When a $12 billion fund loses almost 10% of its value in three months, the people running it usually have to do something. KKR just did.
The private credit giant is putting $300 million into FS KKR Capital, a public fund it co-manages, to stop the bleeding.
Half goes into preferred equity. The other half buys back common shares at $11 each.
FS KKR Capital, ticker FSK, is a business development company, or BDC. Think of it as a public lender that makes loans to mid-sized firms.
Net asset value fell 9.9% in Q1 to $18.83 per share. Non-accrual loans - loans that stopped paying interest - jumped to 4.2% of the fund from 3.4% three months earlier.
Moody's then cut the credit rating to junk in March. That deepened the pressure.
The stock closed last Friday at $10.84. That's well below its $18.83 book value, and one of the deepest discounts of any public BDC.
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KKR isn't just writing a check. The $150 million in preferred equity pays a 5% cash dividend, or 7% if held as more preferred stock.
After three years, that preferred stock converts to common shares at $18.83. That's the same level book value sits at today.
KKR also waived its share of incentive fees for four quarters. That move lifts income for stock holders.
Separately, FSK's board OK'd a $300 million share buyback that runs about a year.
CEO Michael Forman and CIO Daniel Pietrzak said the current stock price doesn't reflect the long-term value of FSK's holdings.
Private credit funds have been under pressure all year. Investors are worried about loose loan vetting, weak loan quality, and heavy bets on software firms at risk from AI.
KKR's move could become a template for managers whose funds get too distressed. Rival Apollo took a different path. It's now seen as an early winner in this cycle.
The dividend cut at FSK tells you how serious it is. The quarterly payout dropped to 42 cents from 48 cents in the same news release.
FSK isn't the only BDC trading below book value. Several peers have come under pressure as private credit slips.
If KKR's move stabilizes the price, it could become a playbook for others. If it doesn't, more dividend cuts could be on the way.
The biggest public BDCs by size include Ares Capital, FS KKR, and Blue Owl Capital. They all have heavy bets on private credit.
The tender offer opens May 12 and runs for 20 business days. If shares trade above $18.83 in three years, the preferred equity converts to common stock.
The real test is what happens to non-accruals next quarter. If they keep climbing, the $300 million won't be enough.
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