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Bond Market News
FS KKR Downgraded to Ba1 by Moody’s
March 24, 2026
FS KKR Capital Corp (FSK) was downgraded by a notch to HY-status of Ba1 from IG-status of Baa3 by Moody’s, making it a fallen angel. The downgrade stems from persistent asset quality challenges that have eroded profitability, high leverage compared to peers, a less senior-oriented portfolio, and growing reliance on secured debt. Asset quality remains a key concern, with non-accrual loans rising to 5.5% of total investments—one of the highest rates among rated BDCs. Beyond formal non-accruals, FSK holds other significantly marked-down positions. Only 58% of the portfolio is in direct first-lien loans, below most peers, leaving it more exposed to volatility in a credit downturn. Earnings quality is also weak, with PIK income accounting for 14.7% of total investment income in 2025, more than double the peer median of 6.3%. These pressures resulted in a net loss of $114mn in Q4 and near-breakeven net income of just $11mn for the full year. Company’s.debt-to-equity leverage rose to 1.3x by end 2025 from 1.11x a year earlier, driven by higher debt and NAV erosion. It also compressed the asset coverage ratio cushion. However, FSK has sufficient liquidity of ~$2.5bn available, comprising of ~$200mn in cash and $2.3bn in committed revolving facilities, most maturing in 2030. Its next unsecured debt maturity of $400mn is not until January 2027, providing a reasonable near-term runway despite the broader credit pressures. Several companies in the private credit space have recently seen a surge of investor redemptions leading to withdrawal restrictions by such funds. This began with Blue Owl last month and recently, some funds run by BlackRock and Apollo have also imposed such restrictions.
It’s dollar bonds traded stable. For instance, the 6.125% 2030s were at 94 cents on the dollar, yielding 7.98%.
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