JPMorgan Chase-led group reins in credit
JPMorgan Chase & Co., along with a group of banks, recently reduced their exposure to a private credit fund managed by KKR just days before the asset manager announced a $300 million infusion to support the struggling vehicle. The fund in question, FS KKR Capital Corp., disclosed that KKR would inject $150 million as equity and spend another $150 million to buy shares from investors looking to exit.
This move comes after the JPMorgan-led group slashed its credit line by $648 million on May 8, representing a 14% decrease to $4.05 billion. Some lenders may have opted to exit entirely rather than continue their commitments. The fund, jointly operated by KKR and Future Standard, commonly known as FSK, has faced significant challenges, with its shares plummeting by nearly half over the past year and trading at a significant discount to its net asset value.
Moody’s downgraded FSK’s ratings to junk in March amid mounting stress in its portfolio. The fund reported losses of $2 per share in the first quarter, totaling approximately $560 million, as its net asset value dropped by about 10%. FSK President Daniel Pietrzak expressed disappointment in the fund’s recent performance and highlighted a disconnect between FSK’s trading price and intrinsic value.
FSK disclosed that non-income generating loans surged to 8.1% by the end of the first quarter from 5.5% at year-end. Despite the fund receiving support from KKR, executives cautioned that individual assets could further deteriorate, necessitating continued efforts to stabilize troubled portfolio companies.
The JPMorgan-led group not only reduced the credit line but also raised interest rates on the remaining facility and provided FSK with more flexibility to absorb losses without triggering a default. This adjustment, lowering the minimum shareholders’ equity floor from $5.05 billion to $3.75 billion, indicates lenders’ belief that the firm’s assets may still have room to decline.
JPMorgan, the largest U.S. bank by assets, has taken steps to mitigate risks associated with private credit turmoil, including marking down the value of private credit loans on its books. FSK plans to focus on supporting existing portfolio companies, reduce new investments, and work towards a smaller, less leveraged balance sheet while repurchasing shares.
In addition to KKR’s $300 million support, FSK’s board authorized a $300 million share repurchase program, with KKR agreeing to waive half its incentive fees for four quarters. The fund, which primarily lends to private, middle-market U.S. companies, became the second-largest publicly traded business development company following a merger in 2018. Software and related services account for the largest portion of FSK’s loan portfolio, comprising 16.4% of exposure at year-end.
The financial landscape for private credit funds remains challenging, with FSK’s situation serving as a cautionary tale for investors and lenders alike. As the fund navigates through its current challenges, stakeholders will closely monitor its performance and recovery efforts in the coming months.
