Is football bankrupt?

Manchester United is saddled with huge debts and is looking down the back of the sofa for funds. Other clubs aren't much better off. How did it come to this? Simon Wilson reports.

What's up at Manchester United?

England's biggest club is flirting with financial humiliation as it attempts to raise £500m by selling high-interest, non-rated bonds to a sceptical market. The club, once a model of good financial management, is now the Premier League's biggest debtor. It needs the money to refinance some of its £700m debt pile, which has ballooned since the Glazers, US businessmen, bought the club in 2005 and promptly saddled it with the £790m price tag. Granted, the arrangement means the club can offset its huge and increasing interest payments against profits, cutting tax liabilities. But the sheer scale of the club's debt is ringing loud alarm bells. Fans remember how rapidly old rivals Leeds United imploded when forced to sell players to service debt repayments. The club is even said to be considering selling off the Old Trafford stadium and leasing it back to raise cash.

Could it go bust?

No at least not yet. Manchester United enjoyed record sales of £257m in 2007/2008, with £101.5m coming from tickets at Old Trafford. But attendances, especially lucrative corporate packages, have been falling. And although the club insists it has a rock-solid business model, it has been notably slow to shell out money on new players over the past year. While manager Sir Alex Ferguson says that's because he can't see any value in the transfer market, sceptics point out that the club would have made a loss of £31.8m last year without the sale of Cristiano Ronaldo. This year, without that boost, the prospect of Manchester United selling off players to service debts is moving closer. If it does become a loss-making club, it will hardly be an exception: in the season ending in 2008 only three of the 20 Premier League clubs turned a profit.

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Who else is in trouble?

Liverpool. Its debts are smaller than Manchester United's, at £237m, but there is more barely concealed wrangling within the club about how to deal with them. More immediately, the most vulnerable club is bottom-of-the-table Portsmouth, which moved a step closer to administration this week when the High Court threw out its attempt to block a winding-up petition from major creditor Revenue & Customs. There are plenty of other top-flight clubs looking wobbly as they struggle with debts totalling £3.1bn. This week, publisher David Sullivan and retailer David Gold shored up ailing West Ham by taking 50% in a deal that valued it at £105m. Sullivan, who owned Birmingham City before selling it for £82m in October, bluntly conceded that the purchase made no commercial sense and that he fully expects a big club to go bust this season.

Why is football a dodgy investment?

Insane wage inflation. On the face of it, Premier League clubs should be raking it in awash with TV rights cash and massive private investment by two or three of the world's richest men (Chelsea, Manchester City). But take Bolton. Its most recent accounts show income of £37m from TV rights and £5m through the gate but a staggering wage bill of £41m, some 80% of all football-related income. Competition from European clubs, some of them backed by implicit or explicit state guarantees (Real Madrid, Barcelona) has driven up wages to the point where the likes of Manchester United's Ronaldo can sell for £80m.

Why do clubs pay such crazy wages?

They get results. In his book Soccernomics, written with the FT's Simon Kuper, the academic Stefan Szymanski studied 40 English clubs over 20 years and found that spending on salaries explained 92% of the variation in their average league position. A similar study for Italy gave a correlation of 93%. (By contrast, they found that changing managers contributes very little.) But the risk is that clubs will gamble everything to avoid relegation by overpaying poor footballers and wasting millions in the transfer market.

What's the future for English football?

The Union of European Football Associations (UEFA) plans to bring in its "financial fair play" initiative, which will exclude heavily-indebted clubs from European competition. UEFA boss Michel Platini has long been a critic of the Premier League, where rich individuals (such as Sheikh Mansour at Manchester City, which made a record loss of £92m last year) are free to bankroll clubs and, in effect, distort the market. But if UEFA gets it way, and insists that all its competitions are played by debt-free clubs by 2012, it will almost certainly hasten the creation of a much-touted breakaway European Super League (see below) permanently altering the English game.

Will there be a breakaway league?

An obvious model for Europe's leading teams would be the formation of the English Premier League 20 years ago, when the most powerful clubs decided to take more power for themselves. Last year the president of Real Madrid called for just such a league, and vowed to take on UEFA if it blocks his plans. These include a guarantee that the biggest clubs, such as Madrid, Barcelona, Manchester United, Liverpool, Milan and Juventus, could rely on participating every season in a lucrative elite competition, no matter where they finish in La Liga, the Premier League, or Serie A. The other likely contenders for a 16-strong league are Atletico Madrid; Chelsea; Arsenal; Internazionale; Bayern Munich; Lyon; Porto; Celtic; Rangers; and Olympiakos. Assuming none of them goes bust.