This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Diamond Foods 'White Knight' Could Be a Stalking Horse

The interest rate of Diamond's new loan is roughly double the rate it paid creditors after reaching a forbearance in March. As part of that agreement, Diamond Foods suspended its dividend and began work with a newly hired financial advisor Dean Bradley Osborne to raise capital and put its balance sheet within debt covenants. Wednesday's deal signals a success on that front.

Oaktree's warrants and preferred shares should be cause for alarm for stock investors. In addition to loaning $225 million at 12%, the warrants to buy Diamond Foods stock at $10 are priced at less than half of its current stock value. Already Diamond Foods shares are off over 30% year-to-date and fell over 5% to $21.79 in afternoon trading on Wednesday.

If Diamond Foods meets undisclosed 2012 walnut supply and profitability targets in the next six months, Oaktree has agreed to tear up its low-priced warrants and instead exchange $75 million in notes for convertible preferred stock at a conversion price of $20.75, 3.5% below Diamond Foods shares on April 25, when the deal was first struck.

Oaktree's creditor status and board positions also have the firm in a familiar distressed investor position were Diamond's finances to deteriorate.

Spokespeople for Diamond Foods couldn't immediately be reached by phone or email for comment.

Diamond Foods troubles began in February when an audit committee review of its finances found significant accounting inconsistencies for its walnut supplies, forcing the immediate suspension of its CEO Michael Mendes and CFO Steven Neil. The review also cast doubt on the accuracy of two years' worth of the company's earnings statements, and delayed all quarterly earnings filings since the second quarter of 2011. Nasdaq has given Diamond Foods until mid-June to file those earnings, putting off a prospective delisting from the stock exchange.

Those accounting restatements, and a significant debt burden taken to buy Pringles from Procter & Gamble (PG) put Diamond in breach of debt covenants with its lenders, leading to lender forbearance agreements and Wednesday's Oaktree investment.

In February, Procter & Gamble pulled the deal and subsequently sold Pringles to Kellogg (K).

Earlier in May, Diamond Foods hired Brian Driscoll, a former Hostess Brands and Kraft Foods executive as its new CEO.

Oaktree, which completed an initial public offering in April, is the world's largest distressed debt investor with over $75 billion in assets under management.

Oaktree's $225 million loan may be more like a distressed investment than a vote of confidence in Diamond's shares. A loan rate that implies a high risk of default, and the fact that Diamond Foods "white knight" has been provided with the right to buy stock at an over 50% discount to already battered share prices -- or in the event that Diamond is able to shore up its finances in coming quarters, access to shares at below market values -- suggests a better deal for the distressed debt giant than distressed Diamond Foods shareholders.

After a brief surge, Diamond shares fell 5% on news of Oaktree's investment on twice their average daily volume of shares.

For more on Diamond Foods, see how it choked on Pringles. For more on snacks investments, see 7 stocks to benefit from lower corn prices and top yielding food and beverage stocks.

--Written by Antoine Gara in New York

Stock quotes in this article: DMND, K, PG, BAC 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,403.14 +140.58 0.86%
S&P 500 1,859.14 +16.16 0.88%
NASDAQ 4,076.4510 +42.29 1.05%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs