Global Credit Trends

Key Insights from March 2025 DBRS Report

The March 2025 Morningstar DBRS Global Credit Insights report highlights several significant trends shaping the global credit landscape. Key themes include the impact of prolonged U.S. tariffs, record revenues in European capital markets, the continued challenges for European banks exiting Russia, and evolving credit risks across industries. Below is a breakdown of the most critical takeaways.

1. U.S. Tariffs and Their Impact on Middle Market Credit

New U.S. trade policies, including a 10% tariff on Chinese imports, are creating a divergence in middle-market credit quality. If additional tariffs on Canada, Mexico, and Europe are implemented, weaker businesses will struggle with higher raw material costs and supply chain disruptions. Companies with stronger balance sheets and service-based businesses are better positioned to withstand these pressures.

• Key concern: Higher-for-longer interest rates may reduce operating cash flow for weaker firms, limiting merger and acquisition (M&A) activity.

• Outlook: A gradual stabilization in credit quality is expected, but struggling middle-market borrowers may see more negative credit rating actions.

2. European Capital Markets Surge Amid Volatility

European investment banking (IB) and sales and trading (S&T) revenues hit record levels in 2024, reaching $12.2 billion in Q4 2024—a 29% increase from the previous year. This trend is expected to continue in 2025 despite global market volatility.

• Driving factors: Strong client activity amid inflation concerns and fluctuating interest rates.

• Potential risks: While European banks are closing the gap with U.S. firms in investment banking, volatility could pose challenges for sustained revenue growth.

3. European Banks Face Ongoing Challenges in Russia

Despite ongoing peace talks, European banks with operations in Russia continue to struggle with exit strategies due to sanctions, regulatory barriers, and financial losses.

• ING Bank is selling its Russian unit at an estimated €700 million loss.

• Raiffeisen Bank International (RBI) remains the largest European bank in Russia, with potential capital ratio risks.

• UniCredit has faced fines from Russian authorities and is considering an accelerated exit if the war ends.

• Outlook: Even if sanctions are lifted, banks are unlikely to return to business-as-usual in Russia due to damaged investor confidence.

4. China: Navigating Economic Slowdowns and U.S. Trade Restrictions

China’s government raised its fiscal deficit target to 4% of GDP, signaling a modest increase in stimulus measures. However, new U.S. trade restrictions—including tariffs on Chinese goods and metals—could further slow China’s export-driven economy.

• Challenges: A weakening property sector, aging demographics, and higher U.S. tariffs pose downside risks to China’s 5% growth target.

• Outlook: Despite headwinds, China’s financial buffers remain strong enough to maintain economic stability in the near term.

5. Maritime Shipping Faces Competitive Pressures

The restructuring of global shipping alliances—including the dissolution of MSC and Maersk’s 2M Alliance—is intensifying competition. This is expected to drive shipping rates lower and pressure profitability.

• Short-term relief: Ongoing Red Sea disruptions have kept rates elevated, but a potential ceasefire in the Middle East could stabilize routes.

• Outlook: Large shipping companies are well-capitalized to weather these changes, but earnings and leverage will likely deteriorate in 2025.

6. U.S. Housing Market: Slower Activity, But Stable Prices

Mortgage rates are trending downward, but home sales have slowed as affordability remains an issue.

• 30-year mortgage rate: 6.76% (slightly lower).

• Existing home sales: Down 4.9% YoY.

• New home sales: Down 10.5% YoY, but median new home prices rose 7.5%.

• Outlook: Mortgage-backed securities (RMBS) remain resilient, with delinquencies moderately mixed but overall credit losses still low.

7. North American Industrials: Credit Quality Under Pressure

The manufacturing sector is seeing signs of slower growth, with the ISM Manufacturing PMI declining and inventory build-up ahead of tariffs.

• Risks: Higher tariffs, slowing new orders, and rising material costs may strain non-investment-grade industrial companies.

• Outlook: Well-capitalized firms with diversified supply chains are best positioned to navigate trade disruptions.

8. Private Debt Funds Remain Strong Despite Market Uncertainty

Despite weaker fundraising activity in private markets, private debt funds continue to outperform expectations, with direct lending taking the largest share.

• Private debt fundraising in 2024: $228 billion, surpassing the previous year.

• Risk factors: A slowdown in M&A and rising credit costs could challenge fundraising efforts in 2025.

• Outlook: Investment fund credit ratings remain stable, with low default rates and strong collateral protections.

Final Thoughts

The global credit landscape in 2025 is shaped by rising tariffs, geopolitical uncertainty, and shifting market dynamics. While capital markets and private debt funds remain strong, industrials and weaker middle-market borrowers face rising risks. China’s economy continues to struggle, and European banks remain cautious on Russia. Looking ahead, resilient credit quality and strong balance sheets will be key differentiators in navigating these evolving challenges.

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Relevant Links:

https://dbrs.morningstar.com/research/450026/global-credit-insights-from-morningstar-dbrs-march-2025

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