On Monday, Wells Fargo (NYSE:WFC) adjusted its stance on FS KKR Group (NYSE:FSK), downgrading the stock from Overweight to Equal Weight and setting a price target of $21.00. The decision comes after observing a narrowing of the discount FSK's stock has in comparison to the broader Business Development Company (BDC) industry.
The downgrade was influenced by the stock's reduced upside potential, now trading at 0.93 times its net asset value (NAV). This shift in valuation follows an earlier upgrade on May 29, 2024, which was based on FSK's significant discount relative to its peers. The Wells Fargo analyst noted that the likelihood of increased earnings may be limited as FSK transitions into assets with lower yield spreads.
The analyst also raised concerns about credit risks associated with FSK's loan portfolio. Approximately $448 million of FSK's loans are marked below 90% yet are still accruing interest. A significant portion of these loans, nearly 40%, are attributed to 48Forty, a company specializing in pallet sales and management, which has seen its valuation mark decrease from about 93% to 87%.
The current downturn in the logistics market, highlighted by new defaults and non-accruals within the industry such as those from SEKO and Convoy, could place additional pressure on 48Forty and, by extension, on FSK.
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