A major private credit fund jointly managed by Future Standard and KKR & Co. has lost its investment-grade rating, a rare occurrence within the $1.8 trillion private credit market. This development could lead to increased borrowing costs for the $14 billion investment vehicle. In a statement released on Monday, Moody's downgraded FS KKR Capital Corp. (FSK) to Ba1, a junk-level rating, citing "ongoing asset quality challenges" that have impaired its profitability and the relative value of its investment portfolio compared to peers. The fund's non-accrual rate, which measures the proportion of non-performing loans, rose to 5.5% of total investments by the end of last year, ranking among the highest in its category. The fund has also expressed concern over other investments that, while not classified as defaulted loans, have suffered significant impairment, including a loan provided to the software company Medallia Inc. A spokesperson for the fund stated in an email, "Despite this decision, FSK remains in a solid position. FSK possesses a robust and laddered liability structure, with no unsecured debt maturing before 2026 and limited near-term maturities, enabling us to continue supporting our portfolio companies and navigating the current market environment." Funds operating as Business Development Companies, like FSK, typically issue their own bonds to enhance returns. They aim to maintain investment-grade ratings on their bonds to attract a broader investor base and secure lower borrowing costs compared to junk-rated borrowers. In its assessment, Moody's also noted that FSK's proportion of payment-in-kind income is higher than that of its peers, describing this as a sign of "weaker earnings quality." Payment-in-kind terms allow borrowers to pay interest by increasing their debt burden. However, the ratings agency indicated that, from a liquidity perspective, the fund is "well-positioned," with approximately $2.5 billion available after repaying $1 billion in notes earlier this year.