Moody’s has downgraded the credit rating of FS KKR Capital Corp, a private credit fund managed by KKR and Future Standard, from Baa3 to Ba1, relegating it to junk status. This decision stems from a deterioration in the quality of the fund’s assets, which has been exacerbated by a notable increase in non-accrual loans—representing 5.5% of total investments at the close of 2025. This figure is among the highest reported for business development companies.
The ratings agency indicated that FS KKR’s continued struggles with asset quality have led to diminished profitability and a reduction in the net asset value relative to its peers. In reaction to the downgrade, shares of FS KKR experienced a 4% drop during early trading on Tuesday, reflecting a significant decline of over 30% since the beginning of the year.
Moody’s assessment highlights broader concerns within the private credit sector, where many asset managers, including Blackstone and Blue Owl, face increased redemption requests as retail investors withdraw funds amidst fears of potential credit losses. FS KKR, which primarily lends to middle-market U.S. companies, was formed through a merger in 2018 and has become the second-largest publicly traded business development company.
In light of the downgrade, a spokesperson for FS KKR expressed confidence in the fund’s structure, emphasizing a robust liability position that mitigates immediate maturity risks. However, Moody’s has also pointed to factors such as higher leverage and a greater proportion of payment-in-kind loans that may increase future vulnerabilities.
Why this story matters: The downgrade signals rising risks in the private credit market, impacting investor confidence.
Key takeaway: FS KKR’s asset quality has significantly declined, leading to a downgrade that may elevate borrowing costs.
Opposing viewpoint: FS KKR maintains that its financial fundamentals remain strong, which could help it navigate current market challenges effectively.
