The private lending market is currently showing rare risk signals! Well-known fund FSK has been downgraded to "junk status" by Moody's.

The private credit fund managed jointly by Future Standard and KKR & Co. has lost an investment-grade rating, a rare occurrence in the $1.8 trillion private credit market, which may lead to an increase in borrowing costs for this $14 billion investment tool. Moody's stated in a statement on Monday that due to "ongoing asset quality challenges" damaging profitability and the fund's portfolio value relative to peers, Moody's has downgraded FS KKR Capital Corp.'s (FSK) rating to Ba1, junk status. The fund's non-accrual rate, which measures the proportion of non-interest-bearing loans, had risen to 5.5% of total investments by the end of last year, one of the highest among similar funds. The fund also expressed concerns about other investments that have been significantly devalued but not classified as default loans, including loans provided to software company Medallia Inc. A spokesperson for the fund stated in an email declaration, "Despite this decision, FSK's situation remains favorable. FSK has a robust and staggered debt structure, no unsecured debt due in 2026, and limited near-term debt maturities, which enables us to continue supporting portfolio companies and adapting to the current market environment." Funds like FSK, which operate as business development companies, typically issue their own bonds to boost income. They aim to maintain investment-grade ratings on the bonds to attract a broader investor base and access lower borrowing costs than junk-rated borrowers. Moody's also noted in the assessment report that FSK's proportion of payment-in-kind income is higher than that of peers, calling it a "sign of weaker earnings quality." Payment-in-kind income terms allow borrowers to pay interest by increasing debt. However, the rating agency stated that from a liquidity perspective, the fund is in a "good position," with around $25 billion available after repaying $1 billion in notes earlier this year.