Overview
Reprinted with permission from Law360.
Recent reporting has spotlighted growing stress in private credit markets, with many publicly traded funds reporting year-over-year lower returns. According to a Reuters calculation, so far in 2026, publicly listed private credit firms have lost a combined $132 billion in market value, some of them even capping the amount that investors can withdraw from the funds. [1]
Although this may seem to affect primarily money center banks, any bank that has extended warehouse lines of credit to nonbank lenders could be affected by deterioration in these markets.
As a result, all banks may have more potential exposure than anticipated. Accordingly, now is the right time to assess that exposure, evaluate loan documents and manage credit risk.
What Is Private Credit, and Why Is It Struggling?
Private credit refers to loans made by investment funds and similar types of entities, rather than traditional banks, directly to businesses, often to smaller or midsized companies that are unable to access public bond markets or the traditional leveraged loan market.
The private credit industry grew rapidly in the last decade primarily because post-2008 banking laws and regulations have made it harder for traditional banks to serve these borrowers, and a decade of low interest rates pushed investors to seek higher yields.
Also, the turmoil in the regional banking markets in 2023 following several highly publicized bank failures further widened the market share held by private credit funds.
Private credit funds filled both needs. Many banks supported this growth by providing warehouse lines of credit to private credit funds.
Warehouse lines essentially provide funding to private lenders, enabling them to originate loans that banks face regulatory or structural constraints in making directly. Banks are able to do so because they are not directly underwriting each loan but rather are making a lending decision based on the portfolio's overall criteria.
As interest rates rise, we have seen that many borrowers of these funds are struggling to make payments. In particular, many private credit funds increasingly concentrated their lending in software companies, which are now grappling with the impact of artificial intelligence and the concern that it may render the company or their products obsolete.
We have seen this concern reach individual investors in private credit firms, many of which have requested the return of their capital.
To counter the appearance of a high level of defaults, we have seen that some funds areextending payment due dates or deferring interest rather than recognizing losses. As a result, the credit lines backing these funds may not be as solid as they appear, and that risk can flow back to the bank.
If the ultimate borrower is not capable of making payments under its agreement with a private credit fund, the fund itself is limited in its ability to manage the payments owed to a traditional bank pursuant to the warehouse line.
Why Warehouse Lines of Credit Are in the Crosshairs
Banks that have extended warehouse lines should be aware of the following risks.
Collateral value may decline. A warehouse line is secured by loans that the nonbank lender is making. If those loans are deteriorating, the collateral protecting the bank's advance may be worth less than it appears.
Even if the collateral maintains its value, it will be burdensome from a procedural perspective for the bank to foreclose on the collateral, and it will then be left to manage a borrower with whom it has no significant, long-term relationship.
Additionally, banks may not have real-time access to value the collateral, unlike in a traditional direct lending relationship.
The borrower may not be able to repay. If the nonbank lender hits a funding wall — meaning it is unable to sell or refinance the loans it has made — it may not be able to pay down the warehouse line, leaving the bank with a drawn, illiquid credit.
Traditional banks will be left to seek other means of recouping their loss from private credit funds, which may not have other assets of any significant value.
Loan agreements may have gaps. Many warehouse agreements were written during a more optimistic economic environment. The covenants and safeguards in those contracts may not be strong enough to protect the bank in a changed economic scenario.
Although the bank may have little leverage to alter the agreements, a thorough review of these materials will ensure that the bank understands its protections and is prepared in the event of a default.
Recommended Actions for Banks
Banks should prioritize the following steps.
Conduct a full inventory of warehouse line exposure. Identify all existing warehouse and credit facilities extended to nonbank lenders, fintech originators or entities adjacent to private credit.
Quantify outstanding balances, advance rates and collateral types. To the extent possible, it would be helpful for banks to get a sense of the clients of the private credit funds — are these entities likely to suffer in a depressed economic scenario? Are their primary revenue-producing activities likely to be affected by changes in the current economic environment?
Stress-test underlying collateral pools. Request updated and more frequent borrowing base certificates, if possible under the loan documents, and conduct independent collateral reviews. Banks should not rely solely on sponsor-provided marks for private credit collateral.
Review loan documents and covenant structures. It is a good practice to periodically revisit the underlying legal agreements governing warehouse lines, including covenant packages, borrowing base provisions and reporting requirements, to confirm that they remain current and provide adequate protection.
If significant time has passed since these documents were reviewed, now is a reasonable time to reexamine them.
Engage proactively with regulators. Anticipate examiner scrutiny of nonbank and private credit exposures. Banks should prepare clear documentation of their risk management framework, credit approval rationale, and process, bank policies, and ongoing monitoring protocols.
Looking Ahead
This is not necessarily a crisis, but it is a moment to engage in meaningful risk management. Banks are encouraged to place this item on the agenda at their next asset-liability committee or board risk committee meetings.
[1] Reuters, "U.S. asset manager shares drop after Blue Owl limits withdrawals in two funds," Apr. 2, 2026, available at https://www.reuters.com/business/us-asset-manager-shares-drop-after-blue-owl-limits-withdrawals-two-funds-2026-04-02/.
About the Lawyers
Stanley F. Orszula is a partner in Barack Ferrazzano's Financial Institutions Group. Clients rely on Stan for strategic counsel on Banking-as-a-Service (BaaS), fintech partnerships, digital assets, bank regulatory and compliance matters, and distressed loans and assets. Drawing on his prior experience as counsel at the FDIC, Stan advises banks through every stage of their BaaS programs: from initial board strategy through partner identification, due diligence, contract negotiation, regulatory approval, and exit planning. He has helped banks across the country launch credit, debit and prepaid cards, payment processing, real-time payments, commercial and consumer loans, and investment products.
Michael Tomczyk is a partner in Barack Ferrazzano's Financial Institutions Group. Clients seek out Michael for his deep expertise in debt financing, with experience representing both lenders and borrowers across senior secured and unsecured term loans, working capital revolvers, second lien and mezzanine financings, acquisition financings, and in-court and out-of-court restructurings. He regularly advises clients on optimizing their capital structures and has extensive experience managing cross-border financings involving multiple jurisdictions.
Camryn C. Dreyer is an associate in Barack Ferrazzano's Financial Institutions Group. Camryn advises clients on a wide range of banking and payments matters, including capital raising, mergers and acquisitions, and securities law as they apply to financial institutions. She also assists creditors with loan restructuring and modifications in distressed borrower situations, helping clients protect their interests while navigating complex regulatory frameworks.
