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November 2005 — Vol. 83, No. 9

CBIA/TD Banknorth Credit Availability survey

Credit there now, but more execs expect tightening

 

Connecticut executives say money is available for their companies to borrow now. But they also believe rising interest rates, higher costs and rising energy prices could tighten credit availability over the next few months. Those are the chief findings of the third-quarter 2005 CBIA/TD Banknorth Credit Availability Index and Survey.

Connecticut’s current lending climate improved over last quarter but is about the same as a year ago. Slightly more than half (51%) of respondents rated current credit availability in the state as either good or excellent, compared with 42% last survey and 52% a year ago. Only 12% categorized conditions as fair or poor, down from 15% last survey and up slightly from last year’s 13%.

“The economy is moving forward, and businesses are still able to borrow money to purchase machinery and goods needed to grow their businesses,” said CBIA Economist Peter Gioia. “But volatility created by energy costs, the effect of the hurricanes that hit the Gulf Coast, and rising interest rates all bear watching because they could affect future credit availability.”

The next few months could bring a tightening of credit conditions, according to survey respondents. Fourteen percent expected credit conditions to worsen, up from 12% last survey and 13% a year ago. Only 7% expected conditions to improve, up slightly from last survey (6%) but down from 28% last year.

In fact, negative opinions about future credit conditions outweighed positive opinions by better than 2-to-1. The Future Expectations Index component of the data, which measures credit expectations six months from now, fell sharply this survey, dropping to its lowest level since the information was first tracked, in June 2000. Any reading below 50 in the Future Expectations Index indicates a perceived deterioration in future credit conditions.

“The current reading of 30 is raising some red flags about credit availability in the coming months,” said Donald Klepper-Smith, chief economist and director of research for DataCore Partners. “If the Federal Reserve continues to raise interest rates despite the economic hardships caused by hurricanes Katrina and Rita, businesses could see higher costs and less credit available to run their companies.”

The CBIA/TD Banknorth Current Credit Availability Index, which indicates the health of the state’s credit markets and measures the quality of credit conditions across the state, had a reading of 55 in this survey, down nearly 20 points from a year ago. A reading above 50 indicates improved conditions, while readings below 50 indicate deterioration. The index is a composite measurement of total credit conditions (80) and future expectations (30), which together reflect a positive environment and slightly more optimism than last survey.

“The modest upswing in Connecticut’s business cycle is evident in this survey,” said TD Banknorth President and CEO John Patrick. “Business executives say the type of financing they need is available, and they are borrowing.”

Respondents sought financing for working capital (27%), machinery (15%) and expanding their operations (10%).

The methodology used to determine the index is similar to that used by The Conference Board to calculate consumer confidence measures. The survey was conducted in September 2005, with 195 executives, 72% of them from small businesses. The survey has a margin of error of plus or minus 5%.