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

Banks sell bonds backed by revenues from chicken wings, music catalogues and oil wells

Investors’ “relentless” appetite for juicy returns has triggered the biggest boom on Wall Street in complex financial products since the lead-up to the global financial 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-financial crisis peak. The boom in complex — 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 income 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 right now,” said Jay Steiner, who leads US asset-backed securities at Deutsche Bank. Wall Street has been hunting for new sources of offerings in ever more obscure corners of the market as demand for structured products has risen. Deals in recent weeks have been tied to franchisee fee revenue 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 investment managers flush with cash are not vetting risk, derisively calling some insurance funds “programmatic buyers” for automatically snapping up deals with little scrutiny. Still, analysts say the size of the market is small enough to avoid creating systemic risk.

Structured finance has been a boon to Wall Street at a time when other parts of the investment banking business remain muted, with fees rebounding but still down from where they were a few years ago. Underwriting fees, as a percentage of deal size, for structured products tend to be higher than government bonds and plain-vanilla corporate debt. Such deals are also alluring to investors because they typically offer 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 income-producing investments. Benjamin Fernandez, head of esoteric structured finance at Barclays, which led the Wingstop transaction 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 time 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 market have already risen 50 per cent this year compared with all of 2023 to $63bn, according to JPMorgan Chase. A large share of the overall structured deals market is backed by consumer credit, such as auto and credit card loans. Default rates on such debt have risen as the Federal Reserve has lifted borrowing costs higher while remaining within historic norms. As a result, lending has continued to expand with investors eager to finance growth. And as baby boomers age, more are buying annuities or shifting assets into income-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 credit at investment group Ares Management. Demand among investors and insurers for structured finance has been so strong that extra returns they require to engage even in the riskiest portions of these deals rather than buying ultra-low-risk debt have tumbled this year, according to Peter Van Gelderen, a portfolio manager at TCW. He added that the clamour for risky slices of structured deals had been amplified by strong competition to purchase less risky “senior” tranches. “The bid for riskier positions is higher than it was at the beginning of the year,” he said. “But the demand for the senior paper is so strong. That’s what’s driving all the new issuance.”