Debt is back – big deals may be close behind

FORTUNE — Here’s one reason buyout kings like Blackstone’s Steve Schwarzman are eager to launch rival mega-bids for takeovers of companies like Dell: They know investors will give them gobs of debt at unprecedentedly cheap levels and with lenient terms. Just look at the way U.S. debt buyers gobbled up the loans and bonds being used to fund Berkshire Hathaway’s (BRKA) $23 billion buyout of Heinz.

At 4.25%, the Heinz (HNZ) deal has by far the lowest interest rate ever for an LBO bond deal and one of the lowest yields on a high-yield bond with a maturity of at least seven years according to S&P Capital IQ LCD. The previous low for an LBO issue was 6.375% and set just a few months ago. By comparison, the private equity firms buying Harrah’s Entertainment, now Caesars Entertainment (CZR), issued notes with roughly the same profile at 10.75% more than five years ago. Had they issued those at the same rate as Heinz, the company would have saved $325 million annually on a $5 billion deal.

The size of the Heinz deal is impressive. Typically an issuer would need to “tap every bucket of available liquidity in order to raise all that money,” says Chris Donnelly, vice president at S&P Capital IQ LCD. “Heinz actually does something else entirely.”

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The U.S. market was so eager, the company was able to push all the debt in dollars, favoring lower interest rates. Even after cutting the price, the company was able to issue $1 billion more than it originally planned. It is the fifth largest single-tranche high-yield offering on record. Issuers also cut the price on the $9.5 billion term loan because investor demand was so strong.

The terms of the debt were pretty lenient too. A portion of the deal is covenant-lite. This means investors are giving up some stringent triggers, typically set in a loan, that allow them to check up on the company’s debt level and performance from time to time and ultimately push the company to restructure if need be.

Heinz’s debt offering shows just how desperate U.S. investors have become for new private equity deals. The resurgence of collateralized loan obligation funds, or funds that pool around 150 different types of loans, is pushing much of the debt demand. These funds are obligated to buy up leveraged loans, package them together, and sell them to investors. Though private equity deals doubled to more than $70 billion in the first quarter, according to Dealogic, the bulk is concentrated in just a few deals. Heinz, for example, will make up 2.5% of the S&P LCD index because it is so large.

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Many investors feel they have to jump on any M&A deal that comes to the market. “There has been precious little” new M&A, says Donnelly. “Heinz is the exception, not the rule right now.”

Private equity firms are flush with big funds, yet they are still relatively quiet. Stocks are pushing new highs. Good takeout targets that are not overpriced may be relatively scarce. Blackstone’s (BX) decision to launch a rival bid for Dell (DELL) rather than find a new deal proves the difficulty in drumming up deals to some extent. “It is a great opportunity on the financing side, but with the stock market so high, public market values don’t allow you to strike a deal,” Donnelly says.

Still, private equity firms may be tempted to start moving given just how low Heinz’s interest rates are. Cheap debt doesn’t always create a successful private equity deal, but it certainly helps.

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