By Ben Glickman

One lending blowup is showing how America's banks helped fuel the private-credit boom, and what could happen in its unraveling.

Traditional lenders, which have been losing market share to investment firms that make riskier loans in exchange for higher interest rates, have touted their efforts to get a slice of Wall Street's newest action. But the details of the exposure are murky, and investors have grown skittish about banks' connections to private credit this year.

A dispute between Southwest bank Western Alliance and investment bank Jefferies Financial Group that spilled into the open this month gives fresh clues to how banks are tied to the type of nonbank lending known as private credit and how messy it might be if trouble gets worse.

Western Alliance sued for breach of contract and alleged a Jefferies subsidiary didn't pay back part of a loan connected to now-bankrupt auto-parts supplier First Brands Group, one of the companies that helped set off a wave of concerns. Western Alliance said it would charge off $126.4 million on the loan, out of the $337 million initially borrowed.

Western Alliance alleged Jefferies and its asset-management subsidiary had knowledge of First Brands' issues, because it had done its own due diligence on the company, but its subsidiary still proceeded with a new lending agreement with the bank. The suit argues that Jefferies is liable for repaying the debts.

Jefferies said that it believes the lawsuit is without merit and that Jefferies has no obligation to repay the loan. In a public letter, executives said the claim that Jefferies couldn't pay back its debt was "false and absurd."

Banks have piled more money into backing the industry in the past year, and analysts say that the industry had exposure to private credit of nearly $300 billion as of last year.

That backing can take a number of shapes, including lending directly to funds, to specific investments or to limited partners in the funds.

Bank stocks have been hammered in recent weeks on investor concerns over the exposure, alongside fears that the war in the Middle East could dent economic growth and reignite steeper inflation. The Nasdaq KBW Bank index is down nearly 10% from the beginning of 2026, compared with a 2% drop in the S&P 500.

"The concerns are because it's such a black box," said Bobby Reddy, a professor of corporate law and governance at the University of Cambridge.

At the heart of the Western Alliance and Jefferies fight is a common setup. Western Alliance had a loan to an entity Jefferies created to fund First Brands known as a special-purpose vehicle, or SPV. The SPV then paid the auto-parts retailer to acquire its expected payments, a type of lending known as factoring, court filings show. When First Brands' customers pay the bills, the money is sent to the SPV.

First Brands collapsed under its borrowing, which lenders now allege included the company double-pledging such account receivables.

Western Alliance says Jefferies is supposed to pay it back because it fully controlled and was effectively the same as the SPV. Jefferies says it isn't liable itself and is protected by the SPV.

Western Alliance and Jefferies shares have fallen nearly 16% and 17%, respectively, since the lawsuit was filed March 6.

Special-purpose vehicles are supposed to allow banks to easily see what is backing the loan and calculate the risk, as opposed to underwriting a whole company or fund. They also are seen as less risky by regulators who generally require banks to hold less capital against an SPV loan than, say, a loan directly to First Brands.

Now investors and analysts are watching the Western Alliance fight to see how protected banks and private lenders seem to be with this common setup.

"Banks are at the center of this system even when they appear not to be, " said Patrick Corrigan, a law professor at the University of Notre Dame. "And SPVs are the legal architecture that make all of this work."

Write to Ben Glickman at ben.glickman@wsj.com

(END) Dow Jones Newswires

March 16, 2026 22:00 ET (02:00 GMT)

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