Moody's downgraded KKR and private credit funds operated according to future standard criteria to junk status

Moody’s Ratings downgraded a private credit fund run by KKR and Future Standard Operations to junk status on Monday, citing rising nonperforming loans and continued weak profitability.

The rating agency lowered the debt rating of FS KKR Capital Corporation by one notch from Baa3 to Ba1, pushing it into the “junk” category. Moody’s said the fund’s underlying asset quality deterioration has been worse than that of its peers.

The report shows that by the end of 2025, the proportion of non-accrual loans—loans on which borrowers have stopped paying—had risen to 5.5% of total investments, making it one of the highest among the rated business development companies.

Moody’s said in the report: “This downgrade reflects FSK’s ongoing asset quality challenges. Compared with peer business development companies, these challenges have led to weakening earning power, with a greater degree of erosion of net asset value over time.”

Moody’s move is the latest sign of strain in the private credit sector. Concerned about upcoming credit losses—especially those related to software loans—retail investors have been rushing to pull out, only to run into redemption limits. Funds like FS KKR issue debt to boost returns, so Moody’s downgrade could increase its borrowing costs and thereby reduce future returns.

Moody’s also pointed to risks that could expose the fund to even larger losses in other areas, including a higher leverage ratio, a higher share of loans settled in kind, and a lower proportion of first-lien loans than its peers.

Based on Moody’s data, FS KKR posted a net loss of $114 million in the fourth quarter alone, and its net profit for all of 2025 was just $11 million.

The fund did not immediately respond to a request for comment.