Valeant Pharmaceuticals International Inc. is losing theconfidence of its biggest investor base: debt markets that lent thedrugmaker more than US$30 billion to fund its rapid expansion.

The company's bonds plunged Tuesday by the most ever, pushingthe yield on its most actively traded securities above 10 percentfor the first time after it slashed its forecast for the yearand warned that it may breach debt agreements. Standard &Poor's and Barclays Plc lowered their outlook on the debt, andMoody's Investors Service cut its credit rating on the companydeeper into junk.

Creditorsare starting to lose faith that CEO Michael Pearson will be able toexecute on his promise of rapidly cutting Valeant's debt load. Adelay in filing its annual report with regulators is alsocomplicating the company's standing in debt markets. Failing tofile its 10-K before Wednesday will trigger a technical defaultunder its credit agreement, restricting it from using its creditline, the company said.

“Investors have been trying to give them time to work throughtheir issues, but new things keep popping up,” said Matthew Duch, amoney manager at Calvert Investments in Bethesda, Maryland, whichoversees more than $13 billion in assets. Duch said he'd hoped tobuy Valeant bonds at a discount but decided against it after theearnings call.

The company's bonds fell even as Pearson reiterated on aninvestor call that Valeant will pay down its debt as fast as itcan.

Valeant spokeswoman Laurie Little declined to comment.

Bonds Plunge

Valeant's longest-dated bonds, $3.25 billion of 6.125 percentnotes maturing in 2025, dropped 1.75 cents on the dollar Wednesday,to 74.625 cents, after losing more than 10 cents the day before,according to Trace, the bond-price reporting system of theFinancial Industry Regulatory Authority. That's the lowest levelsince they were issued at par last year. The debt was the mostactively traded corporate security tracked by Trace on Tuesday.

“You want to be an investor, not a gambler,” Duch said. “Thiscould be a sign of capitulation.”

The company said that it will pay down at least $1.7 billion ofdebt in 2016, less than the minimum goal of $2.25 billion itdeclared in December.

Valeant's estimate that it won't be able to reduce debt asquickly as it'd promised prompted Moody's to cut the drug maker'scredit rating to B1, four steps below investment grade, from Ba3following a review that began Feb. 29, the credit grader said in astatement Tuesday. The rating firm raised concern about operatinguncertainties as well as risks facing the company given “limitedopportunities” to raise prices on products.

S&P warned it may lower its equivalent B+ rating on thecompany due to the lower earnings forecast and delay in the filingof the annual report, the credit grader said Wednesday.

As of last week, the company's bonds hadn't sold off as much asits shares had amid news of a regulatory probe that came the daythe drugmaker pulled financial guidance when Pearson returned frommedical leave. Debt investors said they were confident about thestrength of Valeant's businesses and wanted to give Pearson time toadjust to work.

But the lower earnings guidance revealed Tuesday boosts concernsabout management's ability to effectively navigate the businessthrough a hard operating environment, said Barclays analysts led byShubhomoy Mukherjee. The British bank reduced its outlook on thecompany's notes to market weight from overweight.

“We believe that the extent of today's revision, relative to thecompany's initial guidance, will raise further concerns regardingmanagement's credibility and its effectiveness in managing thebusiness through a difficult operating environment,” Mukherjeewrote in a report.

The Barclays analysts pointed to the $1.5 billion reduction inrevenue guidance as a major problem. They also suggested weaknesswill extend longer than expected and affect parts of the businessthat had been considered “safe havens.”

Valeant also said it won't be able to file a 10-K beforeWednesday, which it said will put it in violation of requirementsunder its bond indentures and trigger cross-defaults that willrestrict it from being able to tap its credit line.

Moody's left the company's ratings on review for furtherdowngrade because of the late 10-K filing and because ofuncertainties related to the ad hoc committee's pending review,among other concerns.

Management said they will begin asking lenders next week toamend the credit agreement so that a default is waived.

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