(Reuters) - U.S. companies borrowed more in May mainly to replace equipment, with worries about unemployment and Europe keeping many businesses hesitant to spend for new projects, the Equipment Leasing and Finance Association said on Monday.
Demand for equipment financing is on the rise, and credit quality has steadily improved this year, but are restrained by euro-zone turmoil and global economic uncertainty.
The financing is for everything from industrial equipment to computer systems and office furniture.
Companies took on $6.2 billion in loans, leases and lines of credit to fund equipment in May, up 10.7 percent from $5.6 billion a year earlier and 1.6 percent above April’s $6.1 billion, ELFA said.
“There’s nothing to say that it’s any kind of expansion; we’re still hearing it’s mostly for replacement,” the group’s chief executive, William Sutton, said in an interview.
Still, Sutton said many industry members are optimistic that momentum can be maintained in the second half of the year.
“The increase in new business volume, very low aging of receivables, very low average charge-offs, credit approvals continuing to stay high - all these trends are really going in the right direction.”
New business loan volume has increased by 16 percent so far this year, according to ELFA, a trade association with over 550 members that reports economic activity for the $628 billion equipment finance sector.
Energy, transportation and technology businesses are leading the increased borrowing for equipment in the first half of the year, and there has been some pickup in the manufacturing sector for new goods purchases, said Maureen Carr, managing director of the corporate asset finance group at CapitalSource.
Companies that are relatively immune to the European crisis have opportunities to grow in the second half of the year, she said in a statement.
“Although overall spending has steadily increased since the financial crisis, pockets of the market are still tenuous as some customers are cancelling or postponing CAPEX purchases amidst softer commodity prices or weaker demand from abroad,” Carr said.
Overall credit quality measures were steady to improved and holding around pre-recession levels.
ELFA said 2.7 percent of borrowers were late by more than 30 days on their debts, unchanged from April.
Charge-offs, which reflect loans unlikely to be repaid, declined to 0.5 percent in May from 0.6 percent in April to stand 37.5 percent below the same period a year ago.
The charge-off rate, which stood at 3 percent in 2009, has fallen steadily as companies cleaned up portfolios of poorly performing loans, ELFA said.
Credit approvals — which have never been above 80 percent — rose to 78 percent in May from 76 percent in April.
ELFA’s monthly index is based on a survey of 25 member organizations, including Bank of America Corp (BAC.N), and the financing affiliates or subsidiaries of Canon Inc (7751.T), Caterpillar Inc (CAT.N), Dell Inc DELL.O, Siemens AG (SIEGn.DE) and Verizon Communications Inc (VZ.N).
Separately, the Equipment Leasing & Finance Foundation, ELFA’s non-profit affiliate, said the European debt crisis, U.S. unemployment and regulatory and political uncertainty helped drive down its monthly confidence index.
The sentiment gauge fell to 48.5 in June from 59.2 in May, near its recent low of 47.6 reached last September, suggesting that businesses are hesitant about major capital spending.
Reporting By Lynn Adler; Editing by Phil Berlowitz