Resulting d.ts is invalid TS code: T_1 generic type argument

[smolijar]

TypeScript Version: 4.0.2 (reproduced in 4.1.0-insiders.20200903 as well)

Search Terms:

template argument, overshadow argument, template argument aliasing

Code

// Any instance type
type Client = string

// Modified instance
type UpdatedClient<C> = C & {foo: number}

export const createClient = <
  D extends
    | (new (...args: any[]) => Client) // accept class
    | Record<string, new (...args: any[]) => Client> // or map of classes
>(
  clientDef: D
): D extends new (...args: any[]) => infer C
  ? UpdatedClient<C> // return instance
  : {
      [K in keyof D]: D[K] extends new (...args: any[]) => infer C // or map of instances respectively
        ? UpdatedClient<C>
        : never
    } => {
  return null as any
}

This is the simplest MWE I could find. Strangely enough, using a generic type instead of function does not cause the error.

Expected behavior:
I expect to find this type in the resulting *.d.ts to be a valid TS code and the type of the object type branch in return to be:

{ [K in keyof D]: D[K] extends new (...args: any[]) => infer C ? UpdatedClient<C> : never; }

Actual behavior:
*.d.ts is not a valid TS code according to the same version of TS. There is this new C_1 which is a reference error.

{ [K in keyof D]: D[K] extends new (...args: any[]) => infer C ? UpdatedClient<C_1> : never; }

'C' is declared but its value is never read.
Cannot find name 'C_1'.

I think TS is probably trying to avoid C, since it assumes it's already reserved from if branch in the ternary type. Using different label does not produce the issue.

Playground Link: link

Related Issues: Maybe #40302 and #36311