AI-Fueled Capex Is Rewriting Utility Credit: What It Means for Spreads, Structure, and Sizing
AI demand is pulling forward a massive buildout of US power infrastructure - and the funding is coming from bonds. Utilities have long been the "safe" corner of corporate credit. That safety isn't disappearing, but the math is changing.
The supply wave is real
US utilities sold about $158 billion of bonds this year, up roughly 19% to a record. The sector is planning more than $1.1 trillion of spending over the next five years on plants, substations, and grid upgrades - about 44% above the prior period. Debt will carry a big chunk of that bill.
Street expectations point to more supply again next year, with forecasts calling for issuance growth near the high single digits. More bonds usually mean wider spreads and stiffer new-issue concessions, especially in the belly and long end.
"Safe," but more levered
Utility cash flows are still anchored by regulation. Projects typically proceed after cost recovery and return mechanics are set. That's your core downside buffer.
The pressure point is political. Electricity prices rose about 5% over the 12 months through September, and rate fatigue is now a talking point in elections. If regulators push back on rate increases or slow recovery, investor returns get squeezed - not catastrophic for investment-grade credit, but it trims the margin for error.
US CPI data gives helpful context on electricity inflation trends.
AI demand, contracts, and bubble risk
New data centers are the headline driver. Take-or-pay features and termination fees in power contracts provide some floor to volumes, which helps underwrite capex. Still, if AI spending cools materially, the growth story gets softer - and that hits valuation more than solvency.
Positioning: OpCo over HoldCo
If you want insulation from political and project risk, stick closer to the assets. Operating-company debt is typically secured (plants, wires, and the franchise to serve a territory) and sits nearer to regulated cash flows. Holding-company bonds add structural subordination and funding dependence.
History supports the bias: operating-company bondholders have an excellent record of principal protection over decades, while some holding companies have impaired investors - PG&E's parent filed for bankruptcy twice in the past 25 years. Know exactly where you sit in the stack.
Demand is still strong
Primary prints continue to clear with size. A recent century-style deal from a large Florida utility unit saw books multiple times covered, and November deals from other majors priced on heavy demand - well above the average book coverage for high-grade new issues this year. Buyers want duration and quality, but they're price sensitive with supply rising.
Portfolio implications: practical moves
- Favor OpCo over HoldCo for core IG exposure; treat HoldCo as a spread product with tighter risk limits.
- Model 10-30 bps of spread widening from supply and keep dry powder for concessions on larger tranches.
- Underwrite the rate-case pipeline: allowed ROE, equity thickness, test-year lag, and recovery timing matter more as leverage ticks up.
- Scrub data center agreements: minimums, step-up schedules, termination fees, interconnection timelines, and counterparty credit.
- Watch duration creep from 30- to 40+ year prints; barbell long utility paper with shorter financials or ABS to balance convexity.
- Stress FFO/debt and interest coverage under slower load growth and capped rate increases; focus on issuers growing rate base without overreaching leverage.
- Prefer seasoned, asset-rich OpCos in constructive jurisdictions; be selective in states with rising political intervention.
- Monitor event tail risks: wildfire/storm liabilities, securitization recovery, and capital-markets dependence at HoldCos.
What to watch next quarter
- Issuance calendars vs. spread momentum; track concession trends by tenor.
- State rate cases and legislative chatter on bills and affordability.
- AI data center pipelines, grid interconnection backlogs, and construction timelines.
- Utility equity needs and hybrid issuance as leverage rises.
- Regulated vs. merchant exposure creep in certain names.
Week in credit: quick hits
- AI capex under the microscope: A major cloud software firm's bond complex drew scrutiny after a data-center partner reportedly withheld expected equity in a Michigan project. Markets are testing how far AI spend can stretch balance sheets.
- Housing finance: Government-sponsored enterprises added billions in MBS and whole loans to balance sheets, fueling talk of rate management ahead of potential public-market moves.
- China property: A top developer pushed bondholders for more time as a grace period neared, keeping default risks in focus.
- Enforcement: US prosecutors charged the founder of a bankrupt subprime auto lender with conspiracy to defraud lenders and investors.
- Restructuring: An auto-parts supplier is seeking up to $800 million in new financing to bridge a court-led overhaul; the founder moved to dismiss a misappropriation suit, alleging predatory off-balance sheet financing.
- Airlines: A bankrupt ultra-low-cost carrier revived merger talks that could offer a route out of insolvency amid tough competition.
- Structured credit: Record volumes of CLO bonds priced as money managers leaned into demand for higher-yielding loan exposure with additional protections.
- Private credit: A large manager is staring at a nine-figure loss on a loan to a consumer-robotics firm now in bankruptcy, per court filings.
- Syndicated loans: An auto-parts name scrapped a planned $1.14 billion leveraged loan amid market pushback.
People moves
- Bank of Montreal's head of global credit trading announced retirement.
- Natixis hired a new head loan trader and managing director.
- A senior private equity executive at a global alternatives firm shifted to the credit and insurance arm.
- Scotiabank added a director for leveraged loan trading.
- RBC Capital Markets hired a veteran investment-grade salesperson, joining in March.
- Performance Trust opened its first European office and hired two MDs to lead securitized products in London.
Why this matters for you
Utilities can still anchor IG portfolios, but they're no longer "set and forget." More leverage, more issuance, and more politics mean your edge comes from structure, jurisdiction, and timing. Get paid for the risk you're actually taking - and be picky with where you add size.
Sources and references
- Industry capital plans: Edison Electric Institute
- Electricity CPI trends: Bureau of Labor Statistics
Useful resource
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