FS KKR private credit fund: JPMorgan Chase-led group reins in credit

A JPMorgan Chase-led group of banks cut their exposure to a private credit fund co-managed by KKR days before the asset manager announced it was spending $300 million to prop up the troubled vehicle.

The fund, FS KKR Capital Corp., said Monday in a release that KKR will inject $150 million into the fund as equity and spend another $150 million to buy shares from investors who want to exit.

Those moves, labeled “Strategic Value Enhancement Actions” by the fund, came after the JPMorgan-led group on Friday slashed its credit line by $648 million, or about 14%, to $4.05 billion. Some lenders may have exited entirely rather than extend their commitments, according to the filing.

The fund, co-run by KKR and the alternative asset manager Future Standard and often referred to by its ticker, FSK, has become one of the most visible fault lines in the private credit story. Its shares have plunged by nearly half over the past year and trade at a deep discount to the fund’s net asset value.

In March, Moody’s downgraded FSK’s ratings to junk amid mounting stress in the portfolio. Since then, loans to software maker Medallia and dental services firm Affordable Care have stopped paying interest, FSK executives said Monday.

FSK said it had losses of $2 per share in the first quarter, or about $560 million in total losses given the roughly 280 million share count, as the fund’s net asset value fell about 10%.

“We are disappointed by our recent performance,” FSK President Daniel Pietrzak told analysts Monday.

The firm’s read of the situation and KKR’s actions to prop up the fund “support our view of a disconnect in the trading price of FSK versus its intrinsic value,” Pietrzak added.

FSK loans that are no longer generating income jumped to 8.1% by the end of the first quarter from 5.5% at year-end, the fund said.

Besides cutting its credit line, the JPMorgan-led group also raised interest rates on the remaining facility and gave the fund more room to absorb losses without triggering a default.

The latter move, lowering the minimum shareholders’ equity floor from $5.05 billion to $3.75 billion, gives FSK more breathing room. But it also indicates that lenders believe the firm’s assets have further to fall.

During the Monday call, FSK executives warned that “individual names could deteriorate further” despite the company’s efforts to stabilize troubled portfolio companies.

The FSK facility was funded by a syndicate of banks led by JPMorgan as administrative agent, a role that typically includes coordinating lender communications and amendment negotiations. ING Capital served as collateral agent, while the other participating lenders were not named in the filing.

JPMorgan, the largest U.S. bank by assets, has made broader moves to insulate itself from private credit turmoil, in part by marking down the value of private credit loans held as collateral on its own books, CNBC reported in March. Many of those marked-down loans are to software companies facing possible disruption from artificial intelligence.

Executives also said Monday that FSK would sharply reduce new investments, focus on supporting existing portfolio companies and work toward a smaller, less leveraged balance sheet while repurchasing shares.

Besides the $300 million that KKR is spending to support FSK, the fund’s board also authorized a separate $300 million share repurchase program, and KKR agreed to waive half its incentive fees for four quarters.

FSK, which lends to private, middle-market U.S. companies, became the second-largest publicly traded business development company, or BDC, when it was formed through a merger of two predecessor funds in 2018.

The fund’s largest single category of loans is for software and related services, which made up 16.4% of exposure at year-end.

FSK’s troubles have added fuel to a debate about whether the rapid growth of private credit poses systemic risks. Prominent investors including DoubleLine Capital CEO Jeffrey Gundlach have warned that private credit could cause the next financial crisis, drawing comparisons to the mortgage-backed securities market before the 2008 collapse.

The private credit industry has pushed back against those comparisons, arguing that losses are dispersed across investors rather than concentrated inside the banking system.

“Private credit industry regulators have consistently found that the industry is conservatively capitalized and structurally designed to mitigate, rather than transmit, risk to the financial system,” said Will Dunham, CEO of the American Investment Council, an industry trade group that represents private equity and private credit firms.

“The private credit system is working as designed,” Dunham said.