Key Takeaways:
A decision by JPMorgan Chase & Co.-led bankers to slash a credit line to FS KKR Capital Corp. by $648 million prompted the fund’s co-manager, KKR & Co., to inject $300 million to shore up the struggling vehicle, signaling deepening stress in the private credit market.
"We are disappointed by our recent performance," FSK President Daniel Pietrzak said on an analyst call Monday, adding that KKR's actions "support our view of a disconnect in the trading price of FSK versus its intrinsic value."
The moves follow a disastrous first quarter for the business development company, which reported a net asset value decline of about 10 percent, equivalent to a $560 million loss, or $2 per share. Loans no longer generating income jumped to 8.1 percent of the portfolio by the end of the first quarter, up from 5.5 percent at year-end. The fund disclosed that loans to software maker Medallia and dental services firm Affordable Care have stopped paying interest.
The dueling actions from the fund’s lenders and its manager highlight the fault lines appearing in the private credit sector. While KKR’s support package is designed to restore confidence, the banks’ decision to simultaneously reduce exposure and give the fund more room to absorb losses indicates they believe the firm's assets have further to fall.
The JPMorgan-led syndicate cut its revolving credit facility by 14 percent to $4.05 billion on May 8, just days before the support package was announced. The amendment also included higher interest rates on the remaining facility and, critically, lowered the minimum shareholders' equity floor from $5.05 billion to $3.75 billion. This covenant change gives FSK more breathing room but suggests lenders are bracing for further deterioration in the fund’s asset values.
In March, Moody's had already downgraded FSK's credit rating to junk, citing mounting stress in its portfolio, which has a 16.4 percent exposure to software and related services.
In response to the fund's performance and the lenders' actions, KKR is providing a multi-pronged support package. The asset manager will invest $150 million in preferred equity and launch a tender offer for another $150 million of common shares at $11 apiece.
Furthermore, KKR agreed to waive half of its incentive fees for the next four quarters. The fund’s board also authorized a separate $300 million share repurchase program. Executives said FSK would sharply curtail new investments to focus on stabilizing its existing portfolio and move toward a smaller, less leveraged balance sheet.
This article is for informational purposes only and does not constitute investment advice.
