Finance
How Default Risk Triggers Credit Downgrades
As the U.S. inches closer to the June 1 deadline to avoid defaulting on our $31.4 trillion national debt, ratings agencies have already begun hinting at downgrading the nation’s credit — a move that would unleash vast consequences across commercial real estate capital markets.
Treasury Secretary Janet Yellen warned yet again this week that the U.S. won’t be able to pay its bills — specifically Treasurys, the bedrock of the global financial system — in the event Congress fails to raise the debt ceiling by the “X date” of June 1. Federal Reserve Chairman Jerome Powell said earlier this month that “no one should assume that the Fed … can really protect the economy” in the event a debt ceiling breach triggers a national default.
While reports surfaced Friday morning that President Joe Biden and House Speaker Kevin McCarthy are near a deal, it’s unclear the type of support McCarthy can gain from House conservatives on any sort of compromise. GOP Rep. Matt Gaetz of Florida has stated he and his colleagues “don’t feel like we should negotiate with our hostage,” while GOP Sen. Mike Lee of Utah has already stated his intention to potentially scuttle a deal in the Senate, which has a one-vote Democrat majority.
The big three ratings agencies — S&P Global Ratings, Moody’s and Fitch Ratings — have already taken notice of the fragile state of affairs. On Wednesday, Fitch placed the United States’ long-term foreign currency issuer default rating on watch for a downgrade, threatening to downgrade its AAA status prior to the “X date.”
“The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits, and a growing debt burden signal downside risks to U.S. creditworthiness,” Fitch said in a statement.
Moody’s warned this week that if the Treasury misses even one interest payment, then the U.S.’s stellar credit rating would be lowered a notch and that the debt-ceiling brinkmanship could “permanently” impact the creditworthiness of the government, according to The New York Times. S&P Global Ratings lowered the U.S. credit rating from AAA to AA+ in 2011, the last time Republicans used the threat of default to extract spending cuts and other concessions from a Democratic president, and has not raised it since.
“This is really, really dangerous,” said Robert Hockett, professor of corporate law and financial regulation at Cornell Law School. “A downgrade of Treasurys … heightens the possibility of a deep, deep recession that could spiral into a depression.”
The downgrade of the U.S. credit rating is intimately tied to borrowing costs and interest rates throughout the financial system. Most government debt is funded by the sale of U.S Treasurys -– T-bills, T-bonds and T-notes -– into the global economy, where investors see them as risk-free bonds that serve as the benchmark interest rate for all other forms of corporate, financial and municipal debt in the United States. If those rates are deemed a high risk — especially in the event of a mass ratings downgrade or debt default — then yields on Treasurys will spike, raising interest rates across the financial system and contracting credit at a time of increasingly tight liquidity.
Hockett said the interest rate hikes across the system would occur immediately, if not a day or two before the debt breach were to occur.
“People get quite nervous as the zero hour approaches,” he said. “You’ll see people dumping Treasurys massively, and that would cause yields to rise because that’s the only way for them to be sold.”
Thomas LaSalvia, director of economic research at Moody’s Analytics, emphasized the interconnected nature of U.S. Treasurys with the benchmark Federal Funds Rate and mortgage rates, and said that any decoupling of what is, or is not, risk-free debt will throw capital markets into turmoil.
“Anything else that causes rates to rise is just another gut punch, slap in the face for commercial real estate because it’s going to put further pressure on the capital markets side of things,” said LaSalvia. “If banks have to borrow at higher rates, then that ultimately affects what they can lend at. That means rates for consumer and commercial loans would go up as well.”
LaSalvia added that a ratings downgrade will also stoke the ongoing regional banking crisis — which has seen the second-, third- and fourth-largest bank failures in U.S. history since March — by increasing interest rates across the system and altering the balance sheets of an already weakened regional banking sector. The three biggest U.S. bank failures this year all poured capital into securities portfolios tied to long-term U.S. debt financed at low rates of interest in held-to-maturity bonds; when interest rates spiked, the value of their loan books plummeted, sending depositors running for the exits.
“We really don’t want to go down this path. It signals the wrong message to the global economy at a time when the U.S. is being questioned as a global center of banking,” LaSalvia said. “If we end up actually defaulting, then I don’t know where those ratings will go, but … if we end up defaulting, then all bets are off.”
A May report by Moody’s Analytics argued that a downgrade of Treasury debt “would set off a cascade of credit implications and downgrades on the debt of many other financial institutions, nonfinancial corporations, municipalities, infrastructure providers, structured finance transactions, and other debt issuers,” and create financing complications at institutions backed by the U.S. debt, namely Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which would all suffer ratings downgrades, as well.
A national credit ratings downgrade carries implications for the currency, too. Tomasz Piskorski, professor of real estate finance at Columbia Business School, said that a ratings downgrade weakens the dollar, and a weakened dollar puts upward pressure on the price of imports.
“Which means it could make fighting inflation harder, which would mean the Fed would have a harder time lowering interest rates to circumvent the rise in prices,” he said. “It could contribute to the increasing interest rates across the system and thus increase the recession risk.”
Piskorski noted that the yield on 10-year Treasury notes — the base and benchmark for 10-year loans and short-term CRE loans — stands at 3.8 percent as of May 25, more than double its 1.8 percent yield of May 25, 2021.
“That ’s how commercial mortgage loans are quoted. Spreads are widening, too, because of the risk, reflecting the default risk,” he said. “In two years, the cost of debt doubled. This is not a good thing.”
Perhaps most alarming for the real estate system is the threat a ratings downgrade poses for the housing market, due to the sensitivity of housing prices to interest rate movements. Because of the levered nature of most home mortgages, lower interest rates increase the value of homes, and vice versa. So in the event interest rates rise following a ratings downgrade, home values will plummet on a national scale, according to professor Hockett.
“You’re gonna see sudden diminution of housing stock value — basically people’s homes will suddenly be worth much less,” he said. “So what we’re faced with is the prospect of swarms of American households being underwater on their home mortgage loans.”
Hockett said the situation could quickly mirror the problems that set off the 2007-2008 housing collapse, which ushered in the Global Financial Crisis, one that seriously damaged the U.S. economy and froze commercial real estate capital markets for much of 2009 and 2010.
“If you see a Treasury downgrade, you get it from two ends: You see people with lower net worth in virtue of home values plummeting and people having less net worth in their securities portfolios, 401Ks, pension plans, and Roth IRAs,” Hockett said.
“This is exceedingly ominous,” he added. “This is a potential calamity for the middle class.”
Brian Pascus can be reached at bpascus@commercialobserver.com
Finance
Seven Hills Realty Trust Closes $45.0 Million Bridge Loan to Finance the Acquisition of a Hotel in Boston, Massachusetts
NEWTON, Mass., December 17, 2024–(BUSINESS WIRE)–Seven Hills Realty Trust (Nasdaq: SEVN) today announced the closing of a $45.0 million first mortgage floating rate bridge loan to finance the acquisition of Club Quarters Hotel, a 178-room hotel located at 161 Devonshire Street in Boston, Massachusetts.
The loan has a three-year initial term with two one-year extension options, subject to the borrower meeting certain requirements. SEVN’s manager, Tremont Realty Capital, was introduced to the transaction by JLL, which advised Arch & Devonshire LLC, the borrower.
Tom Lorenzini, President and Chief Investment Officer of SEVN, made the following statement:
“The Club Quarters Hotel benefits from being near the Massachusetts State House, Faneuil Hall, Boston Common, the Boston Theatre District and many significant historical sites. The closing of the loan to finance the acquisition of this hotel demonstrates our ability to identify and execute compelling loan investment opportunities. Furthermore, we continue to be active in the market and maintain a strong pipeline of quality loan opportunities to generate attractive risk adjusted returns for our shareholders.”
About Seven Hills Realty Trust
Seven Hills Realty Trust (Nasdaq: SEVN) is a real estate finance company focused on originating and investing in first mortgage loans secured by middle market transitional commercial real estate. SEVN is managed by Tremont Realty Capital, an affiliate of The RMR Group (Nasdaq: RMR), a leading U.S. alternative asset management company with nearly $41 billion in assets under management and more than 35 years of institutional experience in buying, selling, financing and operating commercial real estate. For more information about SEVN, please visit www.sevnreit.com.
WARNING CONCERNING FORWARD-LOOKING STATEMENTS
This press release contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These statements may include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will,” “may” and negatives or derivatives of these or similar expressions. These forward-looking statements include, among others, statements about SEVN continuing to be active in the market and maintaining a strong pipeline of quality loan opportunities and SEVN’s investment focus, ability to complete additional loan investments in the future and ability to generate attractive risk adjusted returns for shareholders. Forward-looking statements reflect SEVN’s current expectations, are based on judgments and assumptions, are inherently uncertain and are subject to risks, uncertainties and other factors, which could cause SEVN’s actual results, performance or achievements to differ materially from expected future results, performance or achievements expressed or implied in those forward-looking statements. Some of the risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following: the ability of SEVN to make additional investments; the success of SEVN’s investments; SEVN’s available liquidity, access to capital and cost of capital; and various other matters. These risks, uncertainties and other factors are not exhaustive and should be read in conjunction with other cautionary statements that are included in SEVN’s periodic filings with the Securities and Exchange Commission, or SEC. The information contained in SEVN’s filings with the SEC, including under the caption “Risk Factors” in its periodic reports, or incorporated therein, identifies important factors that could cause SEVN’s actual results to differ materially from those stated in or implied by SEVN’s forward-looking statements. SEVN’s filings with the SEC are available on the SEC’s website at www.sec.gov. You should not place undue reliance upon forward-looking statements. Except as required by law, SEVN does not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
Open Lending (LPRO) has secured its third partnership with an automotive captive finance company, marking a significant expansion of its Lenders Protection™ program. The agreement will enable the unnamed OEM partner to extend lending services to near- and non-prime consumers through automated decisioning and default insurance coverage.
The implementation is scheduled for early 2025, with testing nearly complete. The partnership aims to help the captive finance company expand its business by responsibly lending to consumers with lower credit scores than their traditional borrowers. Open Lending’s solution will integrate into the lender’s processes, from initial application scoring to loan structuring and servicing, using alternative data to price loans based on applicants’ financial profiles and vehicle valuations.
Open Lending (LPRO) ha consolidato la sua terza partnership con un’azienda finanziaria automobilistica, segnando un’espansione significativa del suo programma Lenders Protection™. L’accordo permetterà al partner OEM non ancora nominato di estendere i servizi di prestito a consumatori near- e non prime attraverso decisioni automatizzate e copertura assicurativa contro i default.
L’implementazione è prevista per inizio 2025, con i test quasi completati. La partnership mira ad aiutare l’azienda finanziaria a espandere la propria attività prestando responsabilmente a consumatori con punteggi di credito inferiori rispetto ai tradizionali prestatari. La soluzione di Open Lending si integrerà nei processi del prestatore, dalla valutazione iniziale della domanda alla strutturazione e gestione dei prestiti, utilizzando dati alternativi per valutare i prestiti in base ai profili finanziari dei richiedenti e alle valutazioni dei veicoli.
Open Lending (LPRO) ha asegurado su tercera asociación con una empresa de financiación cautiva automotriz, marcando una expansión significativa de su programa Lenders Protection™. El acuerdo permitirá al socio OEM no nombrado extender los servicios de préstamo a consumidores near- y non-prime a través de decisiones automatizadas y cobertura de seguro contra impagos.
La implementación está programada para principios de 2025, con las pruebas casi completas. La asociación tiene como objetivo ayudar a la empresa de financiación cautiva a expandir su negocio prestando responsablemente a consumidores con puntuaciones de crédito más bajas que sus prestatarios tradicionales. La solución de Open Lending se integrará en los procesos del prestamista, desde la evaluación inicial de la solicitud hasta la estructuración y el servicio del préstamo, utilizando datos alternativos para fijar tasas basadas en los perfiles financieros de los solicitantes y las valoraciones de los vehículos.
Open Lending (LPRO)는 Automotive captive finance 회사와 세 번째 파트너십을 체결하여 Lenders Protection™ 프로그램을 크게 확장했습니다. 이번 계약을 통해 이름이 밝혀지지 않은 OEM 파트너는 자동화된 의사 결정과 디폴트 보험 보장을 통해 네어 프라임 및 비프라임 소비자에게 대출 서비스를 제공할 수 있게 됩니다.
구현은 2025년 초로 예정되어 있으며, 테스트는 거의 완료되었습니다. 이번 파트너십은 금융 회사가 전통적인 차주보다 낮은 신용 점수를 가진 소비자에게 책임감 있게 대출을 확대하는 데 도움을 주기 위한 것입니다. Open Lending의 솔루션은 초기 신청 평가부터 대출 구조화 및 서비스에 이르기까지 대출자의 프로세스에 통합되어 신청자의 재무 프로필 및 차량 평가를 기반으로 대출 가격을 설정하기 위해 대체 데이터를 사용할 것입니다.
Open Lending (LPRO) a sécurisé son troisième partenariat avec une entreprise de financement captive automobile, marquant une expansion significative de son programme Lenders Protection™. Cet accord permettra au partenaire OEM non nommé d’étendre les services de prêt aux consommateurs near- et non-prime grâce à une décision automatisée et une couverture d’assurance contre les défauts de paiement.
L’implémentation est prévue pour début 2025, les tests étant presque terminés. Ce partenariat vise à aider l’entreprise de financement captive à développer son activité en prêtant de manière responsable à des consommateurs avec des scores de crédit inférieurs à ceux de ses emprunteurs traditionnels. La solution d’Open Lending sera intégrée dans les processus du prêteur, depuis l’évaluation initiale des demandes jusqu’à la structuration et le service des prêts, en utilisant des données alternatives pour fixer les taux des prêts en fonction des profils financiers des demandeurs et des évaluations des véhicules.
Open Lending (LPRO) hat seine dritte Partnerschaft mit einem Automobilfinanzierungsunternehmen gesichert, was eine bedeutende Erweiterung seines Lenders Protection™ Programms darstellt. Die Vereinbarung ermöglicht es dem nicht genannten OEM-Partner, Kreditdienstleistungen an Near- und Non-Prime-Verbraucher durch automatisierte Entscheidungsfindung und Ausfallversicherungsdeckung anzubieten.
Die Implementierung ist für Anfang 2025 geplant, die Tests sind nahezu abgeschlossen. Die Partnerschaft zielt darauf ab, dem Finanzierungsunternehmen zu helfen, sein Geschäft zu erweitern, indem es verantwortungsbewusst an Verbraucher mit niedrigeren Kreditwerten als seine traditionellen Kreditnehmer vergibt. Die Lösung von Open Lending wird in die Prozesse des Kreditgebers integriert, von der initialen Antragsbewertung bis hin zur Strukturierung und Verwaltung von Krediten, wobei alternative Daten verwendet werden, um Kredite basierend auf den finanziellen Profilen der Antragsteller und den Fahrzeugbewertungen zu berechnen.
Positive
- Secured third OEM captive finance company partnership, expanding market presence
- Partnership implementation set for early 2025, indicating near-term revenue potential
- Demonstrates growing acceptance of Lenders Protection™ program in automotive lending
Insights
The partnership with a third OEM captive finance company marks a significant strategic expansion for Open Lending. This deal opens up access to a broader customer base in the near- and non-prime auto lending market, potentially driving substantial revenue growth. The timing of the rollout in early 2025 suggests a meaningful impact on future earnings.
The agreement demonstrates Open Lending’s growing market penetration in the automotive financing sector, particularly with captive finance companies. Their Lenders Protection™ program’s ability to facilitate lending to lower credit spectrum consumers while managing risk through default insurance coverage presents a compelling value proposition. This could translate into increased loan origination volumes and recurring revenue streams.
The auto financing market is experiencing a strategic shift as OEM captive finance companies seek to expand their lending portfolios to near- and non-prime consumers. Open Lending’s third major captive partnership validates their technology-driven approach and positions them favorably in this growing market segment. The integration of alternative data for loan structuring and risk assessment represents a competitive advantage in reaching underserved borrowers.
This expansion aligns with industry trends showing increased focus on financial inclusion while maintaining prudent risk management. The partnership could strengthen Open Lending’s market position and create barriers to entry for competitors.
Agreement demonstrates continued importance of near- and non-prime consumers to captive lenders and Company’s industry leadership
AUSTIN, Texas, Dec. 17, 2024 (GLOBE NEWSWIRE) — Open Lending Corporation (Nasdaq: LPRO) (the “Company” or “Open Lending”), an industry trailblazer in lending enablement and risk analytics solutions for financial institutions, today announced that it entered into an agreement with the captive finance company of a premier automaker to begin utilizing Open Lending’s flagship Lenders Protection™ program. This is the Company’s third such partnership with an automotive captive finance company. This agreement will enable the Company’s newest OEM partner to access more near- and non-prime consumers with the unique benefits of Open Lending’s automated decisioning and default insurance coverage.
“We couldn’t be more excited about the addition of a third OEM captive finance company to our customer base,“ said Chuck Jehl, CEO of Open Lending. “This company desired to expand its business by responsibly lending to consumers who are deeper in the credit spectrum than most of their borrowers have historically been. As with so many of Open Lending’s customers, our Lenders Protection solution is the perfect fit. This new relationship further validates Open Lending’s value proposition to auto lenders generally. Full testing and implementation is near completion with a targeted rollout scheduled to begin in early 2025.”
“Signing our third captive finance company is an important milestone for Open Lending,” Mr. Jehl added. “I’d like to thank our co-founder and enterprise account consultant, Ross Jessup, for all his efforts in making today’s announcement a reality.”
“Our expertise in near- and non-prime lending was a significant factor in this captive finance company’s decision to partner with Open Lending,” said Mr. Jessup. “This partnership helps lenders grow safely, strengthens dealer relationships, and ensures OEMs retain their customers within the brand.”
Open Lending’s approach to integration will assist with efficiencies within the captive finance company’s process, from initial scoring of an application, to loan structuring and pricing, and all the way through servicing. Using alternative data, Lenders Protection prices and structures automotive loans according to each applicant’s unique financial profile and vehicle valuation, enabling financial institutions to securely offer loan opportunities to near- and non-prime borrowers.
Learn more at openlending.com.
About Open Lending
Open Lending (NASDAQ: LPRO) provides loan analytics, risk-based pricing, risk modeling, and default insurance to auto lenders throughout the United States. For over 20 years, we have been empowering financial institutions to create profitable auto loan portfolios with less risk and more reward. For more information, please visit www.openlending.com.
Contact
Open Lending Media Inquiries
press@openlending.com
Open Lending Investor Relations Inquiries
InvestorRelations@openlending.com
FAQ
When will Open Lending (LPRO) launch its partnership with the new OEM captive finance company?
Open Lending plans to begin the rollout of its partnership with the new OEM captive finance company in early 2025.
How many OEM captive finance company partnerships does Open Lending (LPRO) now have?
With this new agreement, Open Lending now has partnerships with three OEM captive finance companies.
What services will Open Lending (LPRO) provide to the new OEM partner?
Open Lending will provide its Lenders Protection™ program, offering automated decisioning and default insurance coverage for near- and non-prime consumer loans.
How does Open Lending’s (LPRO) Lenders Protection program evaluate loan applications?
The program uses alternative data to price and structure automotive loans based on each applicant’s unique financial profile and vehicle valuation.
By David Ljunggren
OTTAWA (Reuters) – The abrupt resignation of Canada’s finance minister leaves the government adrift less a month before the inauguration of a new U.S. administration that could impose crippling sanctions on Canadian exports.
Chrystia Freeland quit on Monday after Prime Minister Justin Trudeau offered her a lesser position. She said his wish to increase spending could endanger Canada’s ability to withstand the damage done by the tariffs that U.S. President-elect Donald Trump is threatening to impose.
Freeland had headed a special cabinet committee on Canada-U.S. relations and was working closely with the 10 provinces to ensure a united response.
“As a country we have to project strength and unity, and it’s chaos right now up in Ottawa,” Ontario Premier Doug Ford said after a scheduled online conference call of provincial premiers on Monday to discuss the U.S. threat.
An unimpressed Alberta premier, Danielle Smith, one of Trudeau’s biggest domestic critics, said the provincial leaders had only learned halfway through their call that the point person on Canada-U.S. relations had quit.
“It’s chaos. I’d be looking at this wondering who the next leader is … are they going to be able to bring forward a coherent plan? Is there going to be a team that is able to do a Team Canada approach?” she said.
“It’s not the greatest time to have a vacuum,” she added, calling for a national election to help restore stability.
Unhappy legislators from the ruling Liberal Party, some of whom have been calling on Trudeau to quit for months, met on Monday in Ottawa to vent their frustration.
The Liberals are trailing badly in the polls ahead of an election that must be held by late October 2025. Trudeau has until now ruled out the idea of resigning but if pressure on him mounts significantly, the results could be unpredictable.
“Trump will be inaugurated in 34 days. Canada must have a stable government,” former Trudeau foreign policy advisor Roland Paris said in a post on X.
When Trump came to power in 2017 he vowed to tear up the trilateral free trade treaty with Canada and Mexico. Freeland, who was then foreign minister, played a large role in helping renegotiate the pact and saving Canada’s economy, which is heavily reliant on the United States.
Vincent Rigby, a former national security and intelligence adviser to Trudeau, said Freeland’s departure meant the Canadian stance with Trump was up in the air.
“This is going to be quite problematic for the prime minister from a political perspective, but it’s now also going to be problematic in terms of how the Canadian government deals with an incoming Trump presidency,” he said on the sidelines of an event in Washington.
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