Moody’s Ratings on Monday downgraded a private credit fund run by KKR and Future Standard to junk amid rising bad loans and a string of weak earnings.

The ratings firm lowered the debt ratings of FS KKR Capital Corp by one notch to Ba1 from Baa3 — pushing it into “junk” territory — saying that the fund’s underlying asset quality had worsened more than its peers.

Non-accrual loans, meaning borrowers who have stopped making payments, rose to 5.5% of total investments at the end of 2025, one of the highest rates among rated BDCs, according to the report.

“The downgrade reflects FSK’s continued asset quality challenges, which have resulted in weaker profitability and greater net asset value erosion over time relative to business development company (BDC) peers,” Moody’s said.

The move by Moody’s is the latest sign of distress in the private credit world. Retail investors have been rushing to withdraw funds, running into gates amid concerns about upcoming credit losses, especially related to software loans. Funds like FS KKR issue debt to help juice returns, so the Moody’s downgrade could increase its borrowing costs and, therefore, lower future returns.

Moody’s also flagged other aspects of the fund that could expose it to greater losses over time, including higher leverage, a higher proportion of payment-in-kind loans, and a lower percentage of first-lien loans than peers.

FS KKR posted a net loss of $114 million in the fourth quarter alone and earned just $11 million in net income for all of 2025, according to Moody’s.

The fund didn’t immediately return a request for comment.