Fitch Raises Concerns Over Nigeria’s Proposed $5bn Swap Financing Deal

Global credit rating agency Fitch Ratings has cautioned that Nigeria’s proposed $5 billion Total Return Swap (TRS) financing arrangement could expose the country to additional liquidity and debt-management risks, despite offering short-term funding advantages.

In a special report released on Monday, Fitch acknowledged that TRS structures can help governments access foreign-currency liquidity, diversify funding sources and potentially secure financing at lower costs. However, it warned that such arrangements may also create transparency challenges, increase vulnerability to market volatility and complicate future debt-restructuring efforts.

The warning follows reports that Nigeria has secured approval for a $5 billion financing facility with First Abu Dhabi Bank through a TRS arrangement backed by naira-denominated government bonds.

According to Fitch, total return swaps have gained popularity among some emerging-market economies as an alternative to traditional borrowing through international bond markets. Under the structure, governments pledge bonds as collateral in exchange for cash financing, while the pledged assets are often treated as contingent liabilities rather than direct debt obligations.

The agency noted that this accounting treatment can make it more difficult to determine the full extent of a country’s borrowing commitments.

“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 report added that limited disclosure could weaken legislative oversight and make it harder for investors and analysts to assess potential risks associated with margin calls.

Fitch said Nigeria’s planned transaction appears to be aimed at improving liquidity management and broadening funding options rather than overcoming difficulties in accessing international capital markets.

Nonetheless, the agency warned that the arrangement could create additional pressure on the country’s foreign-exchange position if domestic bond yields rise or the naira depreciates significantly.

According to Fitch, because margin calls would be payable in US dollars while the collateral is denominated in naira, adverse market movements could generate unexpected foreign-currency obligations.

The agency also highlighted broader structural concerns associated with total return swaps, noting that declines in the value of pledged bonds during periods of economic stress could trigger additional financing demands when government liquidity is already under pressure.

It further warned that details relating to pricing, fees, collateral thresholds and termination clauses are often not publicly disclosed, raising concerns about transparency and accountability.

Fitch pointed to experiences in other African countries, including Angola and Senegal, where similar financing structures have been explored. It noted that Angola previously faced a margin-call episode during a period of market stress, forcing the country to draw on its foreign-exchange reserves to meet its obligations.

The agency said the incident illustrated how such arrangements could amplify liquidity pressures during periods of economic uncertainty.

Another concern raised in the report relates to the treatment of TRS obligations in the event of a sovereign debt restructuring. Fitch noted that no established precedent currently exists, creating uncertainty for both governments and creditors.

“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.

According to Fitch, 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 for margin calls.

The rating agency stressed that as the use of total return swaps expands among emerging economies, policymakers and investors must pay closer attention to their implications for debt sustainability and creditor recovery prospects.

Meanwhile, the International Monetary Fund has also urged Nigeria to exercise caution in pursuing the financing arrangement. The IMF described such structures as relatively opaque and potentially risky, while noting that Nigeria has recently enjoyed improved access to international capital markets.

Despite the concerns, Fitch acknowledged that total return swaps can provide valuable funding flexibility and access to external liquidity, particularly at a time when global financing conditions remain challenging for many developing economies.