Diamond Foods 'White Knight' Could Be a Stalking Horse

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.

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.