(Bloomberg) -- Prospect Capital Corp. received its second downgrade in as many weeks, as Moody’s Ratings lowered its assessment of the $7.6 billion private credit fund to Ba1, or one step into junk territory.

Moody’s attributed its action to a deterioration in Prospect’s asset quality, which it said led to weaker earnings, higher investment losses, an increase in payment-in-kind income as well as deterioration of the fund’s cushion above an asset-to-debt metric.

While Prospect has “announced measures to improve investment composition by increasing its senior secured credit mix and ease demands on liquidity, we expect that it will take time for the company’s financial condition to stabilize,” Moody’s said in a note. “In the meantime its performance will likely be weaker than many peers.”

Moody’s decision, which follows a similar action by S&P Global Ratings earlier this month, means the fund now is in junk territory according to both of its main credit graders, which could complicate its efforts to raise fresh financing. 

Prospect has faced increased scrutiny in recent months over its frequent use of PIK arrangements, which allow borrowers to defer interest payments, its relationship with a real estate investment trust it fully controls and its reliance on retail investors for funding. Last month, the fund cut the dividend it distributes to investors for the first time in seven years.

Prospect has publicly defended its 20-year track record, stressing that it has access to diversified sources of funding and that it sees PIK arrangements as appropriate for some borrowers.

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