Moody’s Ratings has downgraded private credit fund FS KKR Capital Corp (FSK), stripping it of its investment grade status and raising concerns over the quality of its assets.
FSK is a $13bn (£9.7bn) publicly traded business development company (BDC) managed by global alternative asset managers KKR and Future Standard. Moody’s cut the firm’s long-term issuer and senior unsecured ratings to Ba1 from Baa3.
The ratings agency said the downgrade reflects the fund’s “continued asset quality challenges”, which have resulted in weaker profitability and greater net asset value erosion than many of its BDC peers. The company reported a net loss of $114m in the fourth quarter and net income of just $11m for the whole of 2025.
For Moody’s, Baa is the lowest investment grade credit rating, while Ba is considered non-investment grade and speculative.
Read more: Private credit firms take hit on exposure to software selloff
According to Moody’s, the BDC’s non-accrual loans rose to 5.5 per cent of total investments from five per cent as of September 2025, “one of the highest percentages among rated BDCs”.
Moody’s also pointed to several large investments that have been marked down but not classified as non-accruals, including that of software platform Medallia. The holding had a fair value of $185m compared with a cost of $233m as of 31 December 2025.
The downgrade comes amid jitters in the US wealth market, as heightened concerns over private credit quality and exposure to software companies prompted a sell-off in BDCs. Many vehicles have also faced elevated redemption requests.
However, so far, liquidity pressures rather than asset quality have been the main issue across the sector. One industry insider said investors should watch for rising non-accruals and payment-in-kind (PIK) income when assessing the health of a fund.
Moody’s noted that the BDC’s proportion of PIK income is higher than peers, which can signal weaker earnings quality. PIK income accounted for 14.7 per cent of FSK’s total investment income in 2025, significantly above the peer median of 6.3 per cent.
FSK’s debt-to-equity leverage has also increased driven by higher debt levels and a deterioration in net asset value, Moody’s said.
Despite the downgrade, Moody’s said the fund retains a sufficient liquidity runway of about $2.5bn on a pro forma basis following the repayment of $1bn of unsecured notes in January 2026.
Read more: Private credit leaders unshaken by software sell-off but warn on fiscal risk
