Investors today are witnessing a remarkable boom in complex financial products on Wall Street. The global volume of structured finance transactions has reached an astonishing $380bn this year, excluding real estate and traditional corporate loans. This figure is a significant increase of more than a fifth from the same period last year and is about $1bn more than the entire 2021 volume, which was the previous post-financial crisis peak. Such a boom highlights the buoyant markets and persistent US economic strength that are enabling bankers to sell more esoteric products to investors seeking high fixed returns.

Unlock the World of Complex Financial Deals

Investment in Spicy Chicken Wings and Beyond

This year, transactions have forged bonds backed by income tied to various unconventional sources. For instance, there are bonds backed by the revenues generated by spicy chicken wings. This shows how the market is expanding into even the most obscure corners. Jay Steiner, who leads US asset-backed securities at Deutsche Bank, emphasizes that we have seen standout years with relentless investor appetite. Wall Street is constantly on the hunt for new sources of offerings in these ever more obscure markets. Deals in recent weeks have been tied to the 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. This diversity in backed assets showcases the wide range of opportunities available in the structured finance market.

Benjamin Fernandez, head of esoteric structured finance at Barclays, which led the Wingstop transaction and co-led the oil well deal on the same day in mid-November, notes that while this isn't the first time they've wrapped up two deals in one day, he expects this to become more frequent as the esoteric universe expands. Other recent deals have required investors to delve deep into the finances of US homeowners with Tesla solar panels and the music catalogues of renowned artists like Shakira, Bon Jovi, and Fleetwood Mac. This shows the increasing complexity and variety of structured deals.

The structured deals linked to more arcane corners of the market have seen a significant growth of 50 per cent this year compared to all of 2023, reaching $63bn. A large share of the overall structured deals market is backed by consumer credit, such as auto and credit card loans. Although default rates on such debt have risen as the Federal Reserve has lifted borrowing costs, lending continues to expand as investors are eager to finance growth. As baby boomers age, more are buying annuities or shifting assets into income-producing investments. This has driven insurers and other professional investors to increase their purchases of structured debt.

Balancing Risk and Reward in Structured Finance

Some investors are nervous about the boom in structured finance, fearing that investment managers flush with cash are not vetting risk properly. They have derisively called some insurance funds "programmatic buyers" for automatically snapping up deals with little scrutiny. However, 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. Underwriting fees for structured products tend to be higher than government bonds and plain-vanilla corporate debt, making them alluring to investors. They offer higher yields than traditional bonds while still providing a certain level of return.

Peter Van Gelderen, a portfolio manager at TCW, points out that demand among investors and insurers for structured finance has been so strong that the extra returns they require to engage even in the riskiest portions of these deals, rather than buying ultra-low-risk debt, has tumbled this year. The clamour for risky slices of structured deals has been amplified by strong competition to purchase less risky "senior" tranches. This shows the complex dynamics at play in the structured finance market.

Despite the concerns, the structured finance market continues to thrive. It offers unique opportunities for investors and plays a crucial role in the financial landscape. As the market expands and evolves, it will be interesting to see how these trends shape the future of finance.