AI Power Boom Catapults NextEra to Top of Hybrid Debt Market

bh10ls0auqld3zudb77j{3z1_media_dl_2.png Bloomberg

Article content

(Bloomberg) — As utilities splash out on spending to power America’s AI boom, NextEra Energy Inc. has just emerged as the largest issuer of hybrid bonds worldwide.

Article content

The Florida-based firm this week overtook long dominant issuers like Volkswagen AG and BP Plc after selling three hybrid bonds this week, including one with a novel structure. The largest US power utility also faces a rise in spending needs once it completes the proposed acquisition of Dominion Energy Inc. 

Article content

Article content

Article content

NextEra’s rise comes just two years after a Moody’s Ratings’ methodology change that made it more practical for US companies to issue hybrid debt — a market long dominated by European borrowers. The shift is helping investments by utilities to meet voracious demand for power from data centers — and plays into bond investors’ rush to buy high-yielding paper.

Article content

Article content

With fears that AI and hyperscaler-related issuers are swamping the market, and predictions they will soon be behind 20% of bond sales, both borrowers and investors are looking to diversify. That’s helped to boost the appeal of alternatives like the hybrid debt with the long call date that NextEra sold.

Article content

“Client conversations this year have highlighted concerns around tech overexposure among investors seeking to add duration in primaries this year,” said Henry Morrison-Jones, a strategist at UBS Group AG.

Article content

Hybrid bonds are a subordinated type of debt that partly count as equity at rating companies. They pay more than more straightforward bonds to compensate investors for the risk of skipped coupons, an uncertain repayment date and taking losses first when a company goes under. 

Article content

Article content

Sales of the securities in US dollars, euros and pound sterling amount to more than $73 billion year-to-date, by far the fastest pace in at least a decade, based on data compiled by Bloomberg.

Article content

The total is nearly five times the volume recorded over the same time in 2023, the year before Moody’s revised its methodology to effectively grant greater equity credit to hybrid bonds, a change that broadened the pool of potential issuers and transformed the market.

Article content

“Everything we were discussing back in the day with the Moody’s change opening the door to new issuance from the US and demand from local investors is clearly playing out,” said Adrien Letellier, fixed income portfolio manager at Bordier & Cie. Multi-tranche offerings “can be done and companies are also trying to give themselves more flexibility with different call dates.”

Article content

This week, analysts at UK bank Barclays Plc called hybrid bonds a “hot spot.” Earlier this month, Goldman Sachs Group Inc. analysts led by Amanda Lynam wrote a note entitled “The Hybrid Renaissance” about the accelerating momentum in supply.