New Tariff in Town: The Potential Impact on Borrowers & Lenders

By Ryan Mulcunry

With the increased noise around tariff implementation, GA Group seeks to provide color and clarity on the potential impact to borrowers and lenders for underlying Inventory, Receivables, Machinery & Equipment, and even Intellectual Property (“IP”) values.  This situation is dynamic, but we will present the key factors and considerations and share what we learned with the last wave of tariffs.

Generally, tariffs impact inventory in the greatest proportion for both the underlying cost of goods purchased and the ability to pass those costs on to customers.  Categorically, inventory can be impacted in different ways, but we have summarized a few key product types below to illustrate the potential impact to the net orderly liquidation values (“NOLVs”) and monitoring points for lenders.

What We Learned

The last wave of tariffs was more focused on specific countries, namely China, and companies were able to pass on the increased costs to their customers. Additionally, companies opted for vendor base diversification and increased purchasing ahead of the changes.  At the time, there was an overall increase in demand for products and this demand, coupled with infrastructure issues and chip shortages, drove a major supply chain strain in the post-COVID world.  In general, the impacts were minimal to borrowers, but we did see some strain in NOLVs particularly related to the buildup of slow-moving inventory.  In-transit figures increased dramatically as companies purchased in anticipation of tariffs which contributed to longer lead times and lower NOLVs.  Early on, GA recommended the bifurcation of in-line and excess to track and, ultimately, reward the right-sizing of inventory.  GA also recommended tracking units (understand denominator), gross margin (ability to pass on costs), demand (both historic and future expected demand) and excess (over or under buy).  Most of these impacts have been realized and there was a normalization of NOLVs from 2024 to now.

What We Expect

This time may be different.

Inventory – While there is a lot of attention being given to tariffs; few have been fully implemented.  We are tracking the “de minimis” rules (shipments below $800) which could have dramatic impacts on e-commerce (outsourcing warehousing to foreign markets and Shein effect).  That said, the expectation is a wider swath of tariffs directly impacting both imported consumer goods and raw materials, such as steel (some domestic pricing already moving) and lumber (limited volatility in January 2025).  This has the potential to create a more widespread impact on industries like automotive, machine sales, manufacturing, housing and consumer goods. The demand levels appear to be softening, which will make passing on these costs to consumers more challenging.  We believe there will be a “sharing of the pain” with consumers buying less or buying American, suppliers (either at retail, wholesale or manufacturing) bearing some of the costs, and orders potentially being cancelled or reduced.  If the borrower believes demand will remain high or grow, they may buy additional goods ahead of the tariff and sell at new, higher prices.  There could be delays at the port, increased duties which will strain In-transit values.  If the timing or buy level is off, this can create excess inventory.

Receivables – The collectability and dilution can be impacted as price increases are accepted or rejected.  If we slip into a recessionary environment, the increase in slow pay/no pay needs to be tracked.

Machinery & Equipment – It is feasible that new machinery will be more expensive to produce, which may bolster used pricing.  This will be sector specific and will generally have a positive impact on NOLV trends.

Intellectual Property – Gross margin and EBITA compression can have dramatic impacts on projected fair market and liquidation values for IP.

These dynamics make collateral monitoring critical during borrowing base reporting, timing the diligence updates to capture more recent, relevant data, is key.

What To Track

• Sales on both a unit and dollar basis (historical and projected)
• Monthly gross margin (pay particular attention to most recent 2-3 months around receipts and sale of tariffed goods)
• Inventory on both a unit and dollar basis
• Excess calculation
• In-transit levels, updating costs to land, timing of receipt
• Inventory turnover impact (faster in turns, quicker the impact)
• Consumer confidence/CPI data – The U.S. is a consumer driven economy which can impact both consumer goods and manufacturing sectors. If overall demand for products waiver, there is a ripple effect which can be compounded by tariffs and an inability to pass on costs (margin compression).
• Steel, Lumber and other commodity prices – could be some serious volatility and an imbalance of stock to demand
• “de minimis” rules around shipments below $800