Tariff-struck companies exploring using refund claims as collateral for loans

US$166 billion of tariff refund claims are outstanding after the Supreme Court struck down Trump’s tariffs, and banks, hedge funds and private-credit funds are considering lending against those claims as collateral. Loans are being structured as term loans with payment-in-kind interest; lenders in this market typically require minimum loans of US$10m backed by at least US$20m of claims, and intermediaries have brokered roughly US$20m of purchases to date. Key risks: high interest costs, collateral erosion if claim prices fall (claims currently trade below par), potential borrower repayment exposure if refunds are delayed (trade experts expect refunds could take at least two years), and additional legal or administrative hurdles.

Analysis

This market is shifting value from smaller importers to capital providers with scale and documentation capability. Minimum economics (loan ≥$10m against claims ≥$20m) and lenders’ need for custody/assignment drive concentration toward large retailers and big importers, increasing credit exposure in a narrow slice of the private-credit market and creating a natural oligopoly of buyers/lenders who set pricing and terms.

Timing and legal-administrative sequencing are the dominant variables: expect a 12–36 month horizon for resolution risk, with a material break-even around a mid-teens coupon versus selling the claim at ~0.75c (so a 15% PIK loan can be preferable only if refunds arrive within ~2 years). Key catalysts that will reprioritize spreads are (1) formal customs refund mechanics and payment cadence, (2) successful use of contingency insurance by buyers, and (3) the emergence of appeals or consumer class-action stack-risks that can strip claim value.

Mechanically, lenders will insist on strict control rights (escrow of proceeds, assignment, step-in rights and repurchase triggers), which compresses borrower optionality and creates a tradable spread between outright claim-sale markets and claim-backed loan yields. Second-order: this could become a nascent ABS market — if securitization occurs, volatility will transmit to public credit (BDCs, CLO equity) faster than today’s bilateral trades anticipate, amplifying downside if secondary claim prices reprice from 0.5x to 0.2x quickly.

Key Decisions for Investors

• Tactical OW in BDCs that lend to middle-market/private-credit (ARCC, AINV, ORCC) — 6–18 month view. Rationale: they can reprice yield and capture spread from claim-backed loans; position size small (max 2% NAV each) given mark-to-market and NAV risk. Risk/reward: coupon boost vs potential NAV compression if claim defaults; set stop-loss if 60–90 day NAV drawdown exceeds 12%.
• Pair trade: long COST / short WMT (or TGT) for 3–12 months. Rationale: Costco’s membership model and lower litigation/returns tail reduce consumer-refund exposure relative to big-box retailers that passed tariffs through. Risk/reward: asymmetric — modest downside if consumer spending weak; target 1.5–2.5x Sharpe on relative movement with stop if pair diverges unfavorably by >8%.
• Buy MMC (Marsh & McLennan) 6–12 month: insurance brokerage demand rises as buyers seek contingency policies to back claim purchases. Risk/reward: modest upside from fee capture and cross-sell; risk is broader insurance-cycle weakness—trim into a 10–15% price run-up.
• Allocate a small-silo private-credit allocation to originate claim-backed term loans (internal vehicle) — target gross yields 14–18% PIK with strict covenants, escrowed proceeds, and minimum claim haircuts of 40%. Risk controls: no single obligor >10% of silo, requirement for contingency insurance on >50% of exposures, and mark-to-market triggers at 30% collateral erosion.