KBRA Affirms Ratings for FS KKR Capital Corp.

KBRA affirms the issuer and senior unsecured debt ratings of BBB for FS KKR Capital Corp. (NYSE: FSK or “the company”). The Outlook for the ratings is Stable.

Key Credit Considerations

The ratings and Stable Outlook are supported by FSK’s affiliation with KKR & Co.’s (“KKR”) $664 billion AUM investment platform, including its $254 billion credit platform (“KKR Credit”). This affiliation provides FSK with SEC exemptive relief to co-invest alongside other KKR Credit-affiliated entities. In addition, the platform offers substantial resources, including research, sourcing, underwriting, and restructuring expertise. As the third largest publicly traded business development company (BDC), FSK maintains a well-diversified investment portfolio totaling $14.1 billion at fair value, with a median portfolio company EBITDA of $120 million. As of March 31, 2025, the portfolio comprised 224 companies across 22 sectors, excluding the joint venture. The investments include first-lien senior secured loans (58%) and first-priority asset-based finance (ABF) loans (15%) to upper-middle-market companies. The top three sector exposures, excluding the joint venture, are Software & Services (18%), Capital Goods (14%), and Commercial & Professional Services (14%).

Further supporting the ratings is FSK’s highly diversified funding mix which includes secured bank facilities, unsecured senior debt, and CLOs which is enhanced by the scale and connectivity of the KKR Credit platform allowing for broad access to the capital markets. As of March 31, 2025, the company had $2.6 billion in available bank lines and $472 million in cash (including foreign currency), offset by $1.4 billion in unsecured debt maturities over the next two years and $2.6 billion in unfunded commitments. Most of the unfunded commitments are subject to performance tests and/or adviser approval. Unsecured debt represented approximately 54% of total debt, supporting financial flexibility and offering meaningful unencumbered assets for unsecured noteholders. FSK’s gross and net leverage ratios as of March 31, 2025, were 1.22x and 1.14x, respectively, within the company’s target net leverage range of 1.0x to 1.25x. The asset coverage ratio stood at 182%, providing a 21% cushion above the 150% regulatory minimum and offering additional capacity to absorb market volatility.

Credit strengths are counterbalanced by FSK’s elevated proportion (29.2%) of non-qualifying investments, which includes equity, a joint venture, and positions in non-U.S. portfolio companies and U.S. public companies. However, the company’s joint venture accounts for approximately 12% of total investments and is primarily composed of first-lien senior secured loans to upper-middle-market companies located outside the U.S. with low non-accruals. Leverage at the joint venture is consistent with FSK’s, at 1.15x gross and 0.99x net. FSK’s non-accrual levels have historically been higher than those of peers, although recent restructurings and exits have led to improvements. As of March 31, 2025, nine portfolio companies were on non-accrual, representing 3.5% of total investments at cost and 2.1% at fair value. Further counterbalancing the strengths are the potential risks related to FSK’s illiquid assets, retained earnings constraints as a regulated investment company (RIC), and uncertain economic environment with high base rates, inflation, and geopolitical risks that could lead to higher non-accruals.

FSK is an externally managed, closed-end, non-diversified investment management company that elected to be treated as a Business Development Company (BDC) under the 1940 Act and as a RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment taxable income. The company was formed as a Maryland corporation. The company is managed by FS/KKR Advisor, LLC, a partnership of FS Investments and KKR Credit that was formed in 2018. The KKR Credit platform is a subsidiary of KKR & Co.

Rating Sensitivities

The ratings are unlikely to be upgraded in the intermediate term. A rating downgrade and/or Outlook change to Negative could be considered if a prolonged downturn in the U.S. economy has material impacts on performance and non-accruals that significantly affect capital, leverage, and liquidity metrics. An increased focus on riskier investments or a significant change in the current management structure coupled with a negative change in strategy, credit monitoring, and/or originations could also pressure ratings.

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