By Chibuzor Alli
Nigeria’s proposed $5bn Total Return Swap (TRS) could create risks for the country’s debt management, liquidity position and ability to restructure its debt in future, Fitch Ratings has warned.
The warning is contained in Fitch’s latest special report, Sovereign Total Return Swaps and Repo Transactions: Q&A 2026, published on 14 September.
The proposed transaction with First Abu Dhabi Bank would use local-currency government bonds as collateral to secure hard-currency liquidity.
Fitch said the arrangement appeared to be aimed mainly at diversifying Nigeria’s sources of funding and managing liquidity, rather than responding to an inability to access conventional international capital markets.
However, the rating agency said the complexity of such transactions could make it harder for investors and policymakers to establish the full extent of a government’s financial obligations.
Fitch identified transparency, liquidity management and creditor recovery as the three main areas of risk associated with sovereign TRS transactions.
Nigeria’s $5bn TRS raises transparency concerns
Fitch said limited disclosure surrounding some TRS agreements could make it difficult to assess contingent liabilities and contractual obligations that might arise during periods of financial stress.
It also warned that provisions covering margin calls and early termination could create additional liabilities for a sovereign when its finances were already under pressure.
The rating agency said this could make it more difficult to assess the potential financial exposure created by the transaction.
Bond collateral could put pressure on liquidity
Liquidity is another key concern because the value of collateral used in TRS transactions can fall during periods of market stress, Fitch said.
When a government pledges its own bonds as collateral, a fall in bond prices could trigger margin calls or lead to early termination of the transaction.
For Nigeria, Fitch said this could create additional pressure on foreign exchange and liquidity at a time when both could already be constrained.
The potential for changes in bond values to trigger additional funding requirements is therefore an important consideration in assessing the risks of the proposed arrangement.
Fitch warns of impact on future debt restructuring
Fitch also said sovereign TRS arrangements could affect how losses are distributed among creditors if a country eventually needs to restructure its debt.
According to the agency, lenders with claims secured by pledged collateral could potentially recover a substantial portion of their exposure by selling the assets.
That could leave unsecured bondholders carrying a larger share of losses during a debt restructuring.
The structure of a TRS could therefore influence the relative recovery prospects of different categories of creditors if a sovereign comes under severe financial pressure.
Fitch and IMF take different approaches
Fitch and the International Monetary Fund have different approaches to how sovereign TRS transactions should be reflected in government debt.
Fitch generally considers the government bonds pledged as collateral to be a contingent liability, while treating the financing proceeds obtained through the transaction as the principal debt obligation.
The distinction is important because the way the transaction is classified can affect how investors and policymakers assess a government’s overall financial position.
Fitch said sovereign TRS arrangements can provide governments with alternative funding and help diversify their financing base, but their complexity means the associated obligations and risks need to be carefully assessed.
For Nigeria, the proposed $5bn transaction therefore presents both a potential source of hard-currency liquidity and a set of risks around transparency, collateral values, liquidity management and creditor recoveries.
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