The Demise of the Corporate Debenture

Places in Hong Kong schools are very competitive — good schools have long waiting lists and lengthy application processes. Right?

Well, this used to be the case. And so employers moving their staff to Hong Kong sought to manage the risk. They did this by - essentially - buying security of a place in a top school.

This security came in the form of corporate debentures. An application to a school accompanied by a corporate debenture enjoys a high level of priority - often the highest level. All applicants must meet the entry requirements, but assuming they do, this is almost a guarantee of an offer, even in the case of a very late application.

Yet, these debentures have been costing companies tens of millions of dollars and are no longer necessary, in our opinion.

What is a Corporate Debenture?

A debenture is the traditional name given to a loan agreement where the borrower is an institutional borrower. For our purposes, the institution is a school. The money raised by the debentures becomes a part of the school’s capital structure, and the school may use the funds raised through debentures in any way it chooses.

Most schools state that the fees are generally set at a level which covers most if not all of the school’s running costs, but not its capital costs. So, debentures are how parents of students contribute to the long-term funding of the School.

Schools issue different types of debentures at different prices. Corporate debentures are the most expensive. Debentures of all types are issued in batches, in limited numbers.

For example, at HKIS, two types of corporate debentures are offered:

At HKIS, corporate debentures retain their value and cannot be sold; they are redeemable at par value after a minimum 15-year holding period. These terms vary between schools.

Some schools have one type of debenture that may be used by families and corporations alike. Or, a company may opt to buy a personal debenture for the family (although that may come with complications).

Usually, debenture holders are exempt from paying an annual capital levy.

Are Debentures Legal?

They are currently being scrutinised by the Education Bureau as a result of an Ombudsman report. We have written extensively on this - see our other articles here:

January 2020: Debentures/capital levies charged by private schools - are they approved?

January 2020: Debentures/capital levies charged by private schools may be illegal and will be subject to scrutiny.
June 2020 : Debentures/capital levies charged by private schools - they are NOT approved!

Transferring Corporate Debentures

A corporation may transfer an unused debenture to another child of an employee.

Trading Corporate Debentures

It is possible to buy some debentures on the ‘second-hand market’. This means that the school has ‘sold out’ and existing holders can transfer them to others. The price of this transfer may be set by market demands or the school may cap it. The school may also take a cut of the sale price. This is less common for corporate debentures and more usual for individual debentures.

More commonly, the school will be selling a corporate debenture directly.

Does our company need a corporate debenture?

Most definitely not. As admissions experts, we believe that professional management of an application can usually substitute the need for an expensive corporate debenture.

The reverse is also true - and very common. Debentures are a substitute for expert management of applications. Where generalist HR staff or relocation staff are handling applications, it's very often a default, easy option to use an existing debenture or purchase a new one from a school.

We can advise on where a debenture may be useful and offer security, as well as associated costs. Fewer than 2% of our 150+ placements are done with a corporate debenture.

We are advising that companies can reexamine the debentures they are currently holding and do NOT buy any new ones - at least not without a thorough analysis of its need.

Can I sell a corporate debenture?

We are receiving an increasing number of enquiries from companies seeking to offload corporate debentures. In some schools, there is no need for a corporate debenture and all children meeting the entry requirements can usually be admitted quickly.

 If you would like expert advice on your corporate debentures, please email [email protected]