Two-thirds of leveraged debt exposed to negative fallout.

Companies that account for a large share of European leveraged debt will be negatively affected by rising tariffs, which will intensify ratings pressure for some, says Fitch Ratings.

In a new report, the rating agency said that higher tariffs on U.S. imports from European countries will have a combination of direct sector impacts, along with the negative effects of an overall deterioration in economic growth — although it is not forecasting a recession for most of Europe.

“In our view, the tariffs will have a high effect on the chemical, automotive and technology hardware sectors,” it said — representing about 13% of leveraged debt as of the first quarter. 

Additionally, tariffs will have a “medium effect on a larger group of sectors,” Fitch said — including the business services, industrials and healthcare sectors, which account for over 50% of leveraged debt.

These negative effects will, in turn translate into increased financial pressure on corporate balance sheets, and some companies could also see their credit ratings negatively affected.

“High exposure to tariffs in the low-rated debt categories may indicate significant potential economic consequences,” the report said.

About one quarter of the exposed issuers had no leverage headroom at the end of 2024, Fitch noted. 

“Tariffs will cut revenue and profitability growth for many issuers, particularly affecting corporates with low leverage headroom and increasing pressure on the ratings,” it said.

Against this backdrop, Fitch has increased its 2025 default rate forecast for high-yield bonds to a range of 5% to 5.5%, up from its previous forecast of 3.5%-4%; and, its’ default rate forecast for leveraged loans was increased to 2.5%-3% from 2%-2.5%.