Convertible Notes and Private Credit in Australia: Combining Them in Hybrid Structures
What are convertible notes?
A convertible note is a loan that turns into shares later, instead of being paid back in cash.
Here’s how it works in plain terms:
| The investor lends the company money now. | → | Interest accruesThe company pays interest on that loan while it’s outstanding. | → | At an agreed future point, often a listing, a sale, or the next equity round, the loan converts into shares instead of being repaid in cash. | → | The price the shares convert at is agreed upon upfront, usually as a discount to whatever the shares are worth at that future point. |
They have become more common in energy and resources sectors as an alternative to equity or straight debt during a development or expansion phase (McCullough Robertson, 2024).
Things to note
- Notes are typically unsecured – The investor isn’t holding a claim over a specific asset, like a mortgage over equipment or property. They’re relying on the company’s promise to pay.
- Payment Ranks – If the company runs into trouble, banks and other secured lenders get paid first, out of whatever assets back their loan. Noteholders only get paid after that, from whatever is left.
- Takeover – In Australia, once an investor’s stake in a listed company crosses 20%, extra rules kick in. Broadly, they can’t keep buying more shares without going through a formal process. If a note converts into enough shares to push an investor over that 20% mark, it can trigger those rules, so this needs checking before the note is issued.
- Listing Limits – The ASX limits how many new shares a listed company can hand out without shareholder approval, roughly 15% of existing shares in any 12-month period. Shares that will be issued later when the note converts count against that limit too, so the company needs to make sure it has enough room left (ASX)
- Accounting – Because the note is part loan and part future shares, accountants often have to treat the “convert into shares” feature as a separate item on the books, which makes it harder for larger or listed companies (Moore Australia, 2026).
What is Private Credit?
Private credit is simply a loan from a lender that isn’t a traditional bank, things like private credit funds, family offices, or specialist lenders. The Reserve Bank of Australia estimates this sector at around $40 billion, about 2.5% of all business debt in Australia, and says it has grown quickly in recent years as banks have pulled back from parts of the corporate lending market (RBA, 2024).
There are two types:
| Senior Secured Debt | The lender takes a charge over specific company assets, like receivables or equipment, and gets paid first if things go wrong. Pricing usually moves with a floating interest rate benchmark. |
| Mezzanine or subordinated debt | This sits behind senior secured debt in the queue. Because it’s riskier for the lender, it usually costs more, and sometimes the lender also gets a small slice of future equity upside. |
Private credit is priced based on the business’ cash flow, EBITDA and what assets it can offer as security.
Using both together
| Convertible notes & equityPaid last if things go wrong, but with the most upside if the business succeeds. | Paid LAST (Most Upside) |
| Mezzanine / subordinated debtSits behind senior secured debt. Costs more, and sometimes carries future equity upside. | |
| Senior secured private creditPaid first if things go wrong, secured against specific company assets. | Paid FIRST(Most Protected) |
Because they sit at different levels, a business can use both at once, for different jobs. A senior secured private credit facility can cover an immediate, specific need, such as working capital, an acquisition, or expansion costs, secured against things the business already owns. A convertible note, sitting further back in the queue, can raise growth capital where everyone would rather wait and set the share price later, once there’s a listing, a sale, or another priced round to set a fair value.
Using both means a business can raise money from two different types of investors at once, instead of putting everything through one instrument or one conversation about ownership.
Advantages and disadvantages
| Advantages | Disadvantages | |
| Convertible Notes | Access to capital now without setting a valuation today, interest that accrues rather than requiring cash repayment, and conversion that can be timed to a future liquidity or listing event when both sides have a clearer price | Dilution can be larger than expected if the conversion discount or cap wasn’t modelled conservatively. Notes are usually unsecured and subordinated, and tax treatment can be complex for larger or listed issuers. |
| Private Credit | No dilution, faster to arrange than a full equity process once financials and collateral are in order, and repayment terms that are fixed and plannable. | Repayment is owed regardless of trading performance. Covenants are tied to cash flow and leverage ratios, and secured facilities require real collateral, which limits who can access them. |
Considerations
When both instruments are used together, it needs to be crystal clear who gets paid first if the business runs into trouble. This is usually set out in an agreement between the lenders, called an intercreditor arrangement, or, at minimum, clear wording confirming the note sits behind the secured debt. It’s also worth checking that the note’s conversion trigger doesn’t accidentally clash with the private credit facility’s conditions, since converting at the wrong moment can throw out the numbers a lender is using to check the loan is on track.
