Global credit rating agency Fitch Ratings has warned that Nigeria’s planned $5 billion Total Return Swap (TRS) financing arrangement could expose the country to additional liquidity and debt-management risks, despite providing short-term access to foreign-currency funding.
In a special report released on Monday, Fitch said while TRS structures can help governments obtain foreign-currency liquidity, diversify funding sources and potentially secure financing at lower costs, they also carry significant risks related to transparency, market volatility and future debt-restructuring processes.
The warning follows reports that Nigeria has secured approval for a $5 billion financing facility with First Abu Dhabi Bank through a Total Return Swap arrangement backed by naira-denominated Federal Government bonds.
According to Fitch, Total Return Swaps have become increasingly popular among some emerging-market economies as an alternative to raising funds through international bond markets. Under the arrangement, governments use bonds as collateral in exchange for cash financing, while the pledged assets are often classified as contingent liabilities rather than direct debt.
The agency noted that this accounting treatment can make it more difficult to accurately assess the full extent of a country’s borrowing obligations.
“TRS may be structured under contractual agreements whose terms and conditions are only partly disclosed, reducing transparency of the true scale and terms of sovereign borrowing,” Fitch stated.
The agency added that limited disclosure could weaken legislative oversight and make it more difficult for investors and analysts to evaluate risks associated with potential margin calls.
Fitch said Nigeria’s proposed transaction appears to be intended to improve liquidity management and broaden funding options rather than address challenges in accessing international capital markets.
However, it warned that the arrangement could place additional pressure on the country’s foreign-exchange position if domestic bond yields increase or if the naira experiences significant depreciation.
According to the agency, because margin calls would be settled in US dollars while the collateral consists of naira-denominated assets, adverse market movements could create unexpected foreign-currency obligations.
Fitch also highlighted broader concerns surrounding Total Return Swaps, noting that declines in the value of pledged bonds during periods of economic stress could trigger additional financing demands at a time when government liquidity is already strained.
The report further pointed to concerns over transparency and accountability, noting that information relating to pricing structures, fees, collateral requirements and termination clauses is often not publicly disclosed.
Drawing from experiences elsewhere on the continent, Fitch referenced cases in Angola and Senegal, where similar financing structures have been explored. The agency noted that Angola previously faced margin-call pressures during a period of market stress, forcing authorities to draw on foreign-exchange reserves to meet obligations.
According to Fitch, the episode demonstrated how such arrangements can intensify liquidity pressures during periods of economic uncertainty.
The agency also raised concerns about how TRS obligations would be treated in the event of a sovereign debt restructuring, noting that no established precedent currently exists.
“There is no precedent for how TRSs would be treated in a sovereign restructuring. Their derivative form and limited disclosure create material uncertainty,” the report stated.
Fitch said Nigeria’s proposed facility is expected to mature in 2032 and would be backed by approximately $6.67 billion worth of local-currency government bonds, with provisions allowing for margin calls.
The agency stressed that as Total Return Swaps become more widely used among emerging economies, policymakers and investors will need to pay greater attention to their implications for debt sustainability, fiscal transparency and creditor recovery prospects.
The development comes as the International Monetary Fund has also advised Nigeria to proceed cautiously with the arrangement. The IMF described such financing structures as relatively opaque and potentially risky, while noting that the country has recently experienced improved access to international capital markets.
Despite the concerns, Fitch acknowledged that Total Return Swaps can provide governments with valuable financing flexibility and access to external liquidity, particularly at a time when many developing economies continue to face challenging global funding conditions.
