Deals Show Everybody Loves a Bargain

The psychology of buying something cheap is powerful.

The bond market is still feeling friendly to just about any deal that comes down the pike, as there is still tremendous demand for high-yield bonds, as pensions, insurance companies, and hedge funds chase returns and high-yielding assets, says Hessel. High-yield bonds have returned 10% year to date, according to the Merrill Lynch High-Yield Master II Index.

HCA, which is being acquired by a group including Kohlberg Kravis Roberts & Co., Bain Capital, Merrill Lynch & Co and HCA co-founder Thomas Frist Jr., declined to comment. Citigroup, the firm which underwrote its bond offering last week, did not return calls seeking comment.

The demand for high-yield bonds, among other high yielding, and more risky asset classes, comes from loose monetary policy and low interest rates around the world which led to still high levels of liquidity. The ensuing demand does and will continue to feed upon the record-setting $285 billion of private equity deals announced this year. Clear Channel's deal was announced Thursday, as was a $2.4 billion offer for Reader's Digest (RDA) by a group led by Ripplewood Holdings. Deals for Four Seasons Hotels(FS), and OSI Restaurant Partners(OSI) were announced last week, among others.

Strong demand in the high-yield bond market puts the private equity firms and the companies somewhat in the driver's seat. But the nature of the LBO deal and their reliance on the high-yield bond market means these private equity firms must walk a tightrope. The balance of power gives the bond investor some room to play hard-to-get, and they force the private equity players to exercise some manners. So, even though the high-yield bond market is already frothy, with low risk premiums compared to Treasury bonds, the rally may have more room to go as new deals price at such attractive yields.

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