(Bloomberg) -- The rate at which companies globally fail to meet their debt obligations could pick up in 2022 if growth and deleveraging efforts stall, while “key lifelines” that have supported the weakest borrowers through the pandemic disappear, according to S&P Global Ratings.

Credit raters have been upgrading high-yield companies and slashing their default rates this year amid accommodative fiscal and monetary policies, a rebounding economy and investor appetite for risk. But risk remains “abnormally high” as government supports are withdrawn and financing conditions normalize, S&P analysts led by Nicole Serino wrote in a report Tuesday.

“We expect that the combination of strong recovery prospects for CCC rated companies and less supportive governments and financing conditions would lead the strongest companies to be upgraded and the weakest to default,” Serino and her team wrote.

In the past 12 months only 16% of CCC rated companies have defaulted on debt payments compared with a historical average of 35%, according to the report. 

Companies in the riskiest tier of high-yield bonds have rapidly emerged out of the category as better financial conditions and improved prospects of an economic recovery have enabled issuers take care of upcoming maturities and prop up their balance sheets. But the pace of upgrades is likely to “gradually decline” in the coming months as business performance becomes the main driver of rating actions, added the analysts. 

Within the leveraged finance universe, debt levels are elevated for single B and CCC rated companies though the divergence between sectors and issuers arising from the pandemic persists, the analysts said. Borrowers have capitalized on a buoyant market and insatiable demand from yield-starved investors to ramp up debt-funded mergers and acquisitions or reward shareholders. 

The high leverage is already starting to worry some bankers and investors. Credit Suisse Group AG has started to say “no” to more debt deals, according to Jeff Cohen, global head of leveraged and acquisition finance at the bank. Goldman Sachs Group Inc. strategist Michael Puempel said continued strong deal-making activity could present credit-return risks for the companies purchasing bigger targets in a more “shareholder-friendly” way. 

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