AI Funding Boom Reaches Muni Market With Google-Tied Deal

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(Bloomberg) — Google parent Alphabet Inc. is poised to enter the municipal-bond market’s prepaid energy space by participating in a $1 billion transaction out of California, a major development in the evolution of a booming segment.

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Alphabet was identified as the funding recipient on a $1 billion transaction slated to be issued by the California Community Choice Financing Authority, according to preliminary bond documents posted late Tuesday. Goldman Sachs Group Inc., one of the leading underwriters of prepaid deals, is arranging the California offering.

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Alphabet’s entry into the prepaid sector would make it the first US tech company known to play such a role on a deal, according to data compiled by Bloomberg.

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Alphabet didn’t immediately respond to an emailed request for comment.

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Prepaid deals provide a mechanism for so-called funding recipients to borrow at tax-exempt rates and invest the proceeds at taxable rates, according to a report from American Century Investments. Utilities benefit because they lock in cheaper prices for gas and electricity as part of the transactions.

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Large banks typically serve as funding recipients, though the space has started to see insurance companies and other players access the market.

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The bonds will finance the acquisition of a long-term supply of electricity at a discounted price for Pioneer Community Energy, an electricity provider based in Rocklin, California. In the roadshow for investors, Pioneer adopted Google’s iconic color palette for its name.

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Investors in the sector count on getting higher interest rates on prepaid energy bonds compared to similarly-rated muni bonds.

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Alphabet this week announced it’s raising $80 billion through a package of equity offerings, including an investment deal with Berkshire Hathaway Inc., to help fund its ambitious and growing artificial intelligence spending plans. The company upsized that amount to almost $85 billion on Wednesday. 

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The deal has an expected rating of Aa2 from Moody’s Ratings, according to bond documents. 

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Jason Appleson, head of municipal bonds at PGIM Fixed Income, said he expects Alphabet’s entrance will be well received by investors because it’s a fresh name, but warned that the presence of big tech companies risks overwhelming the muni market.

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Prepaid structures are “increasingly becoming a wrapper for a variety of sectors that now includes banks, insurance companies, hedge funds, REITs and utilities,” he said in a written comment. “However, adding hyperscalers opens the door to a dangerous precedent, as these companies need to finance hundreds of billions of dollars for data center infrastructure, which the muni market does not have the depth to absorb entirely.”

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—With assistance from Elizabeth Campbell.

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(Updates with expected credit rating and comment from investor starting in tenth paragraph.)

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