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The Deal: PIK Interest Mounts at Pulse Electronics

NEW YORK ( The Deal) -- In the wake of Pulse Electronics' (PULS) CFO disclosing that pay-in-kind interest is piling up at the computer and telecom components company as its revenues stagnate, one hedge fund investor who used to own the stock is glad he bailed, especially since Oaktree Capital Partners LP's holding and influence has grown.

"It's a disaster," the former shareholder, who sold his shares within the past 12 months, said by phone Wednesday. "It's one of the worst positions I've had as a hedge fund. Management did a horrible job, and Oaktree took over."

Pulse CFO Drew Moyer explained in an Aug. 6 earnings call that the principal of the company's term loans from Oaktree has increased to $110.9 million due to the addition of PIK interest, up from $103.5 million when the loans were issued in November.

Meanwhile, Pulse's revenues are languishing, coming in at $88.3 million, down from $100.4 million for the same period a year ago.

The company also has other debt concerns, as Moyer noted that it's in discussions with Oaktree regarding $22.3 million in principal of 7% convertible notes due Dec. 15, 2014.

"We are still in discussions with Oaktree regarding the possible terms of a convertible bond exchange offer as part of our investment agreement with Oaktree," he said. "Though we have not yet reached an agreement to move forward with an offer, we believe we have a number of other options regarding the retirements of the convertible bonds either before or after maturity."

Pulse's stock price has slid steadily since the beginning of 2011, when The Deal Pipeline estimated it had a market capitalization of $220 million or so before getting a takeover offer from Bel Fuse (BELFB). That market cap is now $35.84 million even after the company enacted a 10-for-1 reverse stock split in May in order to regain compliance with the New York Stock Exchange's listing requirements. The shares closed at $4.51 on Wednesday.

Now that $249 million takeover offer that fellow electronics manufacturer Bel Fuse made in February 2011 looks great in the rearview mirror.

At the time, however, San Diego-based Pulse convinced shareholders that it would get a better deal through a recapitalization, the former shareholder explained.
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