diff --git a/changelog/66927.fixed.md b/changelog/66927.fixed.md
new file mode 100644
index 000000000000..f3295b6357ef
--- /dev/null
+++ b/changelog/66927.fixed.md
@@ -0,0 +1 @@
+Prevent `KeyError` raised by module `__virtual__()` during loader initialization from being logged as an error; log it at debug level instead.
diff --git a/salt/loader/lazy.py b/salt/loader/lazy.py
index 677371f6734a..7820c16e191f 100644
--- a/salt/loader/lazy.py
+++ b/salt/loader/lazy.py
@@ -1281,6 +1281,15 @@ def _process_virtual(self, mod, module_name, virtual_func="__virtual__"):
                             end, module_name
                         )
                         log.warning(msg)
+
+                except KeyError as exc:
+                    error_reason = (
+                        "Missing loader context while processing __virtual__ "
+                        "for {}: {}".format(mod.__name__, exc)
+                    )
+                    log.debug(error_reason, exc_info=exc)
+                    virtual = None
+
                 except Exception as exc:  # pylint: disable=broad-except
                     error_reason = (
                         "Exception raised when processing __virtual__ function"
diff --git a/tests/unit/test_loader.py b/tests/unit/test_loader.py
index b7266c59effe..6a65a04019e6 100644
--- a/tests/unit/test_loader.py
+++ b/tests/unit/test_loader.py
@@ -28,6 +28,7 @@
 from tests.support.mock import MagicMock, patch
 from tests.support.runtests import RUNTIME_VARS
 from tests.support.unit import TestCase
+from tests.support.helpers import dedent
 
 log = logging.getLogger(__name__)
 
@@ -1794,3 +1795,83 @@ def test_lazyloader_pyx_modules(self):
         loader = self.__init_loader()
         assert ".pyx" not in loader.suffix_map
         assert ".pyx" not in loader.suffix_order
+
+
+class LazyLoaderVirtualExceptionLoggingTest(TestCase):
+    """
+    Ensure _process_virtual logs KeyError as debug and other exceptions as error.
+    """
+
+    def setUp(self):
+        self.opts = salt.config.minion_config(None)
+        self.opts["grains"] = salt.loader.grains(self.opts)
+
+        self.utils = salt.loader.utils(copy.deepcopy(self.opts))
+        self.proxy = salt.loader.proxy(self.opts)
+        self.funcs = salt.loader.minion_mods(
+            self.opts, utils=self.utils, proxy=self.proxy
+        )
+
+        self.module_dir = tempfile.mkdtemp(dir=RUNTIME_VARS.TMP)
+        self.addCleanup(shutil.rmtree, self.module_dir, ignore_errors=True)
+
+    def _make_loader(self, module_code):
+        path = os.path.join(self.module_dir, "badmod.py")
+
+        with salt.utils.files.fopen(path, "w") as fh:
+            fh.write(salt.utils.stringutils.to_str(module_code))
+
+        return salt.loader.LazyLoader(
+            [self.module_dir],
+            copy.deepcopy(self.opts),
+            pack={
+                "__utils__": self.utils,
+                "__salt__": self.funcs,
+                "__proxy__": self.proxy,
+            },
+            tag="module",
+        )
+
+    def test_keyerror_is_debug_not_error(self):
+        module = dedent(
+                """
+            def __virtual__():
+                raise KeyError("boom")
+
+            def run():
+                return True
+            """
+        )
+
+        loader = self._make_loader(module)
+
+        with patch.object(salt.loader.lazy.log, "error") as mock_error, patch.object(
+            salt.loader.lazy.log, "debug"
+        ) as mock_debug:
+
+            _ = "badmod.run" in loader
+
+            mock_error.assert_not_called()
+            self.assertTrue(mock_debug.called)
+
+    def test_other_exception_is_error(self):
+        module = dedent(
+                """
+            def __virtual__():
+                raise ValueError("boom")
+
+            def run():
+                return True
+            """
+        )
+
+        loader = self._make_loader(module)
+
+        with patch.object(salt.loader.lazy.log, "error") as mock_error, patch.object(
+            salt.loader.lazy.log, "debug"
+        ) as mock_debug:
+
+            _ = "badmod.run" in loader
+
+            mock_error.assert_called()
+            mock_debug.assert_not_called()