Shares of FS KKR Capital Corp fell sharply after Moody’s downgraded the private credit fund run by KKR to junk status, intensifying investor concerns over deteriorating asset quality and weak earnings. 

The stock has now dropped more than 31% this year, reflecting mounting pressure from rising non-accrual loans and broader stress in the private credit sector.

Downgrade driven by deteriorating asset quality

Moody’s Ratings has downgraded FS KKR Capital Corp to junk status.

Moody’s lowered the fund’s debt rating by one notch to Ba1 from Baa3, pushing it into non-investment-grade territory. 

The agency said the downgrade reflects a marked deterioration in asset quality compared with peers.

“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 said.

A key concern is the sharp rise in non-accrual loans—those on which borrowers have stopped making payments—which climbed to 5.5% of total investments at the end of 2025. 

This is among the highest levels seen across rated business development companies.

The fund, which lends to private middle-market companies in the United States, has also been flagged for structural risks. 

Moody’s highlighted its relatively higher leverage, greater exposure to payment-in-kind loans, and a lower proportion of first-lien loans compared to peers, all of which could amplify losses in a downturn.

Weak earnings and market reaction

Financial performance has also come under pressure. 

FS KKR Capital reported a net loss of $114 million in the fourth quarter and generated just $11 million in net income for the full year 2025, according to Moody’s.

The deterioration in earnings, combined with asset quality concerns, has weighed heavily on investor confidence. 

Shares of the fund fell about 4% in Tuesday morning trading and have declined more than 31% so far this year.

Funds like FS KKR typically rely on debt issuance to enhance returns. 

As a result, a downgrade to junk status could raise borrowing costs, potentially compressing future returns and limiting financial flexibility.

Despite the downgrade, the company sought to reassure investors about its financial position.

“FSK remains well-positioned despite the decision,” a spokesperson for the fund said in a CNBC report. 

“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.”

Private credit sector faces broader strain

The downgrade comes amid broader signs of stress across the rapidly growing private credit market. 

Rising concerns about potential loan losses—particularly in sectors such as software and related services—have triggered increased redemption requests from retail investors.

FS KKR itself has significant exposure to software loans, which accounted for 16.4% of its portfolio at the end of 2025, adding to investor concerns about concentration risk.

Asset managers across the industry, including major players such as Blackstone and Blue Owl, have faced elevated withdrawal requests, in some cases imposing limits on redemptions to manage liquidity pressures.

The developments suggest a potential turning point for a sector that has expanded rapidly over the past decade, fueled by investor demand for higher yields in a low-rate environment.

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