Moody’s Downgrades FS KKR Capital
Moody’s has downgraded FS KKR Capital, a private credit vehicle managed by KKR and FS Investments, to Ba1, which is below investment grade, according to a report by Bloomberg as cited in Private Equity Wire. The downgrade stems from “continued asset quality challenges,” including pressure on the fund’s portfolio performance and profitability relative to peers. This move could raise borrowing costs for the $14bn vehicle, which uses debt markets to boost returns.
Reasons Behind the Downgrade
The downgrade reflects the fund’s non-accrual rate rising to 5.5% of total investments at the end of 2025, among the highest in its peer group. Moody’s highlighted concerns over additional marked-down investments, such as exposure to Medallia, and a higher proportion of payment-in-kind (PIK) income compared to peers, which indicates weaker earnings quality. PIK structures allow borrowers to pay interest by taking on more debt, a factor that Moody’s views as problematic for FS KKR Capital.
Implications for Business Development Companies
Business development companies like FS KKR Capital typically aim to maintain investment-grade ratings to access a wider investor base and lower financing costs, but this downgrade may hinder those efforts. According to Private Equity Wire, the ratings agency noted that despite these issues, the fund retains solid liquidity with $2.5bn available after repaying a $1bn note earlier this year. As widely known in finance, credit downgrades can signal broader market risks for similar funds, potentially affecting investor confidence.
Current Financial Position
Despite the downgrade, FS KKR Capital’s liquidity position remains strong, with the $2.5bn available funds providing a buffer against immediate financial pressures. This situation underscores the fund’s reliance on debt markets, as per the analysis in the report.
