Call it mounted trouble or relief for the distressed snack maker, Diamond Foods Inc. , who announced the suspension of its quarterly dividend to seek access to extended credit from bankers.
Yesterday, Diamond Foods, entered into a new agreement with its lenders allowing the company to access funds for an extended period through June 18, 2012. This extension bestows an opportunity upon Diamond Foods to repay loans while also making efforts to further strengthen its balance sheet. The company is closely working with its financial advisor, Dean Bradley Osborne, to seek alternative uses of capital.
Apart from infusing strength, the extended facility will enable the company to work through its restatement process as a part of the allegations of an accounting fraud by the Securities and Exchange Commission (SEC). In February, an internal investigation revealed that the company wrongly accounted for payments to walnut growers and dismissed both CEO and CFO on grounds of misconduct. Therefore, the company has been ordered to restate its financial statements for fiscal 2011 and fiscal 2010.
Moreover, the SEC investigation blocked Diamond Foods from buying the Pringle’s brand from Procter & Gamble Company (PG - Analyst Report) . Kellogg Company (K - Analyst Report) is now the righteous owner of the Pringle’s brand.
Furthermore, Diamond Foods expects to use the period up to June to reinforce the trust of walnut growers to ensure its competitiveness and continued success in the snack industry.
While the new agreement was a blessing in terms of relieving the company of its credit crunch, it also conditions the company to give up its dividends, pulling down its stock prices. Furthermore, the new agreement will attract a raised interest rate on loans, which will perk up by 75 basis points, along with a one-time fee of 25 basis points to creditors.
Diamond Foods is the U.S. leader in the culinary and in-shell nut category with approximately 37% market share. The company focuses on processing, marketing and distribution of culinary, ingredient, in-shell, and snack nuts under the Diamond of California and Emerald of California brand names.
Given the ongoing SEC investigation, Diamond Foods currently has a Zacks #4 Rank, which translates into a short-term sell rating. However, we maintain our long-term ‘Neutral’ recommendation on the stock.