Fitch Ratings has warned that Nigeria’s proposed $5bn Total Return Swap (TRS) could create significant risks for the country’s debt management, liquidity position and potential 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.
The rating agency said TRS arrangements can provide sovereigns with access to alternative funding sources and help diversify their financing base. However, it noted that the complexity of such transactions could make it difficult for investors and policymakers to determine the full extent of a government’s financial obligations.
Nigeria’s proposed transaction with First Abu Dhabi Bank involves using local-currency government bonds as collateral to secure hard-currency liquidity.
Fitch said the arrangement appears to be driven mainly by Nigeria’s efforts to diversify its funding sources and manage liquidity, rather than an inability to access conventional international capital markets.
The agency identified transparency, liquidity management and creditor recovery as the three major risks linked to sovereign TRS transactions.
On transparency, Fitch said limited disclosure of some TRS agreements could make it difficult to assess contingent liabilities and contractual obligations that may arise during periods of financial stress.
The rating agency said provisions relating to margin calls and early termination could create additional liabilities for a sovereign at a time when its finances are already under pressure.
The liquidity risk is particularly significant because the collateral used in such transactions could lose value during periods of market stress, Fitch said.
Where governments pledge their own bonds, a fall in bond prices could trigger margin calls or force the early termination of the transaction. This could put additional pressure on foreign exchange reserves and liquidity at a time when both are already constrained.
Fitch also warned that TRS arrangements could affect how losses are distributed among creditors if a sovereign eventually needs to restructure its debt.
The agency said lenders secured by pledged collateral could potentially recover a significant portion of their exposure by liquidating the assets, leaving unsecured bondholders to bear a larger share of any losses.
Fitch and the International Monetary Fund also differ in their approaches to how such transactions should be reflected in sovereign debt.
Fitch generally considers the pledged government bonds a contingent liability, while treating the funds raised through the transaction as the primary debt obligation.