KBRA Downgrades Ratings for FS KKR Capital Corp.

KBRA downgrades the issuer and senior unsecured debt ratings to BBB- from BBB for FS KKR Capital Corp. (NYSE: FSK) (“the company”). The Outlook for the ratings is Stable.

Key Credit Considerations

The rating downgrade reflects a sustained deterioration in FSK’s credit profile, driven by recently elevated realized and unrealized losses and a material increase in non-accrual investments, pressuring net asset value (NAV) and increasing regulatory leverage above the company’s target of 1.0x-1.25x. Total realized and unrealized losses were approximately $624 million in 2025 due to portfolio company credit deterioration, particularly those loans underwritten in a low interest rate environment pre-2022. Increased marks from credit spread widening and continued pressure on portfolio credit quality could further impact credit metrics.

Asset quality has weakened, as evidenced by an increase in non-accrual investments and negative credit migration across the portfolio. Non-accruals increased to 5.5% of total investments at cost and 3.4% at fair value at year-end 2025. Losses have been largely attributable to several concentrated underperforming investments. In addition, a growing proportion of investments have been trading below par and PIK income is elevated—approximately 15% of total investment income in 2025.

Leverage remains elevated, both on a reported basis and on a look-through basis when incorporating joint venture (JV) exposures. While the JV is mostly comprised of non-U.S. first lien senior secured debt and maintains moderate leverage of 1.22x, FSK’s investment at ~15% of total investments remains high.

The ratings are supported by FSK’s affiliation with KKR & Co.’s approximately $700 billion platform, including its large and established $254 billion AUM credit business, which provides significant benefits in sourcing, underwriting, restructuring capabilities, and capital markets access. FSK also maintains a diversified funding profile, including unsecured debt, bank facilities, and CLOs, with a meaningful proportion of unsecured funding that enhances financial flexibility. As of December 31, 2025, FSK had solid liquidity, including ~$3.3 billion in available bank lines and $208 million in cash, offset by $1.9 billion in unsecured debt maturing within two years.

Offsetting these strengths, FSK maintains a relatively high proportion of non-qualifying investments (29.4%), including equity positions, joint venture exposure, and investments in non-U.S. and public companies, which introduce additional complexity and potential volatility relative to more traditional senior secured lending strategies. Additional counterbalancing considerations are structural risk inherent in the BDC business model, including exposure to illiquid investments, constraints on retained earnings due to RIC status, and sensitivity to macroeconomic conditions.

Rating Sensitivities

The ratings are unlikely to be upgraded in the intermediate term. An Outlook revision to Negative or a ratings downgrade could occur if macroeconomic conditions weaken significantly, resulting in greater than expected pressure on earnings, asset quality, and leverage, including sustained increases in leverage that pressure asset coverage, or a meaningful rise in non-accruals relative to peers.

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Methodologies