Alphabet returns to muni market with $1.7B prepay deal

Less than six months after Alphabet, Google’s parent company, served as a funding recipient for a billion-dollar-plus prepaid electricity deal — a first for a hyperscaler in the muni market — the company returned Wednesday with an even larger $1.65 billion deal.

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The upsized deal from the California Community Choice Financing Authority saw Alphabet as the funding recipient. Goldman Sachs served as underwriter.

The deal was oversubscribed with orders received from more than 80 individual accounts. Bonds repriced with 5s of 2039 at 4.80% (+112 basis points) and 5s of 2040 at 4.85% (+104 basis points).

The 13- and 14-year maturities avoided the complicated structure of the put, which made it a little more “palatable” for retail buyers that don’t want to deal with call options, whether mandatory or soft put, said Paul Hwang, a muni trader and vice president at Payden & Rygel.

Clinton Investment Management participated in the first deal but wasn’t expecting to participate in this deal, a decision based on relative value, not credit, Andrew Clinton, CEO and founder of the firm, said Wednesday morning before the pricing.

“It’s a recognizable name and those that didn’t participate in the first one may be considering the second one — I have a feeling it will do fine,” he said. “We believe Alphabet is a very stable underlying credit and there’s sufficient demand for these types of securities.”

With Alphabet having served twice as a funding recipient, market participants believe hyperscalers will follow suit.

Hyperscaler capex funding needs have been in the $100 billion range for 2026, so a billion-dollar deal is just a “drop in the bucket,” yet it’s still a cheaper supplemental source of funding, Hwang said.

“Given how big hyperscaler needs are, this could be a big shift for an otherwise sleepy muni market,” said James Pruskowski, managing director at Hennion & Walsh.

“What’s new is the credit, not the structure,” he said. “The structure’s old. What’s changing is who’s on the other side, because it’s moving past the big banks. Munis run on familiar names and essential services, so new credits could test the market. Then again, demand is strong, supply has cooled, and California-exempt paper is always special.”

To some, it was a surprise Alphabet didn’t return to the market sooner, given how well the first deal was received.

June’s upsized $1.2 billion deal priced at a spread around the +90 range, immediately traded 25 basis points tighter, and at times during the summer, traded 30 basis points tighter, Payden & Rygel’s Hwang said.

Recently, those spreads have widened a bit, coinciding with the overall selloff in AI-related corporate bonds. But even those spreads have snapped back relatively quickly to trading in that +95 range, where it was when first priced, he said.

Alphabet’s credit has taken a bit of a beating recently, said Triet Nguyen, vice president of credit data and solutions at DPC Data.

“On the back of Alphabet’s third-quarter earnings report showing weakening cash flows, the company’s credit default swap has soared to about 90 basis points, a record high,” Nguyen said. “The company had to offer much higher rates for its recent $6.7 billion euro bond issue. The market is basically not buying the official Aa2 rating by Moody’s [Ratings], at least not currently.”

Last time, Pioneer Community Energy was the project participant. This time, Central Coast Community Energy, a joint powers authority served as the project participant. It assigns power purchase agreements to J.Aron under electricity contracts, said Jeff Lipton, The Bond Buyer’s Market Intelligence analyst.

The transaction allows Central Coast, which supplies electricity to communities between Santa Cruz County and Santa Barbara County in California, to lock in “a long-term electricity supply purchased at a discount to the spot market, hedging against commodity price volatility and reducing overall energy supply costs,” he said.

The bonds are designated green, with third-party verification by Kestrel, because they finance the purchase of renewable and clean energy resources.

These two prepaid deals connected to Alphabet are among a slew of prepaid deals priced this year, usually by issuers in the Southeast or California.

The sector has grown exponentially over the last several years as there’s no question about the need for these types of deals, market participants said.

Issuance for the sector year-to-date is $36.7 billion, surpassing 2025’s record $31.4 billion, said Jude Scaglione, director and head of fixed income credit research at Alvarez & Marsal Private Wealth Partners.

The surge in issuance is buoyed by two out of the three largest issuers in the first three quarters of the year — Black Belt Energy Gas District, which ranked first, and the California Community Choice Financing Authority, which ranked third, according to LSEG.

Currently, the prepay sector’s market has topped $150 billion. Index weights vary widely by state and curve, with gas prepay bonds making up around 27%-28% of Bloomberg’s California Intermediate Index, Hwang said.

Some of the growth of the sector could be related to AI and data center power-driven demand, industrial off-takers or the ability of these utility providers to hedge their energy costs, Hwang said.

A potential slowdown — though unlikely — in prepay deals would be because of “something existential and outside of the structure, and more sector-wide or driven by not having enough new funding recipients because of how individuals look at risk buckets,” Scaglione said.

Overall, prepaid energy deals are a “win-win-win” scenario, Hwang said.

Utility providers get below-market budget on certain gas costs, so they can hedge those energy costs. Suppliers get low-cost, tax-exempt funding, and investors get tax-exempt income on what is effectively a bank or insurance company, or in this case, a tech company, he said.

“It’s a great way for investors to diversify their muni holdings with a little bit of crossover into corporate bonds, and prepaid bonds trade in their own idiosyncratic way that doesn’t necessarily move with the rest of the muni market,” Hwang said.