The Department of Government Efficiency (DOGE), run by Elon Musk, has already put HUD programs under a microscope by leaving $12 billion of CMBS loans at risk. Also, it put federal office leases of private-sector buildings under suspected right-sizing.
These are examples of potential direct impact. As Josyana Joshua and Ethan Steinberg at Bloomberg pointed out, citing a Barclays Plc analysis, there might also be indirect effects on corporations.
“While the legality and duration of the actions to halt spending remain in question, the prevailing uncertainty is undeniable,” the Barclays analysts wrote. “For the time being, the administration’s ‘move fast and break things’ approach could present short-term risks to specific companies and sectors.”
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Heavy involvement with government contracts could suffer from large and rushed budget cuts, as existing programs and associated contracts get trimmed. The effects would be dual-pronged, from the need to cut expenses and a potential hit to credit ratings.
Some industries would be strongly affected. AM General in automotive was at the top of the list with 110% of the federal obligation being 110% of 2023 revenue. Its credit rating is CCC+, significantly below investment grade. Consulting firm Booz Allen was at 81% of 2023 revenue with an A- credit rating. Tech company Leidos Holdings was at 70% of 2023 revenue and a BBB rating. Geo Group had 44% of 2023 and a B+/B rating.
Geo stated to Bloomberg: “All of our contracted facilities and services are closely monitored in accordance with strict government contract standards.”
Aerospace and defense has a collective set of annual obligations from the U.S. government of more than $200 billion, the Barclays analysts wrote. The most potentially affected in the sector, according to Barclays, are Lockheed Martin (federal obligation as 105% of 2023 revenue; credit rate of A-), Huntington Ingalls (90%; BBB-, which is technically a step below investment grade), General Dynamics (64%; A), RTX Corp. (45%; BBB+), Northrop Grumman (44%; BBB+), and L3Harris Technologies (41%; BBB).
Healthcare and pharmaceuticals have the second largest exposure, although the category doesn’t appear in the table. Distributors McKesson and Cencora could face an impact from restricted funding to purchase services “provided via public programs and for the care of government employees or veterans.” The Barclays report listed Prizer and Merck as facing risk if government payments related to their vaccines are reduced.
Again, if any of these companies do face a revenue cut through canceled or restricted contracts or payments — and all this is an analysis of potential problems, not existing ones — a typical corporate reaction would be to cut costs, including workforce headcount and reduction in CRE leasing that might no longer be necessary.
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