Diameter Capital Makes Bold Move on FS KKR Capital Amidst Market Slump

Diameter Capital Partners just dropped over $33 million on FS KKR Capital Corp., betting big on a high-yield lender that’s lost half its value in the past year. The fund’s new stake comes as FS KKR’s shares have plummeted but still pay a hefty dividend.

Picking Up Stakes in a Troubled Asset

Diameter Capital reported a fresh buy of 2,272,393 shares in FS KKR Capital Corp. During the fourth quarter, according to an SEC filing made public on February 17, 2026. The investment totalled about $33.65 million, marking a big addition to the fund’s portfolio.

FS KKR Capital’s shares had slid roughly 51% over the last year, a steep drop that contrasts sharply with the broader market. The S&P 500, by comparison, gained about 16% during the same stretch.

Still, FS KKR Capital offers a juicy dividend yield near 25%, paying nearly 50 cents quarterly. That payout has helped keep some investors interested, despite the stock’s decline and the firm’s recent earnings challenges.

What FS KKR Capital Does

The company works as a business development company focused on lending to private middle market businesses in the U.S. It structures credit solutions mainly by senior secured and subordinated loans. Often, it also picks up equity stakes in the companies it finances.

Its target borrowers have annual revenues between $10 million and $2.5 billion and EBITDA generally ranging from $50 million to $100 million. The firm generates most of its revenue from interest on these debt investments, with some upside from equity and opportunistic bond investments.

Last twelve months revenue hit $113 million, with net income coming in at $11 million. Yet, earnings recently swung negative, and the net asset value dropped to $20.89 per share, creating a wide gap with the current share price just under $10.

Diameter’s Strategy and Market Signal

Diameter Capital has shown a pattern in its portfolio by adding FS KKR Capital. The fund holds concentrated stakes in companies like EchoStar and Telephone and Data Systems—names tied closely to credit quality and capital structure plays.

Diameter’s big investment in FS KKR suggests they believe the stock is undervalued. Even as FS KKR faces pressure, the dividend remains covered by its net investment income, which stood at $0.48 per share last quarter.

This indicates the fund values the yield and expects the market might bounce back from the stock’s drop. It’s a bet on private credit—a sector currently out of favor but possibly poised for a rebound.

Risks and Rewards

Investing in private credit like FS KKR involves risks related to credit quality and the economy. The firm’s earnings dip and declining NAV raise questions about near-term stability.

But the high dividend yield offers some cushion. If FS KKR can stabilize its earnings and close the NAV-to-price gap, investors like Diameter could benefit handsomely.

At the same time, the sector remains sensitive to interest rates and corporate defaults, factors that could keep pressure on FS KKR’s stock.

By investing millions now, Diameter is betting on long-term gains despite short-term ups and downs.

Even though FS KKR’s stock has taken a hit, Diameter’s $33 million investment suggests they see it as undervalued. Whether that gamble pays off depends on the lender’s ability to steady earnings and close the gap between market price and net asset value.