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Diamond Foods 'White Knight' Could Be a Stalking Horse

NEW YORK ( TheStreet) -- Diamond Foods (DMND) investors may think the company has found a much needed white knight, but there's still very good reason to be cautious on the maker of Emerald Nuts, Pop Secret and Kettle Chips.

In fact, as Diamond shareholders question whether a $225 million investment by Oaktree Capital (OAK) is a savior for the company, they should view the private equity firm's investment as a skeptical bet on the likelihood of a resurgence by the San Francisco-based company. 

Oaktree's Diamond Foods play isn't a green light on shares of the embattled food company

Oaktree Capital is the world's largest manager of distressed debt -- investments that often are worked out in bankruptcy courts -- and the terms of the balance sheet fix and appeasement of creditors should remind Diamond Foods shareholders that Oaktree is well hedged if financial problems persist.

An accounting scandal recently led to the suspension of Diamond top executives, put it on the wrong side of creditors and killed a $2.35 billion acquisition of Pringles. Diamond earnings and financial restatements, meanwhile, have been delayed as a result of the accounting issues until June.

Oaktree Capital will give Diamond Foods a $225 million loan at a 12% annual interest rate that expires in 2020 and can be paid-in-kind during its first two years. Oaktree will also get warrants to buy roughly 4.4 million Diamond Foods shares, or 16.4% of the company's outstanding shares, at a price of $10 a share.

As a result of the investment, Diamond Foods lenders, led by Bank of America (BAC - Get Report), will lower the company's total bank debt and provide covenant relief until October 2013. When the transaction closes, which is expected by the end of May, Oaktree managing director Matthew Wilson and advisor Dean Hollis will join Diamond Foods board.

"The investment of new capital by Oaktree, in conjunction with the amended bank credit facility, will provide Diamond with sufficient liquidity to meet its anticipated near-term and long-term funding need," said Diamond Foods in a release.

If Diamond Foods financial position has been shored up compared with recent months when it had to negotiate a forbearance from its creditors, Oaktree's investment still is not a green light for stock investors.

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