The banking consortium led by JPMorgan Chase has reduced its exposure to FS KKR Capital Corp., a private credit fund managed by KKR, just days before KKR announced a $300 million financial intervention aimed at stabilizing the troubled fund. This intervention includes a $150 million equity investment and $150 million allocated for buying shares from investors wishing to exit.
JPMorgan’s group of lenders cut its credit line by $648 million, or approximately 14%, bringing the total credit to $4.05 billion. Some lenders have opted to exit completely rather than prolong their commitments, indicating a loss of confidence in the fund. The fund has experienced significant financial difficulties, with its shares plummeting nearly 50% over the past year and trading at a substantial discount to its net asset value.
In March, Moody’s downgraded FS KKR’s ratings to junk status amid increasing stress from its portfolio, which includes non-performing loans from companies like Medallia and Affordable Care. The fund reported losses of $2 per share for the first quarter, totaling approximately $560 million across its 280 million shares. FSK President Daniel Pietrzak acknowledged the disappointing performance and noted that the firm’s attempts to address the situation were being overshadowed by perceived disconnections in market valuations.
Additionally, JPMorgan’s actions included raising interest rates on the remaining credit facility and adjusting the minimum shareholders’ equity threshold to provide the fund more leeway to absorb losses without triggering defaults.
As a strategy for recovery, FSK aims to curtail new investments, concentrate on supporting its existing portfolio, and work towards a leaner balance sheet while implementing a share buyback program.
Why this story matters
- The situation highlights significant challenges facing private credit markets amidst economic pressures.
Key takeaway
- A leading bank’s withdrawal of support signals a lack of confidence in the private credit fund’s stability.
Opposing viewpoint
- Some may argue that KKR’s commitment to infusing capital could stabilize the fund despite the current downturn.
