It was bound to happen. Investors and banks are moving risk-off, pulling back from the leveraged loan market in the face of macro concerns and demanding better returns from the deals they are willing to back.

Primary market leveraged loan pricing in North America jumped to its highest point in well over a year, responding to inflationary pressures and the ongoing war in Ukraine. At 415 basis points (bps) in March, average margins on first-lien institutional term loans are at their highest mark since the 438bps average back in November 2020. Issuance has also fallen significantly this year, trailing the 2021 figure to the fourth week of March by 51%, to just US$196.2 billion.

What does all of this mean for corporates considering their debt load?

1/ You may be living on borrowed time 

The pullback was inevitable and drives home the need for businesses to make hay while debt markets are shining. Throughout 2021, borrowers had easy access to cheap capital, as yield-starved investors accepted lower coupons to put their capital to work. That was the time to be tapping markets.

Heavily leveraged corporates in need of tapping the loan markets these days can expect a tougher and more costly ride.

2/ Debt markets are flexing their muscles—be prepared for a fight  

More loan tranches flexed pricing wider in February (eight tranches worth US$5.3 billion) than tightened pricing (five tranches for US$4.8 billion). In the first three weeks of March, eight tranches flexed wide and none tightened as borrowers failed to negotiate more attractive terms during syndication.

Average discounts offered by lenders to sweeten syndications and entice investors rose to 169bps in March, as issuers accepted what was necessary to get their loans sold.

With the Fed expected to hike by as much as 50bps at its next meeting on May 3, 2022, from what many hoped would be only 25bps, it doesn't look like financing is going to be getting any cheaper, either.