LAGOS, June 23 – Fitch Ratings has warned that Nigeria’s proposed $5 billion Total Return Swap (TRS) financing arrangement with First Abu Dhabi Bank could increase sovereign debt risks, reduce borrowing transparency and complicate any future debt restructuring process.
The assessment was published in a new Fitch report titled Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks: Balancing Transparency and Recovery Risks Against Financing Flexibility.
Earlier this year, Nigeria’s Senate approved the proposed transaction, which is intended to refinance expensive debt obligations and provide funding for critical infrastructure projects.
The transaction marks Nigeria’s entry into a financing structure that has previously been used by Angola and Senegal.
Under the proposed arrangement, Nigeria would pledge approximately N6.67 trillion worth of naira-denominated government bonds as collateral in exchange for $5 billion in foreign currency financing. The facility is expected to mature in 2032.
Fitch acknowledged that Total Return Swaps can provide governments with valuable financing flexibility.
According to the ratings agency, the structure can improve access to foreign currency liquidity, diversify funding sources and lower borrowing costs compared with conventional international bond issuance.
However, Fitch warned that the contractual nature of TRS agreements may reduce transparency because their full terms are often not publicly disclosed.
The agency noted that limited disclosure could make it more difficult for investors to assess the true size, cost and risks associated with sovereign borrowing.
Fitch also highlighted potential liquidity risks arising from the structure of the transaction.
Because the collateral consists of local currency government bonds while financing is received in U.S. dollars, a depreciation of the naira or a rise in domestic bond yields could trigger additional dollar-denominated margin calls.
According to the agency, such obligations could place significant pressure on Nigeria’s external liquidity during periods of market volatility.
Fitch further warned that if a government is unable to settle its obligations in cash when a Total Return Swap is terminated, the event could be classified as a sovereign default under its rating methodology.
The ratings agency also emphasized that the overall risk associated with TRS financing depends on the scale of exposure.
While Nigeria’s proposed $5 billion facility represents a significant transaction, Fitch said risks would increase if similar financing structures become a larger proportion of the country’s external debt.
The report compares Nigeria’s planned transaction with previous TRS arrangements undertaken by Angola and Senegal.
According to Fitch, Angola initially relied on the instrument during periods of limited access to international capital markets before later using it as a liquidity management tool. Senegal, meanwhile, employed the structure primarily to secure financing at costs below prevailing Eurobond yields.
Fitch concluded that although Total Return Swaps can provide valuable financing flexibility for emerging market sovereigns, governments must ensure adequate transparency and carefully manage the associated liquidity and refinancing risks to preserve investor confidence.
