The riddle of Leeds United: who owns the star players?

Two seasons ago, they cheered their team all the way to the semi-finals of the European Champions' League, the world's most prestigious football club tournament. But yesterday, supporters of Leeds United discovered what a terrible price their short-lived success had exacted from the club's finances.

As if publication of the worst set of financial results in the history of a British football club were not enough, Leeds United dropped an even bigger bombshell: half a dozen of their best players - including England internationals Paul Robinson and Alan Smith - are mortgaged to a previously little-known finance company.

The revelation has exposed the willingness of clubs such as Leeds to run up huge debts (in the case of Leeds, £80m), in their desperation to secure - and keep - the services of top footballers. Now the club, which yesterday announced losses of £49.5m for the past financial year, finds itself in the same position as a homeowner mortgaged to the hilt who falls into negative equity when the value of his property collapses. For Leeds, the problem is trying to keep up the "mortgage payments" when its fortunes on the field have deteriorated and gate receipts have suffered a corresponding fall.

It has also demonstrated the increasing power of Ray Ranson, a retired professional footballer, who has come to wield enormous influence off the field through his financing firm, the catchily-titled Registered European Football Finance (REFF).

When Leeds bought Mark Viduka from Celtic for £6m three years ago, for example, not a penny was put up by the club. The whole amount came from Registered European Football Finance. In return, Leeds pays back an agreed sum every month.

These deals are a recipe for disaster. Since the club does not have to put the cash up immediately, it is tempted to live beyond its means. If the player performs well and his potential transfer value goes up, REFF may be persuaded to increase the loan. The extra cash raised can then be spent on other players, putting the club even further into debt.

It is not even necessary to buy a player to raise cash against his value. Budding stars who have been brought up through a club's youth scheme can be "mortgaged", with REFF putting up a loan that can then be used to assist further the transfer-market spending spree.

But if the player turns out to be a dud, the club is left with negative equity and possibly falling gate receipts. As City analyst Vinay Bedi at investment firm Wise Speke said: "This is the equivalent of buying an expensive home and then losing your job."

Should Leeds need proof of the perils of these financial arrangements, they need only look down the road to Bradford City which went into administration last year. Among its debts was £7m to the German insurance company Gerling, which had underwritten loans from Mr Ranson's outfit.

It gets worse. Of the Leeds debt of nearly £80m, insurance companies are owed £60m. This has been borrowed by securitising gate receipts - in layman's terms, the insurance companies have first call on the money the fans pay at the turnstiles. This is a common practice among top sports teams in the US but a comparatively recent development here.

If Leeds United is unsuccessful - its current Premiership position is next to the bottom having only won three matches out of 20 so far (against Chesterfield, Middlesborough and Blackburn Rovers) - then fewer fans turn up at the matches. In that event Leeds, not the insurers, has to stand all the shortfall.

The Leeds story - of a club which spent beyond its means to buy success and then found it could not afford the repayments - is only the most extreme example of an increasingly common trend in football. Indeed the extent of the mortgage world of soccer can only be guessed at, although it is estimated that about 20 English clubs have used this facility. Two years ago, Deloitte & Touche, the accountancy firm, calculated that £120m was owing. The figure is probably several times that by now.

Leeds United, according to its balance sheet, owed about £21m on sale and leaseback at its financial year end of 30 June. Half a dozen players are subject to this arrangement although the club is not prepared to say who they are.

However, soccer circles believe that Robbie Keane and Danny Mills were subject to sale and leaseback arrangements. Keane was bought for £12m and sold for £7m, presumably leaving Leeds to continue paying for outstanding debt after he had been sold.

More worryingly, it is believed that money has been raised against the value of young players Alan Smith and Paul Robinson. This will unfortunately come as a blow to any Leeds fans.

In fact, selling star players has done nothing to reduce debts, which actually edged slightly higher in the past financial year despite the sale of star players. The proceeds were used to fund losses of £49.5m, a record for a British club, and interest charges of £7m. Leeds United is running just to keep up with itself.

The accounts also show a loss on player trading of £17m, which gives a pretty stark indication of how the leasing company swallows up cash when mortgaged players are sold.

Meanwhile the wages bill has reached 88 per cent of revenue despite the saving on salaries of the dear departed. Mr Bedi said: "This will be thrown up at business schools for years to come as how not to run a business."