utilities that are reprioritizing offshore growth plans to Europe and Asia.

Geopolitics have elevated LNG price volatility. Leading to an increase in European wholesale power prices. Europe’s slow 2025 gas storage buildup has increasingly exposed it to tight and volatile global liquefied natural gas (LNG) markets.

Heightened price volatility. Changing and material tariff levels add to underlying supply and demand dynamics for many metals.

Demand dimmed. Although the Chinese economy has avoided some harsh downside scenarios, domestic industrial and construction demand looks unlikely to rebound. Globally, trade uncertainties engender caution and weigh on potential growth.

Regional price divergence. Tariffs have driven stark price differentials for aluminum, steel, and most recently copper, to the short-term advantage of onshore U.S. producers.

Trade uncertainty has had a moderate impact on product sales, margins and cash flow of some Asia-Pacific technology companies. Ongoing geographic diversification of production mitigates the risk.

Macro softness undermines end demand for industrial, auto and consumer electronics. The effect may be more visible in the second half of 2025 due to a frontloading of orders in the first half.

Global AI investment continues to drive demand for semiconductors and AI server products.

Most rated tech issuers have sufficient rating buffers

Data infrastructure projects in vogue. Capital geared towards data infrastructure and energy to power data centers is outpacing growth in other sectors. Investments in transmission and distribution--centered notably on load growth, modernization, and hardening of the electric grid--will fuel growth in the sector over the next several years. Renewable energy as a complementary source for high energy consuming data centers is a key driver for growth.

Heavy civil infrastructure spending is steady. Less than 35% of the funds from the bipartisan infrastructure bill have been disbursed, presenting room for growth in the sector. Projects are getting bigger while competition is getting smaller, which provides increased contracting leverage for some of the larger construction companies.

Sentiment shifting towards oil and gas (O&G) investments. Following several years of slow activity, we expect investments in O&G to strengthen. The need for additional sources of energy to address power demand and a supportive administration pushing to ease regulation bode well for this segment of the industry.