FSCO: Big Downside Risk And Almost Certain Yield Cut (Downgrade)

2025-10-11 09:15:00 ET

In July this year, I published my first article on FS Credit Opportunities Fund (FSCO). The thesis was bullish and based on conservative leverage, a high-quality portfolio, and a very competitive yield (again, despite the immaterial debt component). And by competitive, I mean FSCO's yield versus a typical level that we can lock in from BDC ( BIZD ) investments. At the moment when I issued the previous article, FSCO offered a yield of ~11.3%, which was almost exactly in line with the BDC sector average. You can find more details in the article about the reasons why FSCO is actually quite similar to BDCs, but the main ones are: 1) exposure to private credit loans, 2) mostly senior secured first-lien loans, 3) relatively modest exposure to equity-like products, and 4) presence of external leverage, which is important to magnify the positive spread effect from high-yielding investments and less expensive cost of capital....

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