iRobot Faces Financial Strain After Amazon Deal Collapse: A Deep Dive into Loan Terms and Cost-Cutting Measures

The collapse of iRobot’s $1.4 billion sale to Amazon has unleashed a cascade of challenges for the robot vacuum cleaner manufacturer, particularly in its efforts to repay a $200 million loan from private equity firm Carlyle Group. As iRobot grapples with regulatory setbacks, plummeting revenue, and soaring losses, the terms of the Carlyle loan have come under scrutiny, intensifying the need for cost-cutting measures.

In response to the deal’s demise in the hands of European antitrust regulators, iRobot announced on Monday that it would lay off 31% of its workforce and implement cost-saving measures to achieve at least $150 million in savings. The fallout from the failed deal has left the Massachusetts-based company at a financial crossroads.

Regulatory filings shed light on the intricacies of the Carlyle loan that iRobot secured last July to navigate the uncertainties of the deal’s regulatory review. According to the filings, iRobot is obligated to allocate $75 million from the $94 million deal break-up fee it will receive from Carlyle toward repaying the loan. This requirement underscores the financial strain iRobot faces as it navigates the aftermath of the collapsed deal.

The terms of the Carlyle loan, which extends until July 2026, impose an annual interest rate of up to 9%, along with the Secured Overnight Financing Rate (SOFR), resulting in a total interest rate of 14.3%. The loan’s interest rate, characterized by its spread of 900 basis points, exceeds the average spread of 599 basis points in direct lending deals by private equity firms with large companies.

Carlyle’s negotiation prowess is evident in the loan terms, where the private equity firm secured a minimum guaranteed return. Even in the event of iRobot prepaying the loan, Carlyle is ensured a return ranging from 1.4 to 1.7 times the loan’s principal, providing a favorable arrangement for the lender.

Beyond financial considerations, Carlyle has imposed restrictions on iRobot’s spending capabilities until the loan is repaid. The loan terms dictate that iRobot must maintain a minimum of $250 million in cash, accounts receivable, and inventory. Although iRobot had double that amount as of September 2023, the company’s financial health is a source of concern, with losses growing from $202 million in the year-ago period to $241 million in the first nine months of 2023.

In response to inquiries, iRobot’s spokeswoman stated that the company had no further comments beyond its public disclosures, while Carlyle declined to provide comments on the matter.

iRobot’s loan from Carlyle is emblematic of the trend where private equity firms increasingly engage in direct lending deals, seizing opportunities as banks retreat due to underwriting losses caused by rising interest rates. While Carlyle’s loan portfolio typically involves leveraged buyouts, it has carved a niche for lending to non-private equity-owned businesses, showcasing its diversified lending strategy.

iRobot, once riding high on surging demand for its vacuum cleaners during the COVID-19 pandemic, now faces a challenging road to recovery. The company’s shares hit a low of $14.25 on Tuesday, the lowest since 2009, reflecting a market value of approximately $400 million. The departure of Chief Executive Colin Angle and the appointment of Chief Legal Officer Glen Weinstein on an interim basis underscore the turbulent period for iRobot.

As iRobot endeavors to implement cost-cutting measures, improve its marketing strategy, and enhance product offerings, the intricacies of the Carlyle loan terms will significantly influence the company’s ability to weather the financial storm and return to profitability.