Moody’s cuts rating on private credit fund run by KKR and Future Standard to junk

Moody’s Ratings downgraded a private credit fund managed by KKR and Future Standard on Monday due to increasing bad loans and weak earnings. The debt ratings of FS KKR Capital Corp were lowered by one notch to Ba1 from Baa3, pushing it into “junk” territory. This move was made as the fund’s underlying asset quality deteriorated more than its peers.

According to the report, non-accrual loans, which are loans where borrowers have stopped making payments, rose to 5.5% of total investments by the end of 2025. This rate is one of the highest among rated Business Development Companies (BDCs). Moody’s stated that the downgrade reflects FSK’s ongoing asset quality challenges, leading to weaker profitability and greater net asset value erosion compared to other BDCs.

Following the downgrade, shares of FSK dropped 4% in morning trading and have fallen by over 30% this year. This downgrade by Moody’s is indicative of the distress in the private credit sector, with retail investors rushing to withdraw funds amid concerns about potential credit losses, particularly in software loans.

FSK issues debt to enhance returns, so the Moody’s downgrade could result in higher borrowing costs and lower future returns for the fund. Despite this, a spokesman for FSK stated that the fund remains well-positioned with a strong liability structure and limited near-term maturities.

Moody’s also highlighted other factors that could expose the fund to greater losses over time, including higher leverage, a higher proportion of payment-in-kind loans, and a lower percentage of first-lien loans compared to its peers. In the fourth quarter of 2025, FSK reported a net loss of $114 million and earned just $11 million in net income for the entire year.

The largest category of loans in the fund is for software and related services, accounting for 16.4% of exposure at the end of the year. This focus on software loans could potentially increase the fund’s vulnerability to market fluctuations.

Overall, the Moody’s downgrade serves as a warning sign for the private credit industry, with asset managers like Blackstone and Blue Owl also facing challenges due to elevated redemption requests. The future of private credit funds remains uncertain, as investors navigate a changing market environment and the potential for increased risk in their portfolios.