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

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