Back from the Brink

Set to stand down this month after four years as Club president, John Durkin details how the Club bounced back from near financial ruin.

The Club was in crisis. It was 2012, and our finances were bleak. Due to the onerous terms of the Club’s redevelopment loan, which was used to build the present clubhouse, we were on the precipice of defaulting on the loan’s debt service cash flow covenant.

The real possibility of insolvency for the Club loomed. Due to the loan’s interest rate and terms, we had little hope of paying back the ¥11 billion principal. While the vultures circled, Members were in open conflict over who was at fault.

Aside from being overleveraged, the Club was pummeled by 2008’s global financial crisis, which decimated its membership numbers. More than 700 international Members, many from the financial services industry, resigned between 2008 and 2011. Membership was at a 20-year low. The Club stayed afloat by breaking its longstanding diversity guidelines and allowing a disproportionate number of Japanese to join. 

Before becoming president in 2012, I was the Club’s volunteer treasurer. To avoid a panic among Members, I shared the details of the Club’s precarious situation with only a few trusted colleagues, while desperately looking for a solution.

We had narrowly avoided default over the same cash flow covenants once before, in 2011. At that time, I worked out a deal with loyal, longtime Member Yuki Makita and the owners of Azabudai Park House, the condominium next to the Club, to which the Club leases the land. We eliminated the lease requirement for the building to be demolished at the end of the term in 2059 in exchange for a one-time payment. The resulting windfall of ¥600 million secured the Club from default for a year.

Meanwhile, members of the Finance Committee and I began canvassing financial institutions in Tokyo in an effort to refinance our loan on more favorable terms. But due to a combination of the Club’s poor credit profile, its nonprofit designation and the lingering effect of the financial crisis, no firm was willing to refinance the loan.

In my professional life at that time, I was working on a private equity-owned investment and frequently visited Japan’s three megabanks: SMBC, Mizuho and MUFG. At the end of each meeting, I would mention the refinance opportunity, stressing that the value of the Club’s Azabudai land would more than offset any default risk.

One day, while gathering my belongings at the end of a meeting with SMBC, one of the bankers handed me an envelope. In the taxi back to the office, I ripped open the package and was delighted to find a refinance proposal for the Club, with terms and conditions that would fully resolve our financial distress.

Our loan interest rate would be lowered from 4 percent to a base rate of 1 percent and the dreaded cash flow covenants eliminated. The only ask from SMBC was an approval vote from Members at our Annual General Meeting. In November 2012, 98 percent of voting Members supported the proposal. At that same meeting, I was elected president.

With the Club’s financial predicament resolved, I turned to the real source of our problems: the huge decline in membership.

Concurrent with opening our new clubhouse in early 2011, we had imprudently rolled out a massive increase to entrance fees, believing that the brand-new clubhouse would justify the price. The result was nearly zero new Members at the rack rate.

Aside from turning a blind eye to diversity, the Club established a time bomb in the form of a “Term Membership” option. Although it included a sizeable discount on the entrance fee, it hit Members with back-loaded cash requirements after the third year of membership. It became apparent that we would be facing a wave of resignations when the cash calls were issued. It was a dilemma of our own making.

We needed a solution that would boost membership numbers, the Club’s lifeblood, and the Membership Committee, under Craig Saphin, conceived an idea that proved hugely successful. For a limited time, we lowered entrance fees for the international community from ¥3 million to ¥800,000. The reaction was staggering. More than 150 applications poured in on day one and, by the end of the three-month campaign, we had clawed back half the number of Members lost during the financial crisis.

Meanwhile, more than 100 Term Members took up our offer to upgrade to full membership for a small fee. Time bomb averted. The monthly dues from the increased number of Members and the agreement from existing Members for a fair dues increase contributed to a sustainable dues base for the Club—crucial for its long-term viability.

In 2013, I presented the TAC 20/20 financial plan, a set of principles and targets to ensure the Club’s long-term health. At the plan’s core is the idea of using entrance fees to service debt, or establish a capital fund, while funding the Club’s fixed costs with dues. All other activities, including the Club’s food and beverage operations, are required to break even. This might appear like setting the bar low, but entrance fees were once used to subsidize Club operations and the dining outlets were wildly unprofitable year after year.

Beyond the financial and membership fixes, my No 1 objective was to restore a sense of community to TAC. With this in mind, we established the monthly First Friday themed events to bring Members together for a fun event at a reasonable price.

For the first two years, each successive First Friday set new attendance records (the best measure of success), and the opening event for CHOP Steakhouse in 2015 drew around 1,000 Members. It was a significant milestone in the Club’s recovery.

Since the original loan refinance in 2012, we have twice worked with SMBC to further improve the terms. The base interest rate now stands at 0.55 percent, a far cry from the days of 4 percent. We have paid down the principal from ¥11 billion in 2012 to ¥7.5 billion this year, a more than 30 percent reduction. Based on our now sterling credit profile, SMBC has granted the Club a loan extension to 2026. The crisis of 2012 now seems like a distant memory.

The Club is enjoying one of its most prosperous periods. Membership is at an all-time high, while profitability is strong. For three straight years, we have been able to provide Members with dining vouchers, year-end celebrations and family holiday shows for free.

When the Club rebuilt its Azabudai home in the early 1970s, its finances were affected by economic conditions at the time, and it was forced to call on Members to buy a bailout bond. Similarly, our more recent redevelopment almost ended in disaster. I hope this issue of INTOUCH can serve as a time capsule of sorts, and that future generations of Members can learn from our experiences.

The Club is my Tokyo oasis, and I treasure our community. It’s been a privilege and a pleasure to lead this great institution over the past four years. Working with our outstanding leaders on the Board and in committees—and with our world-class management team—I’m proud of our achievements in helping our second home flourish. With the Club stronger than ever, I look forward to handing over the reins to the next president.

John Durkin is the Club’s representative governor.

Words: John Durkin
Image: Yuuki Ide