In the world of Australian fixed-income investments, unsecured notes are making a comeback in 2025. Often marketed as a higher-yield alternative to term deposits or bonds, these instruments are increasingly appearing in the portfolios of yield-hungry investors. But with greater returns comes greater risk, and the regulatory environment for unsecured notes has shifted in recent years. Here’s a deep dive into what unsecured notes are, why they’re gaining attention, and the key considerations for any Australian thinking of taking the plunge.
What Are Unsecured Notes?
An unsecured note is a debt instrument issued by a company to investors, promising to pay back the principal plus interest at a specified date. Unlike secured notes, unsecured notes are not backed by specific company assets. This means if the company fails, unsecured noteholders are near the back of the line when it comes to repayment — after secured creditors and often after other types of debt.
- Higher risk, higher return: Issuers typically offer higher interest rates to compensate for the lack of collateral.
- Attracts both retail and wholesale investors: Especially in low-rate environments, the promise of better yields can be tempting.
- Used by a range of companies: From ASX-listed corporates to smaller private firms seeking to raise capital quickly.
2025 Trends and Policy Updates Impacting Unsecured Notes
Australian investors considering unsecured notes in 2025 are entering a market shaped by several notable changes:
- ASIC’s enhanced disclosure regime: Following a spate of high-profile collapses in 2023–24, the Australian Securities and Investments Commission (ASIC) has tightened rules around marketing and disclosure for unsecured notes. Issuers must now provide clearer risk warnings and more transparent financial information.
- Interest rate environment: With the RBA holding the cash rate steady above 4% in early 2025, companies are under pressure to offer attractive yields to compete with bank deposits. Some unsecured notes are offering rates between 7–10%, but these come with significant risk.
- Rise of fintech platforms: Digital investment platforms are making it easier for everyday Australians to access unsecured notes, sometimes with minimum investments as low as $1,000. This democratization increases access — and risk exposure — for less sophisticated investors.
- Focus on creditworthiness: Credit rating agencies and independent analysts are placing greater scrutiny on issuers, but not all notes are rated. Many smaller or riskier issuers remain unrated, making due diligence even more essential.
Risks and Real-World Examples
It’s crucial to understand the risks before investing in unsecured notes. Here are some real-world factors and recent examples:
- Default risk: If the issuer runs into financial trouble, unsecured noteholders may lose some or all of their investment. In 2024, several property developers defaulted on unsecured notes as the construction sector faced cost blowouts and project delays.
- Subordination risk: In a wind-up, unsecured noteholders are paid only after all secured creditors. This can mean little is left if the company’s assets are already pledged.
- Liquidity risk: Unlike ASX-listed bonds, most unsecured notes are not traded on open markets. Investors may not be able to exit early and must hold to maturity.
- Case study: In late 2024, a well-known fintech lender offered unsecured notes with a headline rate of 9%. When the company missed a quarterly interest payment, secondary market prices for those notes dropped sharply, and investors faced an anxious wait as the company restructured.
Should You Invest in Unsecured Notes?
Unsecured notes can play a role in a diversified portfolio, but they’re not for everyone. Consider the following before investing:
- Understand the issuer: Scrutinize the company’s financials, business model, and debt structure. Ask whether the company is generating enough cash flow to service its obligations.
- Check the offer document: Recent ASIC guidelines require issuers to provide detailed risk disclosures. Look for any red flags and seek independent analysis.
- Assess your risk tolerance: Can you afford to lose your investment if things go wrong?
- Balance with safer assets: Most experts recommend limiting exposure to high-risk debt and ensuring the bulk of your fixed-income allocation is in government bonds or investment-grade credit.
For those willing to do their homework and accept the risks, unsecured notes can offer attractive returns. But in 2025’s volatile market, caution is the watchword.
