Why to be grateful for Wenger: the reality of Manchester United's implosion

The media has apparently got ahead of themselves in the Chris Smalling situation. Roy Hodgson was interviewed over the defender's potential move yesterday, stating that a bid had been accepted from Manchester United and that he 'believes' Smalling has agreed terms with the club; however, he has not completed his medical yet. Even the BBC announced his signature, breaking their policy of waiting to announce a player's transfer until after he has featured in about five competitive fixtures with his new team.

The media is tearing United to pieces, and it seems utterly bizarre that a club over £700m in debt is still signing new players without at least selling some of their current squad first. The change in the state of their finances since the Glazers' takeover can be compared roughly to the career path of Eric Djemba-Djemba, and it looks like things will only get worse for them.

There was an interesting piece in the Telegraph yesterday by Paul Marshall, a British hedge fund owner and philanthropist - working in his profession, he should know what he's talking about when it comes to obscenely rich Americans destroying businesses in this country. He pointed out that in 2005 Manchester United were completely debt free, and one of the most financially stable clubs in the world - but now United and their holding company are £716.5m in the red. Malcolm Glazer and his family "have saddled the company with debt close to twice the annual turnover and over five times the underlying profits."

You might recall that the Glazers' takeover bid in 2004 was initially rebuffed, with chief executive David Gill telling them that the resulting debt would create problems - their plan for the takeover didn't seem financially viable. But the Glazers came back and successfully bought the club with a new plan based on the use of 'payment-in-kind' (PIK) notes, which could later be converted to shares. The notes were labelled as equity rather than debt.

However, the problem was that interest on these notes could reach 20%, a sidenote which benefited the three hedge funds that invested the money, but would eventually be catastrophic for both United and the Glazers. In 2006, the Glazers reimbursed half of the PIK notes, but the premium paid to the hedge funds and subsequent restructuring increased the debt to £660m. In 2010, the debt is well over £700m.

From a football perspective, it's pretty shocking. Between 2005 and 2009, Manchester United's holding company Red Football Joint Venture Limited has spent over £260m servicing the debt, meaning that Manchester United Plc has faced debt costs averaging £40m per year since the takeover. So money is literally pouring out of United's 'football budget' into the pockets of the bankers.

And apparently, the worst is yet to come. They might have raised £500m from the bond issue last week to pay off some of the current debt, but the club will now be paying annual interest charges of £60m (£40m on the bonds, £20m on PIK); and the Glazers are even entitled to withdraw £140m from Manchester United as dividends to pay the holding company's debts. Marshall insists that the interest payments are only just covered by the club's annual profits, so "Manchester United will never realistically be able to pay off the debt".

If Arsenal were in this position, we would be outraged. I know they might be annoyed that an Arsenal blog is talking about this, but I can understand the United fans' fury over what is happening to their club. Marshall reckons the fans will have to buy the club, and it looks like the supporters who reacted to the 2005 takeover by branching off to form FC United of Manchester had a point. It just goes to show that we really do take for granted the meticulous financial planning over recent years by Arsene Wenger and the board.

At the moment, other clubs have been hit hard by the global financial meltdown - Portsmouth were given winding up orders to pay off their debt to other clubs, in addition to a transfer embargo. While United's debt hasn't yet reached the point where they would suffer such punishments, it doesn't look like spending £8m on a young player is the best idea right now. However, as Smalling won't be joining until next season, it suddenly looks like there might even be some substance to the rumours about Vidic leaving, which previously seemed to have about as much truth to them as Harry Redknapp's latest correspondence with HM Revenue & Customs.

Anyway, back to Arsenal.

If we really have missed out on Chris Smalling, there could be problems for our defence next season. Wenger yesterday clarified that Philippe Senderos will not be offered a new contract, which would suggest that he might still be after a new centre-back. Considering both Gallas and Silvestre will currently be out of contract in the summer, he will have to act fast to sort out new deals and make sure we won't be short at the back next season; although Djourou is yet to return from injury and Havard Nordveit will be back from loan.

As for this evening, the squad is looking a lot stronger. The first XI will be restored, including Bakary Sagna who has recovered from his shoulder injury. Nicklas Bendtner will be on the bench after three months out, and he should be joined by Samir Nasri.

Here's hoping for a good result at Villa Park to get us ready for another six-pointer on Sunday...