Private debt capital: sharp-elbowed players are happy to clip coupons

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Legacy private equity firms have been smart to jump into corporate lending. Rivals are thin on the ground. Traditional banks are too constrained by regulation, market conditions and politics.

Companies with challenged business models that take on expensive debt may be good bets too. With the US economy strong, immediate distress is unlikely.

This week, iRobot borrowed $200mn from Carlyle amid a liquidity crunch. In the most recent quarter, iRobot revenues fell by nearly 50 per cent. The company behind the Roomba vacuum cleaner had already drawn a portion of an existing credit line. New cash from Carlyle functions as bridge financing until an Amazon buyout, now held up in regulatory reviews, can save the day.

In return for its lifeline, Carlyle is set to earn a floating interest rate starting at as much as 15 per cent. If the loan is repaid early — a real possibility if Amazon can acquire the company — Carlyle could be owed between 1.3 and 1.75 times its invested capital. Should the Amazon deal not close, part of a termination fee that Amazon pays will be contractually sent to Carlyle to pay down the loan.

Amazon has reduced its purchase price for iRobot commensurate with the new debt. That stings for shareholders. But the chance to keep the company afloat is worth it. Similarly, the beleaguered auto retailer Carvana struck a balance sheet restructuring deal with bondholders led by Apollo Global a few weeks ago. This provides a couple more years of runway, albeit with significant concessions.

For the likes of Apollo and Carlyle, however, these financing deals are not intended to be aggressive. They do not wish to take over the companies. Simply clipping coupons and fees will be worth double-digit returns without much heavy lifting.

If either iRobot or Carvana do struggle, it will be interesting to see whether these Masters of the Universe seek to sharply enforce their rights or not.