Datalex facing race to repay Dermot Desmond’s costly loans

It was meant to be a backstop. Just in case. But Dermot Desmond’s commitment of a €10 million debt facility to Datalex, since the airline retail software company sold a block of shares two years ago to repay previous loans from the billionaire, has become a lifeline.

The Dublin-listed company, rocked by an accounting scandal in 2019 and the onset of Covid-19 a year later, had $8.3 million (€7.5 million) of cash in the kitty at the end of 2021 — mainly money left over after repaying €16 million of bailout debt, including interest, to Desmond following a €25 million share sale that year.

But as revenues continued to decline last year, largely due to lockdowns in the key market of China, cash balances had dwindled to $2.7 million by the end of June, and by early August, Datalex had tapped €2.5 million of the facility from Desmond’s Tireragh vehicle.

The rate will ultimately hit 18% in October if the loans are not repaid in the meantime, injecting a bit more urgency into Datalex’s financing plans

Datalex revealed this week that it had drawn down €9 million from Tireragh and that the businessman had agreed to push out the repayment date by 18 months to the end of next year. It’s come at a price, with the already-high 10 per cent interest rate attached to loans — set well before central banks started to hike official borrowing costs last year — increasing to 15.5 per cent with immediate effect.

Bonds are back: but should you invest?

---

CRH puts its hands up over shortcomings on investor dividends

---

Will inheritance cause a problem with my weekly disability payment?

---

High rollers face pension squeeze

---

The rate will ultimately hit 18 per cent in October if the loans are not repaid in the meantime, injecting a bit more urgency into Datalex’s financing plans. Unfortunately, it’s at a time when the company’s third chief financial officer since late 2018, Dan Creedon, has booked a departure flight for the end of June, after only 1½ years in the job.

The company, led by chief executive Sean Corkery, has engaged Goodbody Stockbrokers “to explore further fundraising options to secure capital to repay the debt facility and support the expansion of the business as it returns to positive cash flow generation and further builds out its global customer base”.

In fairness, Datalex is a more backable prospect since China’s president Xi Jinping caved last December to pressure to abandon his zero-covid policy — just after Datalex had warned that it was on track to post earnings before interest, taxes, depreciation, and amortisation loss of as much as $6 million for 2022, up to double what it had previously been projecting.

Corkery said on Thursday that the much-anticipated recovery in Chinese aviation was “truly under way”, with transaction volumes among customers using its software in that country soaring 26 per cent on the month in March, even if total values for the first three months of the year were only at 43 per cent of 2019 figures.

‘Dysfunctional and illogical’: Developer Michael O’Flynn on Ireland’s new vacant land tax

Listen | 46:13

The company has just renewed its partnership deal with Air China for a further three years and will move the flag carrier on to a new flight shopping and pricing product it has designed for that market.

It adds momentum to large contract wins over the past 16 months from Virgin Australia and EasyJet — even as it remains in a protracted legal dispute with Germany’s Lufthansa over a project that was terminated in 2019 following timeline and budget overruns. (Incorrect booking of revenues from that Lufthansa job lay at the heart of the accounting irregularities a few years ago.)

Seasoned Datalex watchers say the company’s next funding round will have to raise close to the €25m raised almost two years ago, in order to clear the Desmond loans

However, as Datalex has yet to actually publish its 2022 year results (though the company says they’ll be issued before a stock-market deadline of the end of the month), investors have no real insight into how the new business is going.

Seasoned Datalex watchers say the company’s next funding round will have to raise close to the €25 million raised almost two years ago, in order to clear the Desmond loans and give it enough headroom to capture opportunities in a recovering global aviation sector.

Global airline passenger traffic in February — measured in revenue-passenger kilometres — surged 56 per cent on the year, leaving activity within 15 per cent of pre-pandemic levels, according to figures last week from the International Air Transport Association.

Under Corkery, who was hired in 2019 to stabilise the business, Datalex has gone from building expensive, bespoke IT systems for airlines to offering off-the-shelf products designed to minimise the amount of configuration needed to plug them into airlines’ existing systems.

Its key products include: Datalex Direct, for airlines taking direct bookings; Datalex NDC, which gives airlines more control over sales through online travel aggregators and corporate travel agents; a pricing system for airfares to baggage that adapts to fluctuating demand; and Datalex Merchandiser, which helps airlines flog add-ons at every opportunity to customers.

Market sources say Datalex would face an onerous rate close to what Demond is charging if it opted for taking on fresh debt — especially with the European Central Bank on track to continue increasing official borrowing costs over the near term, having increased its deposit rate from minus 0.5 per cent to 3 per cent since last July.

The success of Datalex’s €25m share offering two years ago was highly dependent on Desmond, with his promise to continue to provide a €10m debt backstop and willingness to become a cornerstone investor in the equity raise

Another dilutive share sale appears on the cards for the company, which has a market value of less than €70 million, according to observers. Datalex’s plan to hold a capital markets half-day event for analysts and investors on May 10th in London is telling. “All signals would suggest that after a protracted period of restructuring, product development and post-pandemic travel recovery coupled with the cost of onboarding two significant clients (EasyJet and Virgin Australia), Datalex is now poised for a significant increase in business momentum,” said Ian Hunter, an analyst with Cantor Fitzgerald Ireland.

The success of Datalex’s €25 million share offering two years ago was highly dependent on Desmond, with his promise to continue to provide a €10 million debt backstop and willingness to become a cornerstone investor in the equity raise. That meant his stake jumped to 40.5 per cent from 29.8 per cent, requiring an Irish Takeover Panel waiver from a rule where crossing 30 per cent ordinarily triggers a mandatory takeover bid.

Will Datalex have a good enough story to sell to the market to avoid becoming even more beholden to Desmond to get an equity raise off the ground?