Fitch downgrades FS KKR Capital to sub-investment grade amid asset quality concerns

Fitch Ratings has lowered its credit rating on FS KKR Capital, the private credit vehicle managed by FS Investments and KKR, moving it into non-investment grade territory as concerns mount over portfolio performance, according to a report by Reuters.

The agency cut the rating to BB+ from BBB-, pointing to ongoing deterioration in asset quality, elevated levels of non-performing investments, and further realised losses. The outlook remains negative, signalling the potential for additional pressure ahead.

Fitch highlighted that approximately 16% of FS KKR Capital’s portfolio is tied to software businesses—an area facing increasing disruption from advances in artificial intelligence. This exposure, the agency noted, could weigh on credit fundamentals as business models come under strain.

At the end of 2025, non-accrual assets—loans no longer generating interest or principal repayments—accounted for 4.4% of the firm’s debt portfolio by value, underlining the challenges within its investment base.

The downgrade comes against a broader backdrop of rising risk in the US private credit market, where lenders are bracing for a potential uptick in borrower defaults. Technology-driven disruption, particularly in software, is expected to play a key role in this trend.

Separately, redemption pressures have emerged within related vehicles. KKR FS Income Trust, a non-traded business development company, recently moved to limit investor withdrawals following a surge in redemption requests.

Looking ahead, Fitch expects business development companies (BDCs) to contend with a more competitive landscape in 2026, alongside weaker earnings, tighter dividend coverage, and continued strain on asset quality metrics.

The move follows a similar action by Moody’s last month, which also downgraded FS KKR Capital to below investment grade, albeit with a stable outlook.