A group of banks, led by JPMorgan Chase & Co., has reduced its exposure to a private credit fund co-managed by KKR. This action occurred days before KKR announced a $300 million support package for the troubled vehicle. The fund, FS KKR Capital Corp., stated on Monday that KKR will inject $150 million into the fund as equity and spend an additional $150 million to purchase shares from investors seeking to exit.
These actions, which the fund described as "Strategic Value Enhancement Actions," followed an amendment to the credit line by the JPMorgan-led group on May 8. According to the filing, some lenders may have chosen to exit the syndicate entirely rather than extend their commitments. FS KKR Capital Corp., which is co-managed by KKR and the alternative asset manager Future Standard, and is often referred to by its ticker FSK, has become a prominent example of the stress within the private credit sector. Its shares have fallen by nearly half over the past year and are trading at a significant discount to the fund's net asset value.
In March, Moody's Investors Service downgraded FSK's ratings to junk status, citing increasing stress within its loan portfolio. Since then, loans made to software maker Medallia and dental services firm Affordable Care have stopped generating interest payments, according to executives who spoke on Monday. FS KKR Capital Corp. reported first-quarter losses of $2 per share, which amounts to approximately $560 million in total losses, given its share count of roughly 280 million. During the same period, the fund's net asset value declined by about 10%.
FSK President Daniel Pietrzak told analysts on Monday that the firm was "disappointed by our recent performance." He added that the firm's assessment of the situation, combined with KKR's actions to support the fund, "support our view of a disconnect in the trading price of FSK versus its intrinsic value."
The proportion of FSK loans that are no longer generating income, classified as non-accrual loans, increased to 8.1% by the end of the first quarter. This marks an increase from 5.5% recorded at the end of the previous year, indicating a worsening asset quality within the portfolio. During a call on Monday, FSK executives also cautioned that "individual names could deteriorate further" despite the company's efforts to stabilize troubled portfolio companies.
In addition to cutting its credit line, the JPMorgan-led banking syndicate also increased the interest rates on the remaining facility. Furthermore, the lenders provided the fund with more flexibility to absorb additional losses without immediately triggering a default. This was achieved by lowering the minimum shareholders' equity floor from $5.05 billion to $3.75 billion. While this provides FSK with more operational breathing room, it also suggests that lenders anticipate further declines in the value of the fund's assets. Executives also warned that "individual names could deteriorate further" despite the company's efforts to stabilize troubled portfolio companies.
The FSK credit facility was funded by a syndicate of banks, with JPMorgan serving as the administrative agent. This role typically involves managing communications with lenders and overseeing amendment negotiations. ING Capital served as the collateral agent, though the other participating lenders were not named in the filing. JPMorgan, the largest U.S. bank by assets, has been actively managing its exposure to the private credit market. According to a CNBC report in March, the bank has marked down the value of private credit loans held as collateral on its own balance sheet. Many of these marked-down loans are reportedly to software companies facing potential disruption from artificial intelligence.
FSK executives also announced on Monday that the fund would significantly reduce new investments. The primary focus will shift towards supporting existing portfolio companies and working towards reducing the fund's overall leverage and balance sheet size, while simultaneously repurchasing its own shares. In addition to KKR's $300 million capital injection, the FSK board has authorized a separate $300 million share repurchase program. KKR has also agreed to waive half of its incentive fees for the next four quarters, a move aimed at alleviating some of the fund's financial burden.
FS KKR Capital Corp. specializes in lending to private, middle-market companies in the United States. It became the second-largest publicly traded business development company, or BDC, when it was formed through the merger of two predecessor funds in 2018. At the end of the previous year, the fund's largest single loan category was software and related services, accounting for 16.4% of its total exposure. This sector has faced increasing scrutiny due to potential disruptions from artificial intelligence.
