ABUJA, Nigeria — Global rating agency Fitch Ratings has warned that Nigeria’s proposed $5 billion total return swap (TRS) financing arrangement could expose the country to additional debt-management and liquidity risks, despite its potential benefits.
In a special report obtained on Monday, Fitch said that while total return swaps can provide governments with hard-currency liquidity, diversify funding sources and lower borrowing costs, the structure could create transparency concerns, increase exposure to market shocks and weaken recovery prospects for conventional creditors if not carefully managed.
The report comes weeks after reports emerged that Nigeria had secured approval for a $5 billion financing arrangement with First Abu Dhabi Bank using a total return swap structure backed by local-currency government bonds. The Senate approved the proposal in March 2026, with the transaction expected to have an estimated maturity of 2032.
Fitch explained that under such arrangements, governments pledge bonds as collateral in exchange for cash financing, with the pledged securities typically remaining outside standard debt statistics because they are treated as contingent liabilities rather than direct debt obligations. According to the report, Nigeria’s planned facility would be backed by about $6.67 billion equivalent of naira-denominated bonds and would include margin-call requirements.
The rating agency identified specific threats to Nigeria’s fiscal stability, particularly regarding margin calls. Under the terms of the swap, if the value of the naira-denominated collateral falls due to a weakening currency or rising domestic interest rates, the government may be required to provide additional capital in US dollars. Fitch warned that “margin calls payable in US dollars against naira-denominated collateral could generate hard-currency pressure either if domestic yields rise or the naira weakens.”
Fitch also raised concerns about disclosure standards, stating that detailed contractual provisions such as pricing structures, fees, collateral valuation thresholds and termination clauses are often not publicly disclosed. “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,” the report stated.
The agency further cautioned that there remains significant uncertainty about how total return swap obligations would be treated during a sovereign debt restructuring because 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,” Fitch stated.
Fitch compared Nigeria’s proposed arrangement with similar transactions undertaken by Angola and Senegal, noting that African countries have increasingly explored total return swaps as alternative financing mechanisms. The report observed that Angola’s experience highlighted the potential dangers after a previous risk-off market episode triggered a margin call that the country had to meet using foreign-exchange reserves.
Despite the concerns, Fitch acknowledged that total return swaps can offer genuine financing benefits, including access to external liquidity, lower borrowing costs and greater flexibility in managing government funding needs, particularly during periods of tight global financial conditions.
The warning from Fitch follows a similar caution from the International Monetary Fund, which earlier described such structures as opaque and potentially risky. The IMF’s resident representative in Nigeria, Christian Ebeke, had previously stated that “transactions in these types of structures carry risks” and that “usually, they are opaque, so the terms are not always very transparent.”
As the debate over the financing arrangement continues, the IMF has also noted that Nigeria has market access and could consider issuing Eurobonds or borrowing from multilateral institutions on concessional terms as alternative options for deficit funding.
