Fitch Ratings has warned that Nigeria’s proposed $5 billion financing arrangement with First Abu Dhabi Bank could create fresh liquidity and debt-management challenges, even as it offers the government an alternative source of foreign-currency funding.
In a report released on Monday, the global rating agency examined the implications of the Total Return Swap (TRS) structure reportedly approved by Nigerian authorities and cautioned that such transactions could expose sovereign borrowers to market-related shocks and transparency concerns.
The planned deal, which is expected to be backed by naira-denominated government bonds, is designed to provide hard-currency financing while allowing Nigeria to diversify its funding sources outside the conventional Eurobond market.
Fitch noted that total return swaps have increasingly been adopted by emerging-market governments seeking flexible financing options amid tighter global credit conditions.
Under the arrangement, government bonds are pledged as collateral in exchange for cash financing. However, because such obligations are often classified as contingent liabilities rather than direct debt, they may not be fully reflected in conventional debt statistics.
According to the agency, this feature can make it more difficult for investors, lawmakers and market participants to accurately assess the scale and cost of government borrowing.
“Reduced transparency limits the ability of legislators and markets to assess the true cost, scale and structure of sovereign borrowing,” Fitch said.
The agency stated that Nigeria’s proposed transaction appears to be motivated by liquidity management and funding diversification rather than a lack of access to international financial markets.
Nevertheless, it warned that the arrangement carries risks that could intensify during periods of economic stress.
One major concern identified by Fitch is the possibility of margin calls. Since the financing would be obtained in foreign currency while the collateral consists of naira-denominated bonds, a sharp depreciation of the naira or a rise in domestic interest rates could reduce the value of the collateral and trigger additional payment obligations.
Such demands, the agency said, could place further pressure on Nigeria’s foreign-exchange reserves at a time when liquidity is already constrained.
Fitch also pointed to uncertainties surrounding the contractual details of many TRS agreements, noting that critical information such as pricing structures, collateral requirements, fees and termination clauses is often not publicly disclosed.
The report argued that this lack of transparency could complicate risk assessment and weaken confidence among investors.
Drawing comparisons with similar transactions in Africa, Fitch cited Angola’s experience with a TRS-backed financing arrangement that resulted in a margin call during a period of market turbulence. The country was forced to rely on foreign-exchange reserves to meet its obligations before conditions later stabilised.
According to the agency, the episode demonstrated how such financing structures can amplify financial pressures during economic downturns.
Fitch also highlighted the absence of any established framework for dealing with TRS obligations in the event of a sovereign debt restructuring.
“There is no precedent for how TRSs would be treated in a sovereign restructuring,” the agency noted, adding that the derivative nature of the instruments and limited disclosure requirements create uncertainty for creditors.
Details contained in the report indicate that Nigeria’s proposed facility could run until 2032 and would be supported by approximately $6.67 billion worth of local-currency government bonds as collateral.
While acknowledging the risks, Fitch said total return swaps can offer important advantages, including access to external liquidity, lower financing costs and greater flexibility in managing government funding needs.
The warning comes shortly after the International Monetary Fund advised Nigeria to proceed cautiously with the proposed arrangement, describing such financing structures as potentially opaque despite the country’s recent success in accessing international capital markets.
Analysts say the growing use of alternative financing instruments by developing economies underscores the need for stronger disclosure standards and careful risk management to prevent future debt vulnerabilities.
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