Rating agency warns transaction could complicate liquidity management, debt transparency and recovery for creditors in a future restructuring…
Fitch Ratings has raised concerns over Nigeria’s proposed $5 billion Total Return Swap, warning that the transaction could create additional pressures on the country’s debt management, liquidity and prospects for any future debt restructuring.
The warning was contained in Fitch’s latest special report, Sovereign Total Return Swaps and Repo Transactions: Q&A 2026, published on September 14.
While acknowledging that Total Return Swaps can provide governments with alternative financing channels and help broaden their funding base, Fitch said the complex nature of such arrangements could make it more difficult for investors and policymakers to establish the full scale of a sovereign’s financial commitments.
Nigeria’s proposed deal with First Abu Dhabi Bank involves pledging local-currency government bonds as collateral in exchange for hard-currency liquidity.
According to Fitch, the structure appears to be aimed primarily at diversifying Nigeria’s sources of funding and strengthening liquidity management, rather than addressing a lack of access to conventional international capital markets.
The rating agency identified three key areas of concern surrounding sovereign TRS transactions: transparency, liquidity management and creditor recovery.
On transparency, Fitch said limited disclosure surrounding some TRS agreements could make it difficult to properly assess contingent liabilities and other obligations that may emerge if a sovereign comes under financial stress.
The agency also pointed to provisions governing margin calls and early termination, which it said could generate additional financial liabilities at precisely the point when a government is facing heightened pressure on its finances.
Liquidity presents another potential challenge.
Fitch said the government securities pledged as collateral could lose value during periods of market volatility. A sharp decline in bond prices could trigger margin calls or result in the early termination of the agreement.
For Nigeria, such a development could intensify pressure on both foreign-exchange availability and overall liquidity at a time when those resources may already be constrained.
The rating agency also highlighted possible implications for creditors if Nigeria were eventually required to restructure its debt.
Fitch said creditors whose exposure is secured by pledged government bonds could potentially recover a significant portion of their claims by liquidating the collateral.
That could, in turn, leave unsecured creditors, including holders of other sovereign debt, carrying a larger share of losses under a restructuring scenario.
Fitch, IMF differ on treatment of TRS
Fitch and the International Monetary Fund also apply different approaches when determining how transactions of this nature should be reflected in sovereign debt.
Fitch generally considers government bonds pledged under a TRS arrangement to represent a contingent liability, while treating the financing proceeds generated through the transaction as the principal debt obligation.
The differing approaches highlight the complexity surrounding the classification and assessment of sovereign TRS transactions, particularly when governments use domestic securities to obtain foreign-currency liquidity.
For Nigeria, the Fitch assessment adds another layer to the debate over the proposed $5 billion arrangement, with the transaction offering an alternative source of funding while also creating obligations and risks that could become more significant under adverse market conditions.
