AI Boom Floods Utility Bonds: Safer Haven Gets a Little Hotter
The AI buildout is running on credit, and regulated utilities are taking the lead. That means more supply, a heavier primary calendar, and a modest reset in what has long been a sleepy corner of investment-grade credit.
Utilities aren't broken. They're just borrowing more to chase unprecedented load growth from data centers and grid hardening. The result: pressure on spreads and a sharper focus on regulatory risk, tenor, and where you sit in the capital stack.
The numbers that matter
- US utility bond issuance rose 19% in 2025 to a record $158 billion.
- Capex outlook: more than $1.1 trillion over the next five years for generation, substations, and grid upgrades, per the Edison Electric Institute.
- Street expects more supply in 2026, with forecasts calling for another rise in utility issuance as data center demand persists and resilience projects ramp.
- Electricity prices increased 5.1% year over year through September, according to BLS CPI data, keeping political pressure high on rate cases.
- Primary demand is still strong: a $1.15 billion 2066 deal from Florida Power & Light was ~5x covered; select Duke and Evergy tranches in November saw 6x+ books versus a ~3.9x 2025 high-grade average.
Why "safe" is getting pricier
Supply is the first-order effect. More bonds mean fatter calendars and a bias for wider spreads, especially in the long end where utilities love to print.
Regulation is the second. Allowed ROEs and rate lag will be contested as bills climb, and that compresses the cushion bondholders have enjoyed. Politics matter when customers are frustrated and election-season promises center on lower utility bills.
AI demand is the wild card. Take-or-pay structures and termination fees help, but a slowdown in data center spend would dent the growth pitch utilities have used to justify outsized capex.
How to position in utility credit
- Favor operating companies over holding companies. Opco debt is closer to assets, cash flows, and regulated franchises; holdcos have weaker structural protection and a more checkered history in stress.
- Be selective on tenor. Expect the 30-50 year part of the curve to carry the heaviest new-issue traffic; demand concessions there. If you need beta, lean shorter and recycle on supply windows.
- Prioritize jurisdictions with constructive regulation. Scrutinize rate-case cadence, allowed ROE, equity thickness, and mechanisms like CWIP/trackers that reduce lag.
- Prefer secured/first-mortgage and opco senior unsecured over structurally subordinated holdco paper when spreads are similar.
- Underwrite the load story deal by deal. Validate data center off-take, minimums, and termination provisions rather than assuming AI demand bails out every capex plan.
- Watch capex execution risk. Transmission interconnection timelines, commodity costs, and permitting can stretch schedules and defer cash recovery.
What could go wrong
- AI capex cools. Contracts soften the blow but won't fully backstop growth assumptions embedded in multi-year plans.
- Rate pressure increases. Higher bills and politics cap allowed returns, extend timelines, or push utilities to absorb more costs.
- Balance sheets lever up faster than equity issuance. Debt-funded capex without timely rate relief drives negative rating pressure at the margin.
What could go right
- Regulators keep pace. Constructive rate outcomes and mechanisms that reduce lag support credit while growing rate base.
- Order books stay deep. Oversubscribed deals and a steady bid for long duration can offset supply and keep new-issue concessions tight.
- Utilities compound earnings. Management teams are signaling confidence that investors accept the risk for the growth on offer.
Tactical checklist for 1H26
- Lean into primary. Target long-dated tranches with 5-15 bps concessions; switch to secondary when calendars thin.
- Run relative value versus single-A industrials at the 30+ year point; take advantage of seasonal pension demand.
- Screen for opco/holdco basis trades where structure, security, and cash flow proximity are mispriced.
- Track rate-case pipelines and allowed ROE changes by state; size positions to regulatory momentum, not headlines.
Week in Review: Credit moves worth watching
- Oracle's aggressive AI spend put its bonds under scrutiny after a key partner reportedly withheld equity from a Michigan data center project; equity traded weaker.
- Fannie Mae and Freddie Mac added mortgage assets, fueling talk they're pushing down rates while positioning ahead of a potential public float.
- China Vanke asked bondholders for more time as a grace period nears its end, raising default risk on a once-unthinkable name.
- US prosecutors charged the founder of bankrupt subprime auto lender Tricolor with conspiracy to defraud lenders and investors.
- First Brands is seeking up to $800 million in new financing to bridge a court-led restructuring; the founder moved to dismiss a suit over alleged misappropriation.
- Spirit Aviation is back in talks to merge with Frontier Group in a possible path out of bankruptcy.
- CLO managers sold a record amount of deals this year as demand for loan risk stayed firm.
- Carlyle is staring at a nine-figure loss on a loan to now-bankrupt iRobot based on court filings.
- Autokiniton pulled its planned $1.14 billion leveraged loan amid market conditions.
On the Move
- Bank of Montreal's global credit trading head announced retirement; the bank is reshuffling senior trading leadership.
- Natixis hired a new head loan trader; Scotiabank added a director in leveraged loan trading.
- Blackstone shifted a senior private equity MD to its credit and insurance arm.
- RBC Capital Markets added a senior investment-grade salesperson from a bulge-bracket rival.
- Performance Trust opened a London office to expand CLO and ABS coverage, hiring two MDs to lead the desk.
Bottom line: Utilities remain a defensive anchor, but the AI buildout turns supply into the main risk. Get paid for structure, tenor, and jurisdiction-and keep dry powder for heavy calendars.
Credit Weekly returns Jan. 3.
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