SAN FRANCISCO — On the heels of developments leading to top management turnover, financial reversals and the collapse of what was expected to be a transformational acquisition, Diamond Foods, Inc. on May 23 said it has secured a $225 million investment from a private equity investor as part of a market recapitalization.

Under the pact, Oaktree Capital Management will make the investment in Diamond in the form of senior notes while the snack products company will amend its credit agreement with lenders. San Francisco-based Diamond said the investment, together with the company’s bank credit, will provide the company liquidity adequate for both its near- and long-term needs.

As part of the transaction, Oaktree will receive warrants to purchase 4.4 million shares of Diamond stock, equivalent to 20% of the current 22 million shares of Diamond outstanding. The agreement allows Diamond to cancel the warrants if the company reaches certain performance thresholds, giving Oaktree the chance to instead convert a portion of the notes into convertible preferred shares with a higher conversion price than the warrants’ exercise price.

“The recapitalization will result in a capital structure that supports the company's long-term strategy as well as the execution of its current business plan,” Diamond said. “The recapitalization will allow Diamond to further strengthen the company's leadership position in the walnut industry, continue the growth of its snack business and reduce the amount of existing bank debt.”

The transactions are expected to close by the end of May 2012.

Announcing the transaction, Brian Driscoll, who recently was named president and chief executive officer of Diamond, said Oaktree has an “exceptional record” in working with consumer companies and is an ideal partner for the company.

“In connection with Diamond's thorough review of capital alternatives, the company received interest from a number of top-tier investment firms,” Mr. Driscoll said. “We are very pleased with our decision to partner with Oaktree, an experienced investor with an outstanding reputation. Looking forward, our balance sheet strength will provide a solid foundation from which to build as we position Diamond for the opportunities ahead that can deliver value to our shareholders, our growers and our customers.”

The $225 million investment will be in the form of new senior notes and the warrants. The notes will mature in 2020 with an interest rate of 12%. The notes may be paid-in-kind at Diamond’s options for the first two years. The warrants may be exercised at $10 per share and would give Oaktree a post-exercise stake of 16.4% in Diamond.

Under the agreement, all of the warrants may be cancelled by Diamond if the company secures a specified minimum supply of walnuts from the 2012 crop and achieves profitability targets for its nut businesses for the six-month period ending Jan. 31, 2013. Oaktree may exchange $75 million of the senior notes for convertible preferred stock of Diamond. The convertible preferred stock would have an initial conversion price of $20.75, equating to a 3.5% percent discount to the closing price on April 25, 2012, the date that the company entered into its commitment with Oaktree. The convertible preferred stock would pay a 10% dividend that would be paid in-kind for the first two years.

“We are pleased with the progress across our walnut initiatives and with the efforts over the last three months to restore and strengthen the company’s relationships with its growers at a time of record walnut prices,” Mr. Driscoll said. “These extensive efforts, along with the goal of providing competitive prices and terms for our growers, are focused on reestablishing the success of this business and expanding our leadership position in the walnut industry.”

The credit facility amendment features a lower level of total bank debt, initially at $475 million, and substantial covenant relief until October 31, 2013.

When the transaction closes, Matthew Wilson, a managing director of Oaktree, and Dean Hollis, a senior adviser to Oaktree and former president and chief operating officer of ConAgra Foods, will join the Diamond board of directors.

“We recognize the value of Diamond’s high quality brands and their leadership position in the walnut industry,” Mr. Wilson said. “We look forward to working with Diamond’s management team to continue building upon the momentum of recent months.”

Dean Bradley Osborne and Fenwick & West L.L.P. served as advisers to Diamond while Latham & Watkins L.L.P. acted as advisers to Oaktree.

More information about the transaction may be found on the company's web site in the presentation archive in the investor relations section.

The new financing arrangement comes after a turbulent several months at Diamond during which the company acknowledged inadequate internal accounting controls and said certain grower payments for the 2011 and 2010 crops were not accounted for in the correct periods. The investigation and findings led to the ouster of Michael J. Mendes and Steven M. Neil, the company’s c.e.o. and chief financial officer, respectively. It also prompted Diamond to abandon its $1.5 billion acquisition of the Pringles snack business from Procter & Gamble Co.

Since September 2011, when Diamond issued its last earnings report before announcing the internal review, the company’s market capitalization has tumbled from a peak of $2.2 billion to about $500 million, down 77%. The Diamond Foods share price traded at $22.55 at mid-day after the Oaktree announcement, down 2.6% from the previous market close.

Mr. Driscoll was named c.e.o. at Diamond in early May.