Moody’s Downgrades KKR-Run Private Credit Fund to Junk Amid Rising Defaults and Weak Earnings

New York, NY – Moody’s Ratings has downgraded a private credit fund managed by KKR and Future Standard to "junk" status, citing a significant increase in non-accrual loans and a pattern of weak financial performance. The rating agency lowered the debt ratings of FS KKR Capital Corp (FSK) by one notch to Ba1 from Baa3, signaling increased risk for investors. This move places FSK into speculative-grade territory, commonly referred to as "junk" bonds, indicating a higher probability of default.

The downgrade reflects Moody’s assessment that FSK’s underlying asset quality has deteriorated more sharply than that of its industry peers. Non-accrual loans, which represent borrowings on which borrowers have ceased making payments, climbed to 5.5% of the fund’s total investments by the close of 2025. This figure is notably high when compared to other rated Business Development Companies (BDCs), a type of closed-end investment company that invests in the debt and equity of private companies.

"The downgrade reflects FSK’s continued asset quality challenges, which have resulted in weaker profitability and greater net asset value erosion over time relative to business development company (BDC) peers," Moody’s stated in its report, referencing the fund by its ticker symbol. The fund’s shares reflected this concern, dropping 4% in early Tuesday morning trading and experiencing a year-to-date decline of over 30%.

This action by Moody’s underscores a broader trend of increasing distress within the private credit sector. In recent months, retail investors have been increasingly attempting to withdraw funds from private credit vehicles, often encountering withdrawal restrictions or "gates." These actions are driven by growing apprehension about potential future credit losses, particularly in portfolios heavily exposed to software loans. Major asset managers, including industry giants like Blackstone and Blue Owl, have also faced a surge in redemption requests for their private credit funds. This period is being viewed by many as a potential turning point for an asset class that has witnessed exponential growth over the past decade.

FSK, which specializes in providing debt financing to private, middle-market companies in the United States, was established in 2018 through the merger of two predecessor funds. At the time of its formation, the merger positioned FSK as the second-largest publicly traded BDC.

Funds like FSK typically utilize debt financing to amplify investor returns. Consequently, the Moody’s downgrade is likely to increase FSK’s borrowing costs. This, in turn, could lead to reduced future returns for investors.

Despite the downgrade, a spokesperson for FSK expressed confidence in the fund’s position. "FSK remains well positioned despite the decision," the spokesperson told CNBC via email. "It has a strong, well-laddered liability structure with no 2026 unsecured maturities and limited near-term maturities, enabling us to continue supporting our portfolio companies and navigate the current market environment."

Moody’s also highlighted several other factors contributing to FSK’s increased risk profile. These include higher leverage ratios, a greater proportion of payment-in-kind (PIK) loans, and a lower percentage of first-lien loans compared to its BDC peers. PIK loans allow borrowers to defer cash interest payments by adding the interest to the principal balance, which can obscure underlying financial stress. First-lien loans generally represent a more senior position in a company’s capital structure, offering greater protection in the event of default.

Financially, FSK reported a net loss of $114 million in the fourth quarter of 2025. For the entirety of 2025, the fund’s net income was a mere $11 million, according to Moody’s figures.

Further compounding concerns, FSK’s largest single loan category is within the software and related services sector. At the end of 2025, this sector represented 16.4% of the fund’s total exposure. This concentration in software loans is particularly relevant given the broader market concerns about potential credit losses in this segment.