Leeds' spending puts huge pressure on O'Leary

Leeds United's enormous transfer spending under David O'Leary – some £100m including the £11m capture of Robbie Fowler – has been made possible primarily by loans. The latest and most significant, for £60m, was confirmed in Peter Ridsdale's chairman's statement when the club's annual accounts were published in September.

"We are pleased to announce that we have agreed a £60m, 25-year bond with institutional investors," he wrote. "This will refinance the short-term debt used by the company to build the squad to its current levels and gives us stable financing for the long term."

When football clubs, especially floated clubs, want to raise money, the most obvious way is a share issue. The lack of confidence in football by investors has made this less attractive in the past year so the bond was the best way forward. The bond effectively functions like a mortgage. Leeds receive the capital and then repay the interest, likely to be between £3m and £4m a year. This will be on top of interest in existing loans.

The loan strategy for development also stretches to deals to buy individual players. It is not uncommon for clubs to borrow from a financial institution to buy a player. The club then pays the selling club in instalments over a number of years. The player is used as collateral on the loan.

"Leeds United's policy is to protect the value of its playing squad," Ridsdale said in the annual report. "This is achieved by signing four or five-year contracts with players, which are then renewed when the contract has at least two years left to run, or by selling the player at that point whilst they retain significant transfer value."

In September, an independent sports business consultant assessed the sell-on value of Leeds' squad at £198m. That, primarily, is the club's insurance. The downside to loan-funded development is the risk that a club will not achieve the success it needs to meet its borrowing. In a worst-case scenario, if Leeds fail to qualify for Champions' League football for several years, they risk mounting debt, the prospect of selling players to finance it, and a possible cycle of decline.

The onus is therefore very much on O'Leary to establish Leeds as a major force in European competition.

Domestically, Leeds' financial figures look good. This year's annual report showed turnover up by 65 per cent to £86.3m, driven by growth across all the club's businesses, including ticket sales, merchandising, travel and commercial income, including money from Sky for certain media rights. Sponsorship deals with Strongbow, Nike, AMD, Siemens, Gameplay, HSBC and Sports.com will bring in some £22m in the three years to summer 2004.

And then there is television money, which will be around £22m this season from domestic competition alone (based on a fourth-place finish in the Premiership). Television income from European games can be worth £20m-plus with a run to the Champions' League final. Uefa Cup income is substantially less and can stretch to around £10m with a run to the final. Leeds' wage bill, thought be approaching £40m per season, accounts for all its television income.

Champions' League football is a must for the club's long-term stability.