Letter of Comfort in Australia: 2025 Guide for Businesses

Letters of Comfort are back in the spotlight in 2025 as Australian businesses seek alternative ways to provide assurance in commercial arrangements. With shifting regulatory expectations and a renewed focus on corporate transparency, understanding how these letters work—and their real-world impact—can give your business an edge.

What Is a Letter of Comfort?

A Letter of Comfort is a written statement by a parent company or third party, usually addressed to a lender or creditor, expressing support for the financial obligations of a subsidiary or related entity. Unlike a formal guarantee, a Letter of Comfort is generally not legally binding, but it can still influence lending decisions, risk assessments, and negotiations.

Common uses in Australia include:

• Supporting bank loan applications for subsidiaries

• Assisting with trade credit agreements

• Facilitating supplier or landlord relationships

For example, a large mining company might issue a Letter of Comfort to a bank to assure them that its wholly owned subsidiary will remain solvent and supported throughout a major equipment lease.

2025 Regulatory Updates and Industry Practice

This year, Australian regulators have sharpened their guidance on Letters of Comfort, particularly in the wake of high-profile insolvencies in 2024. The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) now expect lenders and businesses to clarify the nature and enforceability of such letters in their disclosures and risk statements.

• Disclosure rules: As of March 2025, ASX-listed companies are required to explicitly state in financial statements whether Letters of Comfort from related parties exist, and whether they are legally enforceable or merely indicative.

• Banking standards: Major banks have updated their credit policies to require legal opinions on any Letter of Comfort used in significant lending arrangements. This reflects a broader trend of tightening due diligence and risk management procedures.

• Tax implications: The ATO has flagged potential transfer pricing and thin capitalisation risks where Letters of Comfort are issued by offshore parents, especially in cross-border lending scenarios.

These updates mean that businesses can no longer treat Letters of Comfort as a casual formality. Documentation, intent, and precise language matter more than ever.

Risks, Benefits, and Practical Tips

While Letters of Comfort offer flexibility, they are not without pitfalls. Here’s what Australian businesses and lenders should consider in 2025:

Benefits:

- Facilitates financing when a formal guarantee is not feasible

- Signals confidence and support to third parties

- Can bridge the gap during restructuring or transitional periods

Risks:

- Ambiguity over enforceability—recent court decisions continue to favour substance over form, but there’s no guarantee of enforceability

- Potential for shareholder or creditor disputes if the letter’s intent is unclear

- Heightened regulatory scrutiny, especially for listed companies and financial institutions

To maximise the effectiveness and minimise the risks of Letters of Comfort in 2025:

• Draft with precision: Clearly state whether the letter is intended to be legally binding or merely a statement of current intent.

• Update regularly: Review letters annually to ensure they reflect the current financial position and corporate intent.

• Engage legal counsel: Obtain a legal opinion before issuing or accepting a Letter of Comfort, especially for high-value or cross-border transactions.

• Disclose transparently: Ensure any Letters of Comfort are disclosed in line with current ASX and ASIC requirements.

Real-World Example: Letter of Comfort in Action

In 2025, a Sydney-based fintech seeking a $10 million facility from a major bank secured approval after its global parent issued a Letter of Comfort. However, the bank required a legal opinion from both Australian and UK counsel regarding the letter’s status, and the facility terms included ongoing disclosure requirements. This arrangement allowed the fintech to access funding quickly while providing the bank with additional comfort—without the parent company assuming a legally binding guarantee.

Conclusion

Letters of Comfort are evolving in Australian finance. In 2025, they remain a valuable tool for businesses needing flexibility, but they demand careful drafting, disclosure, and ongoing review. Whether you’re a lender, a borrower, or a corporate parent, understanding the nuances of these letters—and staying ahead of regulatory changes—can help you manage risk and seize new opportunities in a dynamic economic landscape.