FS KKR Is Selling $400 Million Bonds in Junk-Rated BDC Deal

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(Bloomberg) — A private credit fund jointly managed by Future Standard and KKR & Co. is looking to sell at least $400 million of junk bonds, according to people familiar with the matter, in a rare high-yield offering by a publicly traded credit fund.

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The FS KKR Capital Corp. notes may yield about 7.5%, one of the people said, asking not to be identified because the discussions are private. That’s at the lower end of initial price talk in the mid- to high-7% range, and comes after the deal attracted $1.5 billion of demand, the people said.

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Proceeds from the bonds may be used to refinance debt, one of the people said.

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FS KKR, a type of private credit fund known as a business development company, has suffered after writing down struggling loans it made. It cut its dividend twice in the last year. In March, Moody’s Ratings cut the BDC to junk, and in April, Fitch followed suit. In May, KKR said it was injecting $300 million into the BDC, buying preferred equity and tendering for $150 million of the firm’s shares.  

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The bond sale is being run by Bank of America Corp., Bank of Montreal, JPMorgan Chase & Co., KKR Capital Markets LLC, Royal Bank of Canada and SMBC Nikko Securities Inc.

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A representative for KKR declined to comment, while spokespeople for the banks either declined or didn’t respond to requests for comment. 

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“Ultimately, we’d like to see the company execute on the turnaround, but the pricing gives investors a reasonable margin of safety while that plays out,” said Michael O’Brien, investment analyst at Hilton Capital Management. 

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BDCs have raised more than $14 billion in the debt markets this year, as private credit managers from Blackstone Inc. to Goldman Sachs Group Inc. tapped investors. Some of the latest bond sales from these private credit funds have found strong demand, enabling them to borrow more than they had initially planned.

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Most strikingly, a Blue Owl Capital Inc. private credit fund sold a $400 million investment-grade bond in May, a month after bond giant Pacific Investment Management Co. snapped up an entire $400 million issue, helping ease concerns about access to capital.

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“Institutional investors have done their homework on BDCs and are comfortable with their long-term viability,” said David Havens, an analyst at Bloomberg Intelligence, in a note on Monday. “Since the market reopened to BDCs in April, bond issuance has topped $5.5 billion.” 

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(Updates price talk, adds peak demand and context.)

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