KKR's Private Credit Fund Shows Stress
KKR's $13 billion private credit fund, FS KKR Capital Corp. (FSK), has reported an increase in troubled loans and weaker Q4 income, causing its stock to drop 15%. The results from the publicly-traded BDC are seen as a bellwether for the broader private credit market, highlighting growing risks as the credit cycle turns.
FS KKR Capital Corp.'s net asset value (NAV) per share took a 5% hit in the fourth quarter, falling to $20.89. For a Business Development Company (BDC), which is often valued based on its NAV, this decline was a significant factor in the subsequent stock price drop. The company's net investment income also fell to $0.48 per share, down from $0.57 in the prior quarter. A key driver of the weaker results was the increase in non-accrual loans—investments that are no longer generating their expected interest income. These troubled loans rose to 3.4% of the portfolio's fair value, up from previous quarters. Specific investments in companies like Medallia and Cubic Corp were cited as challenges. In response to the earnings pressure and portfolio challenges, FSK announced a dividend cut. The new quarterly distribution is $0.48 per share, a significant reduction from the previous $0.70. This move aims to better align shareholder payouts with the fund's actual net investment income. The fund's portfolio is heavily weighted towards senior secured loans, with first-lien loans making up the largest portion. In the face of recent headwinds, management has stated a strategic focus on increasing originations of these higher-quality, first-lien senior secured loans to fortify the portfolio. FSK primarily lends to "upper middle-market" private U.S. companies, typically those with annual EBITDA between $50 million and $100 million. The median EBITDA of its portfolio companies is $132 million, with a leverage multiple of 5.8x. The broader private credit market has seen explosive growth, becoming a multi-trillion dollar industry as traditional banks have pulled back from lending. However, this rapid expansion has brought increased scrutiny and concerns about transparency, interest rate sensitivity, and the potential for systemic risk, especially as the credit cycle turns.
