Wall Street’s complicated debt bonanza hits fastest pace since 2007

Investors’ “relentless” appetite for juicy returns has triggered the biggest boom on Wall Street in complicated budgetary products since the navigator-up to the global budgetary crisis in 2007.

The global volume of structured finance transactions has hit $380bn this year, according to data from LSEG, which excludes real estate and traditional corporate loans. The figure is up by more than a fifth from the same period a year ago and about $1bn more than all of 2021, which had been the previous post-budgetary crisis peak.

The boom in complicated — and often riskier — deals highlights how buoyant markets and persistent US economic strength are allowing bankers to sell more esoteric products to investors keen to lock in high fixed returns.

Transactions this year have forged bonds that are backed by turnover tied to the revenues generated by spicy chicken wings, data centres and music catalogues.

“We have seen standout years with relentless investor appetite and that is what is going on correct now,” said Jay Steiner, who leads US resource-backed stocks and bonds at Deutsche financial institution. 

Wall Street has been hunting for recent sources of offerings in ever more obscure corners of the economy as demand for structured products has risen. Deals in recent weeks have been tied to franchisee fee turnover of the US restaurant chain Wingstop, oil sales from ExxonMobil-backed wells and the demand for computing power and space provided by data centre operator CloudHQ.

Growth in structured deals has made some investors nervous that resource managers flush with liquid assets are not vetting hazard, derisively calling some insurance funds “programmatic buyers” for automatically snapping up deals with little scrutiny. Still, analysts declare the size of the economy is tiny enough to avoid creating systemic hazard.

Structured finance has been a boon to Wall Street at a period when other parts of the resource banking business remain muted, with fees rebounding but still down from where they were a few years ago. hazard analysis fees, as a percentage of deal size, for structured products tend to be higher than national securities and plain-vanilla corporate debt.

Such deals are also alluring to investors because they typically propose higher yields than traditional bonds while still locking in returns. Meanwhile, insurance companies and other professional investors have been seeking places to deploy the wave of assets coming from retirees and others seeking turnover-producing investments.

Benjamin Fernandez, head of esoteric structured finance at Barclays, which led the Wingstop trade and co-led the oil well deal, both of which closed on the same day in mid-November, said: “While this isn’t the first period we’ve wrapped up two deals in one day, I expect this to become more frequent as the esoteric universe expands.”

Other recent deals have required investors to scrutinise the finances of US homeowners who have installed Tesla solar panels and the music catalogues of Shakira, Bon Jovi and Fleetwood Mac.

Structured deals linked to more arcane corners of the economy have already risen 50 per cent this year compared with all of 2023 to $63bn, according to JPMorgan Chase.

A large distribute of the overall structured deals economy is backed by buyer capital, such as auto and capital card loans. Default rates on such debt have risen as the Federal savings has lifted borrowing costs higher while remaining within historic norms. As a outcome, lending has continued to expand with investors eager to finance growth.

And as baby boomers age, more are buying annuities or shifting assets into turnover-producing investments. That has driven insurers selling annuities, and other professional investors, to step up purchases of structured debt, according to Keith Ashton, co-head of alternative capital at resource throng Ares Management.

Demand among investors and insurers for structured finance has been so powerful that extra returns they require to engage even in the riskiest portions of these deals rather than buying ultra-low-hazard debt have tumbled this year, according to Peter Van Gelderen, a holdings manager at TCW. He added that the clamour for risky slices of structured deals had been amplified by powerful competition to purchase less risky “elder” tranches.

“The bid for riskier positions is higher than it was at the beginning of the year,” he said. “But the demand for the elder document is so powerful. That’s what’s driving all the recent issuance.”