Introduction

Industrial companies within the high yield market have been challenged with end customer buying hesitation in light of tariff uncertainty and macro-economic concerns. Management teams continue to take action to mitigate the impacts from tariffs while acknowledging increased uncertainty embedded in outlooks. Within high yield, we see opportunities in well-capitalized companies that continue to experience strong order intake, notably companies servicing clean energy, data center and HVAC end markets. As spreads have tightened significantly from April highs, new issuance is expected to increase as companies look to take advantage of more favorable borrowing terms in an otherwise uncertain economic environment.

High Yield Market and Tariffs

• The first quarter saw a high degree of uncertainty among management teams due to the unknown implications of tariffs. Despite this, most companies held or slightly tweaked their guidance.
• Industrial companies have been proactive in mitigating tariff risks by shifting their supply chains away from China and into Southeast Asia and India.
• Companies are confident in their ability to mitigate tariff risks by negotiating with suppliers, shifting away from tariffed countries, and passing on prices.
• The earnings season has been decent, with some pull forward in demand due to anticipated tariffs. Companies are generally well capitalized and moderately levered versus their enterprise value, positioning them well for potential turmoil.

Concerns and Opportunities

• The main concern is the potential for demand destruction due to overall trade policy and the erosion of consumer and business confidence.
• There is uncertainty in small businesses and interest rate sensitive projects.
• We believe that opportunities exist in select names that provide systems and components for the hydrogen, liquefied natural gas (LNG), clean energy, and carbon sequestration capture markets globally, as well as names that produce compressors for heating, ventilation, and air conditioning (HVAC) systems, with a significant portion of demand being for replacements.

High Yield Valuations

• High yield valuations have tightened significantly in the last 24 hours, back to March levels on spread of about 340 basis points.
• Despite the tightening, there are still individual opportunities.
• The new issue market has been slow year to date, but issuers are ready and waiting for the right market moment.

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