How Private Lenders & Non-Bank Finance Companies Structure Acquisition Finance in Australia21 min read

Introduction

The market for acquisition finance in Australia has shifted, with non-bank entities capturing substantial market share from traditional banks. A private lender will typically provide a flexible funding structure, such as a unitranche loan or bridging loans, to lend capital and facilitate private lending in Australia.

Sponsors, corporate borrowers, and growth businesses benefit from understanding these mechanisms to secure optimal finance terms, while mortgage lenders and managed investment funds use them to compete for higher-value deals. This article explains how a non-bank lender and other lenders in Australia structure an Australian loan and private mortgage for secured lending so you can execute term sheets and manage intercreditor issues effectively.

Interactive Tool: Check If Your Acquisition Finance Structure Is Legally Ready

The Growing Role of Private Lenders in Australian Acquisition Finance

Filling the Gap Left by Traditional Banks

The landscape of acquisition finance in Australia has seen a significant shift. While traditionally dominated by domestic and international banks, the market is now increasingly occupied by non-bank lenders, institutional investors, and private credit funds. As a result, these private lenders have rapidly gained market share, particularly in large-ticket transactions.

Private credit providers are an attractive option for sponsors and borrowers for several key reasons:

• Flexible funding structures: They offer a range of products not typically provided by major domestic banks, such as unitranche facilities and Term Loan B (TLB) options.
• Faster execution: Many private lenders underwrite and hold credits on their own balance sheets, which can lead to quicker decision-making and deal execution by removing syndication risk.
• Borrower-friendly terms: The increased presence of private credit has led to the adoption of more flexible terms, often imported from US and European markets, including higher leverage multiples, reduced amortisation, and longer tenors.

This competition has prompted traditional banks to offer more flexible terms in their own leveraged products. However, global private equity sponsors often turn to global private credit funds, leveraging worldwide relationships to align their Australian acquisition finance terms with those in North America or Europe.

Past Regulatory Scrutiny & ASIC Oversight

The rapid expansion of private lending in Australia has not gone unnoticed by regulators. In February 2025, the Australian Securities and Investments Commission (ASIC) released a discussion paper, signalling a period of increased focus on regulatory compliance for the private credit market.

ASIC’s review concentrated on several key areas of market practice and governance, with the main points of focus including:

• The adequacy of governance, board, and senior management oversight.
• The strength of credit assessment standards and risk management frameworks.
• The consistency and independence of valuation practices for illiquid assets.
• The management of conflicts of interest.
• The quality of disclosures to investors, particularly concerning risks, fees, and liquidity.

Following industry submissions and surveillance reviews in 2025, ASIC indicated it did not intend to introduce new regulations specifically for private credit in the near term. Instead, it expects to maintain close supervisory attention on the sector, encouraging industry-led standards and enhancing its own data collection to monitor market size and risk.

Funding Structures Used by Australian Non-Bank Lenders

Unitranche Facilities & Term Loan B Options

Private lenders in Australia frequently use specialised funding structures that offer greater flexibility than traditional bank loans. One common structure is the unitranche loan, a hybrid facility that combines senior and subordinated debt into a single agreement requiring expert loan structuring and documentation, with a blended interest rate.

Another popular option is the Australian Term Loan B (TLB). Non-bank lenders and private credit funds offer these facilities to provide borrowers with more favourable terms. Key features of an Australian TLB often include:

• Higher Leverage: They can support greater levels of debt compared to traditional bank financing.
• Minimal Amortisation: Borrowers are typically required to make only small principal repayments, or none at all, before the loan’s final maturity date.
• Covenant-Lite Terms: These loans often feature “springing” financial covenants that are only tested under specific conditions, providing the borrower with more operational freedom.

These products have become increasingly common as they compete directly with traditional bank funding for acquisition finance. In addition, unitranche facilities are often paired with a “super senior” revolving credit facility, which is typically provided by a local bank for working capital purposes and ranks ahead of the term loan in an enforcement scenario.

Holdco Payment-in-Kind & Bridging Loans

For larger acquisitions requiring additional leverage, sponsors often turn to “holdco” instruments. This involves raising debt at a holding company level, which sits above the main operating group that has taken on the senior debt. As a result, this structure makes the holdco debt structurally subordinated, meaning the senior lenders to the operating business have a priority claim on the operating assets.

A key feature of this structure is the use of Payment-in-Kind (PIK) interest. This allows the holdco borrower to capitalise interest payments by adding them to the principal loan balance instead of paying them in cash. Furthermore, this approach is particularly useful for reducing the cash debt service burden on the business, especially in a high-interest-rate environment.

Bridging loans are another tool used in acquisition finance for speed and certainty. These are short-term debt facilities, often with a tenor of 365 days or less. They are used in situations where funding commitments need to be secured in a compressed timeframe, with the intention that the bridging facility will be refinanced shortly after the acquisition is completed through a longer-term capital raising or debt issuance.

Executing the Deal Term Sheets & Diligence for Private Credit Funds

Structuring Debt Commitment Letters & Term Sheets

In most acquisition finance transactions, lenders provide fully underwritten commitments to fund the deal. These commitments are formalised through debt commitment letters, which are typically required when the acquisition agreement is signed. Ultimately, this process ensures the buyer has secure funding to complete the purchase.

A detailed term sheet outlines the key commercial terms of the finance. The final long-form facility agreements are based on this term sheet. In addition, the commitment from a private lender is usually subject to specific conditions being met before the funds are released.

Lenders often include flex provisions in commitment letters to manage risk. These provisions allow the lender to change certain terms of the finance, within agreed-upon limits, to adapt to changing market conditions. Flex provisions commonly focus on:

• Pricing Flex: This allows for adjustments to the interest rate or margin if the lender’s cost of funding changes or if market appetite shifts during the syndication process.
• Structure Flex: In some cases, provisions may allow for changes to the debt structure itself, although this is less common and heavily negotiated.

Conducting Diligence & Managing Conditions Precedent

Before releasing funds for an acquisition, private lenders conduct thorough legal due diligence to assess downside risks. This process is especially detailed in bilateral private credit facilities where the lender may not have access to a sponsor-led due diligence report. Therefore, the focus is on understanding potential exit scenarios and other commercial risks associated with the target business.

Funding is contingent on the satisfaction of several conditions precedent, which are outlined in the commitment letter and facility agreement. These are the final hurdles to clear before the loan can be drawn down, typically including:

• Mechanical Conditions: These are procedural requirements, such as the execution of all finance documents, the provision of legal opinions from lawyers, and the submission of a valid drawdown notice by the borrower.
• Corporate Authorisations: The borrower must provide evidence of all necessary corporate approvals and consents for the transaction.
• No Default: A key condition is that no event of default or potential event of default under the facility agreement exists at the time of funding.
• No Change of Control: The lender will require confirmation that there has been no change of control in the purchasing entity.

Security Packages & Common Drafting Friction Points for Secured Lending

Understanding the PPSA & Featherweight Security Interests

In Australia, security over personal property is governed by the Personal Property Securities Act 2009 (Cth) (‘PPSA’) PPSA. Lenders perfect their security interests to ensure they are enforceable against third parties. The most common method of perfection is registering a financing statement on the Personal Property Securities Register (PPSR).

Other methods of perfection under the PPSA include:

• Possession: The secured party takes physical possession of the collateral.
• Control: The secured party has control over specific types of assets, such as bank accounts or shares, which provides the highest-ranking priority.

A key concern for lenders in secured lending is the risk associated with a borrower entering voluntary administration. The Corporations Act 2001 (Cth) (‘Corporations Act’) imposes a statutory moratorium that prevents creditors from enforcing their security once an administrator is appointed. However, an exception exists for a creditor holding security over the whole, or substantially the whole, of a company’s property. Consequently, this creditor can enforce its security within a 13-business-day decision period following the administrator’s appointment.

To benefit from this exception, lenders often use specific mechanisms designed to ensure their security covers all of the company’s assets, including:

• Featherweight security interests: These attach to all of the grantor’s property from day one but only secure a nominal amount, such as AUD1,000, without restricting the company from dealing with those assets.
• Springing security interests: These remain dormant and only spring into existence to attach to the remainder of the company’s assets immediately before an administrator is appointed.

While these structures have not been tested in an Australian court, they are a market-standard approach to mitigate administration risk and preserve a lender’s enforcement rights.

Financial Assistance Rules & Corporate Benefit

When a target company in an acquisition provides a guarantee or security for the finance, two key legal restrictions must be addressed: the rules on financial assistance and the requirement for corporate benefit.

Under Section 260A of Corporations Act, a company is generally prohibited from providing financial assistance for the acquisition of its own shares or shares in its holding company. This includes providing guarantees or granting security over its assets, and a breach can lead to civil penalties for those involved.

The most common way to permit financial assistance is through the whitewash procedure outlined in Section 260B of Corporations Act. This process requires approval from the company’s shareholders and, if applicable, its ultimate Australian holding company. Furthermore, notices must be lodged with the Australian Securities and Investments Commission (ASIC) at least 14 days before the assistance is provided, which often means security from target entities is granted sometime after the acquisition closes.

Directors also have a duty under Sections 181 and 184 of Corporations Act to act in the best interests of the company. When a company provides a guarantee or security, its directors must be satisfied that the company derives a sufficient corporate benefit from the transaction, which can include:

• Direct benefits: Such as immediate access to funds.
• Indirect benefits: Such as ongoing support from the wider corporate group.

For wholly-owned subsidiaries, Section 187 of Corporations Act can assist. It deems a director to be acting in the company’s best interests if they act in the best interests of the holding company, provided the subsidiary’s constitution allows for it.

Covenant-Lite Structures & EBITDA Adjustments

The Australian acquisition finance market has seen a significant shift towards more borrower-friendly terms, largely influenced by practices in the US and European markets. A key feature of this trend is the increasing prevalence of covenant-lite or cov-lite loan agreements, particularly in deals led by private equity sponsors.

A covenant-lite structure does not mean there are no financial covenants; instead, it typically features a springing financial covenant. This covenant is only tested if a specific condition is met, which is often linked to the company’s liquidity. For example, the covenant might only be tested if the borrower draws down on its revolving credit facility above a pre-agreed threshold. Ultimately, this approach treats the covenant as a liquidity tripwire rather than a tool for continuous performance monitoring.

Another area of heavy negotiation involves the definition of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), which is a key metric in financial covenants. Facility agreements often permit numerous adjustments that increase the calculated EBITDA, providing the borrower with greater flexibility. Common adjustments include allowances for:

• Revenue synergies: Including the anticipated future revenue benefits of an acquisition or merger.
• Cost-out initiatives: Factoring in expected cost savings from future business improvements or restructures.

These adjustments, along with other flexible terms, reflect the high level of competition among private lenders and banks for acquisition finance deals.

Intercreditor Issues for Managed Investment & Mortgage Lenders

Contractual Subordination & Enforcement Waterfalls

Intercreditor agreements are a customary part of acquisition finance in Australia, regulating the rights and obligations between different classes of debt providers. These agreements contractually determine the priority for repayment. Under Australian law, this concept of contractual subordination is formally recognised by Section 563C of Corporations Act.

The agreements establish a clear order for repayment and the distribution of funds if security is enforced. This process is often called the enforcement waterfall. Key features of this structure include:

• Senior Debt Priority: The senior debt will always rank ahead of any junior or subordinated debt for repayment.
• Deep Subordination: The repayment of junior debt is typically deeply subordinated, meaning no principal repayments are permitted until the senior debt has been paid in full.
• Interest Payments: Junior creditors may be permitted to receive interest payments, but this is usually subject to conditions, such as the borrower meeting specific financial ratios and no event of default occurring.
• Turnover Provisions: Agreements often include “turnover subordination” or “trust subordination” clauses. These require any payment a subordinated creditor receives from the debtor to be paid over to the senior creditor until the senior debt is fully settled.

The senior creditors typically form the instructing group, giving them the authority to direct the security agent on the enforcement and recovery of security.

Managing Super Senior Facilities & Standstill Periods

In many modern funding structures, particularly those involving unitranche loans, a super senior revolving credit facility is included. This facility is often provided by a local bank for working capital and ranks ahead of the term loan facilities if enforcement occurs. Consequently, the intercreditor agreement modifies certain terms to manage the enforcement rights of these super senior lenders.

The rights of subordinated creditors to enforce their security are significantly limited. These rights often only become available after a standstill period has expired. During this period, junior lenders are prevented from taking enforcement action, giving the senior lenders time to manage the situation. Furthermore, in some transactions, subordinated creditors may have no right to enforce until the senior debt is completely discharged.

Hedge counterparties, who provide interest or exchange rate hedging, also have their rights managed by the intercreditor agreement. They typically rank equally with senior lenders for payment but face restrictions on their ability to terminate hedging arrangements or take independent enforcement action before a formal enforcement process begins.

Conclusion

The Australian acquisition finance landscape is now significantly influenced by private lenders who provide flexible funding structures like unitranche facilities and Term Loan B options. Executing these transactions involves detailed attention to security packages, financial assistance rules under Corporations Act, and the careful negotiation of intercreditor agreements.

To properly structure your next non-bank finance deal, whether you are a private lender or a corporate borrower, contact GRM LAW’s experienced private lender and non-bank finance lawyers. Our Legal Team offers specialised advice on all facets of private lending in Australia to help secure a successful outcome for your acquisition.

Frequently Asked Questions