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Looking Under the Hood: The Catalysts of Hotel Credit Spreads

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Abstract

The interest-rate spread (or credit spread) between hotel loans and office building loans is an effective predictor of the relative change in delinquency for hotel loans, as explained in a prior report, “A New Canary for Hotel Mortgage Market Distress” (published by the CHR). In this companion report, we take a look under the loan spread hood to see what are the catalysts that drive that credit spread (which is also known as the relative risk premium or risk premium differential). Using a Vector Autoregression (VAR) statistical framework, we find that hotel credit spreads (against office loans) widen if the general economy worsens, anticipated corporate profitability declines, capital availability decreases, hotel revenues decrease, or relative risk increases. The variables that are statistically significant capture risk and return information embedded in the risk premium differential (credit spread), and it is the decline in these factors that makes our canary stop singing (as a warning of impending trouble with hotel loans).

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2015-03-02

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interest-rate spread; vector autoregression (VAR); hotel loans; credit spread

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Required Publisher Statement: © Cornell University. This report may not be reproduced or distributed without the express permission of the publisher

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