(Bloomberg) -- Moody’s Ratings this week gave private credit investors greater reason for concern about credit quality in the flourishing $1.7 trillion industry.

The ratings company on Monday reduced its outlook for direct lending funds managed respectively by BlackRock Inc., KKR & Co. alongside FS Investments and Oaktree Capital Management, lowering them to negative from stable. The three publicly traded business development companies, with a combined total of more than $20 billion in assets, each increased the number of loans on non-accrual status, meaning they’re in danger of losing money on those investments.

“We’ve been expecting non-accruals to increase with the jump in interest rates,” said James Morrow, founder and chief executive of Callodine Capital Management, an investor in public BDCs. “Companies will start to fall off the back of the peloton if they were in trouble already.”

While the BDCs retained their Baa3 rating, the lowest rung of investment grade, the change to a negative outlook is the first such move by Moody’s in private credit since 2020. The ratings provider said the three BDCs are managing their liquidity positions well.

Moody’s defines a negative outlook as meaning a company faces the chance of a ratings downgrade in the medium term, commonly seen by market participants as 18 to 24 months. A downgrade would make the funds the only ones in the direct lending industry with a junk rating from Moody’s, potentially increasing the cost at which they can borrow and hurting returns.

For FS KKR Capital Corp. and Oaktree Specialty Lending Corp., the dollar amount of non-accrual loans more than doubled in the fourth quarter, to 6.4% and 4.5% of the portfolio respectively, well outside Moody’s median of about 0.4% for BDC peers at the end of 2023. The FS KKR and Oaktree funds’s shares have dropped since disclosing their deteriorating portfolios in February.

BlackRock TCP Capital Corp. saw a jump in non-accruals to 2.2% from 1.2%, Moody’s said. Its shares have traded down about 9% since the company’s results in February.

Oaktree’s largest non-accrual was a $47 million loan to Thrasio LLC, a seller of goods online, that counts Bain Capital, Blackrock Inc., Goldman Sachs Group Inc., HPS Investment Partners and Monroe Capital among its lenders, according to securities filings.

Thrasio filed for Chapter 11 bankruptcy in February as its sales on Amazon.com slowed and the company began to grapple with rising interest rates. Oaktree moved its loan to non-accrual in December, following similar actions by other lenders. 

Representatives from BlackRock and KKR declined to comment. Oaktree representatives did not comment, while FS Investments didn’t respond to a request for comment. 

Moody’s outlook revisions are the latest warning on how some private credit borrowers, often highly leveraged ones owned by private equity firms, are struggling to make debt payments in a higher interest rate environment. Regulators and investors are bringing more scrutiny to the private arena, where firms typically don’t make public the financial performance of companies in their portfolio.

Read more: Private Credit’s Code of Silence Is Hiding Market’s Flaws

And a problem loan can affect more than just one BDC at any given investment company, as direct lenders often spread the risk throughout several of their portfolios, including private ones.

“The easier part of private credit is lending money, the harder part is getting it back,” said Morrow. “Where a management team differentiates itself is with their ability to manage non-accruals and avoid credit losses.”


  • A $4.2 billion term loan supporting the acquisition of pharmaceuticals manufacturer Catalent Inc. had a margin of 525 basis points over the Secured Overnight Financing Rate
  • Riverside Co. is exploring strategic options including a sale of its direct lending arm, Riverside Credit Solutions
  • PIB Group is in talks with private credit funds to cut borrowing costs on £1.5 billion of loans
  • Bain Capital has agreed to sell UK payroll software company Zellis Group to Apax Partners. The deal values Zellis at about £1.25 billion and will be partly funded with £450 million from private credit funds
  • Bondholders of Vingroup JSC, a major Vietnamese conglomerate whose main businesses include property and electric vehicles, have agreed to roll over half of its $625 million exchangeable bonds
  • Vedanta Ltd. has mandated JPMorgan Chase & Co. to help it raise 25 billion rupees ($300 million) via rupee-denominated bonds. Those investors include global private credit funds
  • Blackstone Inc. led a roughly $2 billion financing package to Park Place Technologies to refinance the company’s debt and to fund a payout to its private equity owners
  • Brookfield Asset Management is in advanced talks to buy a majority stake in private-credit manager Castlelake
  • RevSpring received a $650 million private credit facility associated with Frazier Healthcare Partners acquisition of the software company
  • Blackstone Inc., Goldman Sachs Asset Management, Sixth Street Partners and Singapore’s GIC Pte are leading a syndicate providing a £1.5 billion lending package to Iris Software at some of the cheapest rates seen in private credit
  • Dish Network Corp., the satellite-TV provider saddled with more than $20 billion in debt and losing customers, has received financing offers from private credit firms
  • Orange Bank SA is selling about €1.9 billion of loans as the unit of the French telecoms company pulls out of the financial services business
  • Blue Owl Capital Inc. beat out all other lenders to provide natural gas servicer, Dresser Utility Solutions, a $335 million credit facility as it was able to offer lower pricing


  • AGL Credit Management, the lender that has partnered with Barclays Plc on its push into private credit, launched a business development company
  • Macquarie Group Ltd. has held preliminary talks with potential investors about a new fund focused on infrastructure debt, known as Macquarie Specialised Infrastructure Global Debt Fund, for which it’s targeting more than $1.5 billion

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(Adds that fund representatives declined to comment in 10th paragraph)

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