Euro investment grade corporates and tariff uncertainty

European investment grade (IG) corporate spreads have outperformed US spreads by nearly 20 basis points (bps) year to date (as of 15 April 2025), despite headline volatility around tariffs and the threat of a global trade war. We think that European corporate health remains robust overall, despite near-term uncertainty in some sectors, such as autos. More European names could be caught in the crosshairs of US tariffs, if they are implemented, but we think that the headwind caused by tariffs will be manageable from a credit perspective, based on announcements so far.

We estimate that the first order impact of a 10% effective US tariff will reduce EBITDA (earnings before interest, tax, depreciation and amortisation) growth by approximately 100bps, on our baseline expectation of around 3% EBITDA growth in 2025. For credit, however, the impact is countered by ongoing disciplined capital allocation. Given the current economic uncertainty, corporate management teams are not committing additional funds to capital expenditure (capex) or taking large investment decisions. This caution may be adverse for the long-term strategy of the corporates, but it helps to conserve cash in the near term.

Heading into this period of heightened uncertainty, European corporate health was relatively strong, providing headroom to manage business volatility. At the end of 2024, EBITDA grew by 2.4%, having bottomed out in the second quarter at 1.2%. Gross leverage has been stable at 2.6x for five quarters in a row up to Q4 2024, while net leverage of 1.6x is back below the long-term average of 1.7x. European IG companies have maintained operating margins at around 12%, which is above the long-term average of ~11%, and above the Covid-era lows of ~10%, providing some buffer to offset the potential impact of tariffs.

We expect a net positive impact over time for European industrials from fiscal expansion in Germany. The positive effects from higher defence and infrastructure spending are expected to build gradually from later in 2025, but mainly from 2026, with a relatively higher impact on the capital goods and transport sectors. Germany’s €500 billion infrastructure fund should also have a positive impact on the automotive, building materials, chemicals, engineering/construction and rail infrastructure sectors over the long term, depending on how the funds are allocated.