You can’t say investors weren’t warned.

Back in July 2016, analyst Carol Levenson at Gimme Credit wrote critically of Teva Pharmaceutical Industries Ltd.’s proposal to pay $40.5 billion for a generic-drugs division of Allergan Plc. She doubted management’s ability to cut the massive debt load they’d be taking on to finance the deal, and even took a swipe at Moody’s Investors Service and S&P Global Ratings for having ” gone easy on the company,” though both had downgraded Teva’s credit rating.

Last week, Teva proved its critics prescient. The world’s biggest maker of generic medicines on Aug. 3 triggered a selloff in its debt and equity by paring a profit forecast and warning investors that it may have to renegotiate some debt covenants if cash flow worsens. The Petach Tikva, Israel-based company slashed its dividend by 75 percent, and said it plans to cut jobs and sell off non-core assets to shed some of its $35 billion debt load. Moody’s dropped its credit rating to one step above junk. (S&P reaffirmed the drugmaker’s rating a level higher.)

What’s more, Teva is facing this crisis without a leadership team — it has been without chief executive and chief financial officers for months.

Teva is just the latest example of a company loading up on debt in an effort to spur growth in a low interest-rate environment. Yet while debt may be historically cheap, it still has to be repaid. And if revenue doesn’t keep up with payments, the downfall can be rapid, even for a former high-flier like Teva.

Once the darling of the generic-drug industry and a poster-child of Israel’s vibrant corporate scene, Teva has fallen on hard times as it cycled through three CEOs this decade. The deal for Allergan’s Actavis drug unit was just one of Teva’s multibillion-dollar takeovers as it heaped on the debt while building itself into an industry powerhouse.

‘Cash Flow’

The acquisition of the Actavis generics unit was supposed to help Teva “generate multiyear top-line and bottom-line growth as well as significant cash flow,” then-CEO Erez Vigodman said one year ago when the sale closed.

The gamble failed to pay off, however, as generic drugmakers’ profit margins were squeezed. The U.S. Food and Drug Administration sped up drug approvals, flooding the market with products from smaller companies that compete on price, while pharmacy chains and retailers began consolidating their orders to the point where four groups account for 80 percent of the purchases, Teva said on its recent earnings call.

Going full-on into generics “was completely the wrong move for them,” said Elizabeth Krutoholow, an analyst who covers biotechnology and pharmaceuticals for Bloomberg Intelligence. She said the acquisition of another blockbuster drug like its multiple-sclerosis drug Copaxone “would’ve been more in their wheelhouse. That could’ve been a great way to go,” she said.

Confront Challenges

“All of us at Teva understand the frustration and disappointment of our shareholders in light of these results,” interim CEO Yitzhak Peterburg said on Aug. 3 after the company pared its forecast. “We will continue to take action to aggressively confront our challenges.”

A representative for the company declined to comment beyond those made last week.

While Teva tried to placate bondholders earlier this year, saying that it has “a number of tools” available to protect credit ratings, creditors wonder whether it has the right tools for its present predicament.

“As a bondholder, we would welcome additional measures to stabilize the credit profile,” said Bastian Gries, head of investment-grade credit at ODDO BHF Asset Management GmbH, which manages about 100 billion euros ($118 billion) of assets. “Teva could increase the disposal program or cost-cutting measures, but the toolbox does not appear ample overall.”

Investors are looking for progress as the company has almost $5.5 billion of bonds maturing before the end of 2019, according to data compiled by Bloomberg. The company’s debt posted its biggest selloff on record on Friday, with $2 billion of bonds maturing in October 2046 sliding 4.6 cents on the dollar to about 86 cents, data compiled by Bloomberg show.

Debt Covenants

“The pressure on the company to deliver bondholder-friendly measures has increased further given the significant debt maturities,” said Gries, who doesn’t expect a downgrade to high yield in the near term without an additional deterioration in 2018.

Teva’s net debt has risen to 4.56 times its earnings before interest, tax, depreciation and amortization, the company said last week. It’s expected to seek amendments to its maintenance covenant in the near term because it risks a breach at year-end unless asset sales proceed as planned and operations run almost perfectly, Eric Axon, a credit analyst at CreditSights in New York, wrote in a note to clients Aug. 3.

The covenant test steps down to 4.25 times net debt to earnings before interest, tax, depreciation and amortization at the end of the year from 5.25 times currently, he wrote. It reduces further to 3.5 times by the end of 2018, Axon said. Maintenance covenants, which ensure borrowers keep up a certain standard of financial health, are standard in loan agreements and periodically tested.

‘Money Back’

While the situation looks dire, Bloomberg Intelligence’s Krutoholow suggests there may be a way out for Teva.

“I don’t expect the creditors to be too hard on them — they should be able to refinance,” she said, because debtholders “want their money back.”

One solution might be to split off the generics business. “If they could pull that off, it’d be a good way to go,” she said. Specialty pharmaceuticals “is completely overshadowed because generics is such a drag at this point.”

Moody’s now ranks Teva’s debt at Baa3, the lowest investment grade, while S&P reaffirmed the drugmaker’s rating at BBB, the equivalent of one level higher.

Levenson of Gimme Credit, who previously said the ratings companies hadn’t been tough enough on Teva, said they now “are getting it right, belatedly.” She also said the worst of the Teva news has been revealed at this point.

“I still believe management’s top priority is to do something about the elevated leverage,” she said. “Although, because of the generic pricing issues, it may take longer than management had originally anticipated to restore the balance sheet.”