what is esoteric debt 
esoteric debt refers to debt instruments as well as other investments called esoteric assets that are structured in a way that few people fully understand esoteric debt is complex and can be a product of securitization or simply arise through a complex financing arrangement as such the pricing of these securities can be contested or seem to be known to relatively few market participants moreover the structure of these instruments may lead to deceptively attractive risk return profiles over other investments when the instruments function properly but can also lead to illiquidity and pricing problems when markets are disrupted understanding esoteric debtesoteric debt can refer to a range of debt investments some are based off collateral that isn t a traditional base from which to offer bonds or other debt securities including things like patents fees licensing agreements and so on others offer complex payment terms to the issuing company pay in kind toggle notes for example are debt securities that allow a company to toggle between two options one is to make the interest payment the other is to take on extra debt owing to the security holder these investments come with higher risks and therefore offer higher yields than regular bonds or even junk bonds they also come with the extra issues of liquidity as the market for complex instruments is thin at the best of times and can completely vanish during periods of uncertainty a common type of esoteric debt are pass through securities pools of individual fixed income securities that are in turn backed by a package of assets a servicing intermediary collects the monthly payments from issuers and after deducting a fee remits or passes them through to the holders of the pass through security mortgage backed securities mbs are a common example of pass through securities they derive their value from unpaid mortgages in which the owner of the security receives payments based on a partial claim to the payments being made by the various debtors multiple mortgages are packaged together forming a pool which thus spreads the risk across multiple loans however some mortgage owners are likely to refinance their home or sell meaning that their loans will be paid off early others may default on their loan these unknowns lead to esoteric pricing models that can vary among and between counterparties in this market auction rate securities are another example of an esoteric debt vehicle that has been effectively shut down since the 2008 financial crisis esoteric debt and the financial crisisthe financial crisis of 2008 2009 introduced the global economy to some of the risks inherent in having too much esoteric debt and too many esoteric investments in general during this time credit was flowing so freely that many companies and third party issuers were creating innovative and imaginative debt vehicles tailored to whatever a particular investor wanted the primary driver of course was to make a lot of money in fees and meet the financing needs of some desperate companies rather than as a favor to investors 