Debentures, secured & unsecured notes
Delving into debentures, secured and
Debentures, secured and unsecured notes are types of investments
that pay interest. Companies issue them as a way to raise funds
from investors. In return for your money, the company promises to
make regular interest payments, and return the money you lent them
on a date in the future.
Debentures, secured and unsecured notes usually offer higher
interest rates than bank deposits, but also carry higher risks.
Read the prospectus carefully to find out about the company, how it
will use your money, the risks and the terms of the investment.
How debentures, secured and
unsecured notes work
Debentures, secured and unsecured notes are fixed interest
investments. This means that the interest rate on the money you
lend is set in advance. The issuer may give you (through the
trustee) security for repayment of your money. If that security is
tangible property the notes can be called debentures.
If it is a first ranking security interest over other property
(e.g. a debt) then they might be called secured notes, but if there
is no security then they must be referred to as unsecured notes.
The reference to being secured is not an indication of a less risky
product, so read the prospectus carefully.
Debentures are usually offered for set periods, for example 1,
3, 6 or 12 months. Some debentures have a set period of 5 years.
Unless they are offered 'at call', you do not have the right to ask
for your money back before the set period expires. Some companies
may be prepared to repay your money early on hardship or
compassionate grounds; however a penalty is likely to apply.
Debentures, secured and unsecured notes are unlisted
investments. This means they can't be traded on a secondary market
like the Australian Securities Exchange (ASX). So it is very
difficult to sell them if you decide you no longer want the
Even though these products are not listed on a market, issuers
must ensure that they keep investors continually updated on things
that affect their investments in a material way.
This means you should consider what an issuer's prospectus says about how they will
keep you up to date, including how you can access information.
Although a debenture issuer may seem like a bank, they are not a
bank, so the government guarantee on deposits does not apply.
You could easily lose all your investment if the company or project
To understand the risks you should read the prospectus to find
out exactly how the company will use your funds. It might use your
money to finance a wide range of investment activities, or may
on-lend your money to another business. The riskier the
activity, the more careful you should be. See more information
on reading a prospectus.
It is important that you:
- understand the return being offered and whether it will
compensate for the risks
- understand how the risks of investing in debentures compare
with other investments paying
- have diversified your investments
- are clear on why debentures are suitable for you
- seek professional financial advice if you are
unsure of any aspects of the investment.
Check the security being offered
The prospectus should tell you what security, if any, is being
offered for your loan. A secured note will generally carry more
risk than a debenture because it will not be secured entirely over
As the lender, you must judge what the security is worth if the
company should default. For example, a company may take your money
and on-lend it to others, taking a mortgage over the borrower's
property. To asses this you would compare the size of the loan to
the value of the property and look to see what percentage of these
loans are behind in their repayments or in default. Find out how
the company values the properties they take mortgages over.
If you notice a high number of loans are not being repaid on
time, this is likely to be a riskier investment in which you may
lose some or all of your capital.
Valuing the underlying investment
To be safe, assume that a company's valuations are optimistic.
Valuations for property developments must be done on an 'as is' and
'as if complete' basis. But, if the development fails before
completion, the land with a half-finished building could be worth
even less than the land before the project started.
When a bank values people's homes, the valuation is usually
lower than the price paid for the home. The bank is trying to
protect itself, and you should do the same when you are the
If you are still unsure about the investment, try explaining the
business to a friend. If you can't explain how it works, stick to a
safer investment where the risks are clearer.
Check the benchmarks
ASIC has developed some benchmarks that apply to unlisted
debentures and unsecured notes to help you assess the risks and
decide whether to invest your money.
in unlisted debentures and unsecured notes booklet for
more information on these benchmarks and how you can use them.
Case study: Mavis loses her money in a secured note
Mavis was reading the newspaper when she came across an ad
asking for investors in a new secured note. The finance company in
question was offering an interest rate of 8.5% p.a. on a minimum
investment of $5,000 for a term of 5 years. This sounded great to
Mavis so she asked for a prospectus to be sent to her. Mavis
decided to invest $50,000 of her retirement savings in the unlisted
secured note because the interest rate seemed too good to pass
The finance company planned to use investors' money to on-lend
to property developers. It offered its loan book as security. Six
months after Mavis invested her money, the finance company went
bust. The company directors had overestimated the company's assets
resulting in valuations being overstated. There was no return to
investors. Mavis lost a big chunk of her hard earned retirement
A large number of debentures are offered where the initial term
can be extended. This is called a rollover. Before the term of the
debenture expires, you will be contacted by the company to see if
you'd like to extend the term. If you do nothing, the company will
automatically rollover the debenture for the same set term as the
original investment and you will not be able to access your money
until the end of the new period.
The company does not have to provide another prospectus to
rollover your investment. You should take the same care to consider
the potential risks of extending the investment, as you did with
your original investment.
The company's business or financial position may have changed
since you originally invested. Check the company's website for its
financial report for the year and other information that could
affect the value of your investment. See keep track of your
investments for more information.
What to do if things go wrong
If something goes wrong with your debenture, secured or
unsecured note you may be able to recover some of your money.
Contact the company first with a formal complaint. If you don't get
a satisfactory outcome see our how to complain webpage for details on
how you can take your issue to an external dispute resolution
scheme if the debenture issuer is a member of a scheme.
While debentures, secured
and unsecured notes may seem very attractive, you could easily end
up losing everything if the company or project fails. Seek
financial advice before you invest in one of
Last updated: 12 Dec 2018