Global credit rating agency Fitch Ratings has raised fresh concerns over Nigeria’s planned $5 billion Total Return Swap (TRS) financing arrangement with First Abu Dhabi Bank, warning that the deal could obscure the country’s true debt exposure, increase fiscal vulnerabilities, and complicate any future debt restructuring efforts.
The warning was contained in Fitch’s latest report titled “Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks: Balancing Transparency and Recovery Risks Against Financing Flexibility,” which examined the growing use of derivatives-based financing instruments by emerging economies seeking alternative funding sources.
The caution comes months after the Nigerian Senate approved the proposed transaction, designed to refinance expensive debt obligations and provide funding for critical infrastructure projects.
The facility, approved in April 2026 and expected to mature in 2032, would see Nigeria pledge approximately N6.67 trillion worth of naira-denominated government bonds as collateral in exchange for access to hard-currency liquidity.
The proposed transaction marks Nigeria’s entry into a financing structure previously utilized by countries such as Angola and Senegal, albeit under different economic circumstances.
According to Fitch, Total Return Swaps can offer governments significant benefits, including access to foreign currency financing during periods of market volatility, diversification of funding sources, and potentially lower borrowing costs than conventional Eurobond issuances.
However, the agency warned that these advantages come with substantial risks.
“A TRS can provide hard-currency liquidity even in difficult market conditions, broaden funding options and reduce borrowing costs relative to conventional market issuance,” Fitch noted.
Despite these benefits, the rating agency cautioned that TRS arrangements are often structured through complex contractual agreements whose full terms may not be publicly disclosed, making it difficult for investors, creditors and rating agencies to accurately assess a country’s debt obligations.
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One of Fitch’s major concerns centres on the potential for margin calls arising from fluctuations in domestic bond prices and exchange rates.
Under the proposed arrangement, Nigeria would pledge naira-denominated government bonds while receiving financing in U.S. dollars. If domestic bond yields rise or the naira depreciates significantly, the value of the collateral could decline, triggering demands for additional payments in hard currency.
“Margin calls payable in U.S. dollars against naira-denominated collateral could intensify liquidity pressures if domestic yields rise or the naira weakens,” the report stated.
The agency warned that such obligations could emerge at a time when external reserves and foreign exchange liquidity are already under strain, creating additional pressure on public finances.
Fitch further explained that because Total Return Swaps are classified as derivatives rather than traditional loans, they may not always appear in conventional public debt statistics.
This, according to the agency, creates governance and transparency concerns, especially where repayment obligations, early termination clauses, or collateral requirements are not fully disclosed.
The rating agency cautioned that if a sovereign borrower is unable to settle its obligations in cash upon termination of a TRS arrangement, such an event could be classified as a default under Fitch’s sovereign rating methodology.
The warning underscores the importance of fully understanding the contingent liabilities embedded in complex financing instruments before they are adopted on a large scale.
Economic analysts say the concerns raised by Fitch and the IMF highlight the delicate balance Nigerian authorities must strike between accessing affordable financing and maintaining fiscal transparency.
A Lagos-based financial analyst, Dr. Bismarck Rewane, noted that alternative financing instruments can be useful when deployed prudently but warned that excessive reliance on complex derivatives could expose governments to unforeseen risks.
“TRS structures can provide short-term liquidity relief and lower financing costs, but they also create contingent liabilities that may not be immediately visible. The key issue is transparency and effective risk management,” he said.
Similarly, development economist Prof. Muda Yusuf argued that while the facility may help the government diversify funding sources, authorities must ensure that all obligations associated with the transaction are clearly disclosed.
“The concern is not necessarily the instrument itself, but whether stakeholders, investors and citizens have full visibility into the terms, risks and repayment obligations. Transparency remains critical for maintaining market confidence,” Yusuf stated.
Financial markets expert Johnson Chukwu also stressed the need for comprehensive disclosure, noting that Nigeria’s rising debt service burden makes prudent borrowing decisions increasingly important.
“Any financing arrangement that creates future foreign currency obligations should be carefully assessed against exchange-rate risks and debt sustainability considerations,” he said.