Elite Hong Kong Club crashes $256,000 membership market

(Bloomberg) – On a clear day, the view from Hong Kong’s seafront American Club is among the most beautiful in the city.

That’s one of the reasons why more than HK$2,000,000 (US$256,000) worth of membership bonds of the century-old institution have changed hands. They give holders access to amenities such as tennis courts, fine dining restaurants in two prime locations and even a club yacht.

But many of those holders now face heavy losses after the club made a controversial decision to buy back bonds at par, a fraction of what they were recently trading at on the secondary market. The incident is shaking up the genteel world of Hong Kong’s private clubs and reminding denizens of the financial hub of the importance of reading – and believing – the fine print.

The American Club said earlier this month it would buy back individual bonds held mostly by non-voting members who are not Americans, people familiar with the matter said. The move will affect about 200 members, who will have the choice of either leaving the club or rejoining it at a cost of HK$1.5 million. The bonds came with a condition that the club could buy them back at face value at any time with one month’s notice, so anyone who buys them at a higher price on the secondary market faces losses.

American Club President Christopher Burgess said in a letter to members this month that the goal was to “rationalize our membership categories” and “consolidate within the membership structure an important constituency, namely non-voting members.”

The initiative will be discussed at a board meeting on Monday and affected members will be informed if there are any changes to the plan, David Loan, the club’s general manager, told Bloomberg News.

According to Burgess’ letter, the initiative should also ensure that the club maintains its nonprofit status, which requires that at least 50% of the club’s operating revenue come from voting members.

National makeup

Only U.S. citizens may become voting members of the club, whose mission is to “maintain commitment to American identity.”

Some members expect the proposal will reduce the number of non-Americans in the 2,900-member club.

The existence of the bonds dates back to a crucial period of the club’s existence, which was founded by businessmen in 1925 and changed locations several times in the decades that followed. After rents soared during the prosperous years of the 1970s and demand for members increased, the club sought to expand by purchasing a permanent location.

In 1983, the club entered into a deal with Hongkong Land Holdings Ltd. to acquire land in the planned Exchange Square complex in the financial district, as well as a site in Tai Tam in the south of Hong Kong Island. The timing was opportune – fears that China might regain its sovereignty over the city triggered a crisis in the property market. The total cost, including construction and fitting-out, was estimated at up to HK$200 million, according to an official history of the club.

To finance the new clubhouses, the club planned to borrow up to HK$200 million by selling bonds of HK$300,000 each and a limited number of bonds reserved exclusively for the city.

Stand to lose

These bonds were allowed to be resold on the secondary market, with the American Club receiving a substantial redemption fee in each deal. Over the years up until 2007, the Club issued further bonds. Over time, the second-hand value rose to over HK$2 million.

The new plan means that someone who bought a bond with a face value of HK$300,000 for HK$2 million on the secondary market could lose HK$1.7 million if they do not pay for continued membership. If they choose to shell out the additional HK$1.5 million to remain a member, the previously paid transfer fee, which can be as high as HK$750,000, will be deducted.

Bondholders have until the end of August to make their decision. Corporate bonds are not affected and will not be repaid.

Since the founding of the Hong Kong Club in 1846, private clubs have been an integral part of the social fabric of the former British colony, catering to everyone from sailors to tennis players and cricketers. Most charge high joining fees as well as monthly membership fees, while waiting lists can be long. The clubs are popular with families, whose children can use swimming pools and sports facilities not always available in Hong Kong apartment complexes, and often become a permanent part of family life in the city.

For the affected members of the American Club, the financial pain is accompanied by emotional stress.

One woman, who has to shell out an additional nearly HK$600,000 to stay, said her family is there almost every day.

She doesn’t know how to tell her children that they probably won’t come back.

– With support from Lulu Yilun Chen.

(Updated to add details about Hong Kong clubs in the fourth-to-last paragraph. An earlier version of this story was corrected to restore a word removed from the caption.)

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