AI Boom Turns Power Firms Into Biggest US Hybrid Capital Engine
(Bloomberg) -- The artificial intelligence revolution is driving such an insatiable quest for cash that it’s rewiring one section of US capital markets.
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Utilities, which are racing to keep up with surging electricity demand to power AI data centers, have dethroned US banks as the biggest sellers of subordinated securities to big investors. Dominion Energy Inc., CenterPoint Energy Inc. and others have raised nearly $18 billion through sales in 2024, a ninefold jump from last year, according to data compiled by Bloomberg.
More specifically, utilities are turning to hybrid bonds, an emerging category within the asset class. Part of the shift is being driven by a Moody’s Ratings methodology change whereby hybrids can be treated as half-debt and half-equity, so companies carry less debt on their balance sheet than if they had sold a regular bond.
“There’s going to be more energy needed whether you’re talking about cars, whether you’re talking about data centers,” said Mark Lieb, a near five-decade veteran of preferred securities and chief executive officer at Spectrum Asset Management Inc. “You have all these different segments that seem to be converging together.”
Power generators and infrastructure firms are bracing for electricity demand to outstrip supply during the next few years after a period of flat or shrinking consumption, with data centers accounting for the bulk of the increase, according to Bain & Co. Meeting these needs would require utilities to boost annual generation by as much as 26% by 2028, the consulting firm said.
Capital expenditure is set to exceed $200 billion next year, almost double the amount of a decade ago, according to trade group Edison Electric Institute.
For utilities faced with big financing needs, the change in Moody’s ratings methodology in February made hybrids more cost-effective to raise debt without risking rating downgrades. Companies could now classify 50% of capital raised through hybrids as equity, an increase from 25%, in addition to benefitting from deducting interest payments for tax purposes.
Prior to the change, utilities would’ve generally issued preferred stocks, another category within subordinated securities that are usually sold by banks. Hybrid bonds that fit Moody’s criteria typically mature in 30 years and can be repaid five or 10 years after issuance.