Geopolitical risk casts shadow on hot credit market

Sasha Padbidri
+Yiwen Lu
+ 1 more

23 September 2025•4 min read

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Companies are more frequently citing geopolitical risks in their debt documents, an indication that these are no longer abstract concerns for borrowers. But that view seems to run counterintuitive to the current narrative among market participants, who have suggested that the country’s economic resilience (and Fed backing) should be sufficient to withstand potential shocks.

Perhaps both things can be true at once. We used 9fin’s document tool to screen through our database of deal OMs and found that at least 114 deals in 2025 contained “geopolitical risk” disclosure — that’s more deals this year-to-date versus the total over the prior three years. And while there isn’t one standardized definition of geopolitical risk, some of the common themes cited in OMs include war, terrorism, trade tariff escalation and immigration.

The recent change in administration and its policy shifts have intensified the focus on geopolitical risk. For Aon’s co-head of transaction solutions Matthew Wiener, who focuses on risk solutions for M&A and alternative investments, these discussions tend to pick up around the US presidential elections and administration transition periods.

“In times of political change, particularly around administration changes in the executive branch, it is not uncommon to see disclosures that address future or potential changes in law, such as tax reform,” he said. “Relatedly, when the executive or legislative branches have taken much more definitive positions on issues that impact businesses, disclosures are often drafted that specifically address the geopolitical risks related to such positions.”

But at the same time these fears are playing out, LevFin data is painting a different picture — credit spreads are hovering close to all time tights even as the Fed starts cutting rates with weaker payroll numbers and other indicators pointing to a potential slowdown.

According to JP Morgan data from 19 September, nearly half of the leveraged loan market is trading above par while the average loan coupon stands around 7.47% (versus a market high of 9.26% in October 2023); JP Morgan data also showed that high-yield bond yields and spreads have declined to 6.82% and 316bps, respectively, representing a three-year low for bond yields and 6.5-month low for bond spreads.

Some buysiders have acknowledged the disconnect between the two realities, but noted that geopolitical risk remains tough to quantify in debt underwriting.

“I don’t know how you predict the next geopolitical move. With this administration and what’s going on across the world, you are always worried about geopolitical risk and policy impact,” said a portfolio manager. “But I don't really know how you underwrite it effectively really because it's so arbitrary.”

In a M&A or buyout scenario, uncertainty around geopolitical risk can create tension over which party takes on greater risk, according to Aon’s Wiener.

“There are structural ways to address geopolitical risk where the parties can both agree to allocate the potential liabilities related to such risks through contractual arrangements. This is more common when neither party really knows what the potential impacts of such risks could be, so they are become amenable to structuring their transactions around these risks to enable the deal to get to the finish line,” he said.

“These structures often include insurance capital solutions, as well as unique deferred or contingent payments, which enable the parties to mitigate the unforeseen impacts that may arise from uncertain geopolitical risks.”

Immigration sparks concern

Immigration is another hot-button geopolitical risk that market participants are monitoring.

Preliminary data from Pew Research indicated that the tough crackdown by the current administration has resulted in over 1 million immigrants (including authorized and unauthorized individuals) disappearing from the US labor force between January through the end of July, making this the “first sustained drop” in the US immigrant population since the 1960s.

For sectors that depend heavily on migrant labor, such as hospitality, manufacturing and agriculture, the effects of this will likely materialize in the next earnings cycle and perhaps influence risk language in future debt documents, sources said.

It also represents one more unwelcome headwind, particularly for borrowers that are already grappling with tariffs and inflation-related costs.

“We’ve certainly seen pressure in the agricultural space and that’s somewhat related to labor,” said an investment grade portfolio manager. “That could really affect manufacturing, and that’s where we’ve seen the most credit stress, not just based on immigration but also an inability to pass through rising input costs.”