The bankruptcy of US auto supplier First Brands has set off alarm bells. When the company recently filed for Chapter 11 bankruptcy protection, it wasn’t even able to specify the size of its liabilities – most of which stem from debt-financed acquisitions. The amount is thought to be somewhere between 10 billion and 50 billion dollars, with part of it hidden off balance sheet. Several Wall Street lenders and hedge funds, including investment bank Jefferies, have been hit by the default on loans backed by supplier invoices.

This raises the question of whether private credit could become a major transmission channel for systemic shocks in a future financial crisis. The risk is clearly there. The global private debt market has expanded rapidly and is expected to reach 1.7 trillion dollars in 2025, according to rating agency Fitch. In Europe, leveraged finance markets – which provide funding to companies rated below investment grade – are set to hit a record 300 billion euros this year, a significant share of which comes from private credit funds. Spreads are at record lows, and billions are being handed out to refinance weak borrowers with little caution. Although private credit funds generally have only moderate leverage, that’s hardly a reason for comfort.

A wave of defaults would reverberate across the entire financial system. Sovereign wealth funds, foundations and even retail investors would be among the hardest hit, according to Fitch. Deregulation has opened the field to insurers as well. Private debt funds do often top up their investors’ equity with bank borrowings – making the web increasingly opaque. It’s high time for a stress test of the nonbank sector, and preparations for such an exercise should be accelerated. If defaults rise and everyone rushes for the exit at once, the bottlenecks could prove painful. The situation evokes grim memories of 2008: back then, no one knew where the biggest risks from recklessly granted US mortgage loans were hidden – bundled into massive pools, sliced into small tranches, and sold around the world with attractive ratings.