Fitch Warns on Nigeria’s $5bn Swap Deal Risks

Nigeria’s proposed $5 billion Total Return Swap with First Abu Dhabi Bank has drawn caution from Fitch Ratings, which said the structure could mask sovereign debt exposure and complicate any future restructuring process.

The warning was contained in a new Fitch 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 funding by emerging economies.

Earlier in 2026, the Nigerian Senate approved the proposed transaction aimed at refinancing costly debt and supporting infrastructure spending, marking Nigeria’s entry into a financing model previously used by Angola and Senegal.

The facility, expected to mature in 2032, involves pledging about N6.67 billion equivalent in local currency bonds as collateral in exchange for foreign currency liquidity from First Abu Dhabi Bank. Fitch said Total Return Swaps can offer advantages such as lower funding costs, improved liquidity access and broader financing options, particularly for sovereigns facing constrained market access.

“A TRS can provide foreign currency liquidity even in difficult market conditions, broaden funding options and reduce borrowing costs relative to conventional market issuance,” the rating agency said. “These advantages can be meaningful for sovereigns with constrained market access or heightened liquidity needs.”

However, the agency warned that such arrangements may rely on partially disclosed contractual terms, limiting transparency around the true scale and structure of sovereign borrowing. “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,” Fitch noted.

According to the report, Nigeria’s structure, which involves pledging naira denominated bonds in exchange for foreign currency liquidity, is mainly aimed at funding diversification and liquidity management rather than immediate market access constraints.

Fitch also raised concern over potential liquidity stress points embedded in the structure, especially where margin calls require foreign currency payments linked to domestic market movements. “Margin calls payable in United States dollars against naira denominated collateral could intensify liquidity pressures if domestic yields rise or the naira weakens,” the report said.

The rating agency further warned that Total Return Swaps, being derivative instruments, may not always appear on conventional public debt records, raising governance and transparency concerns. It added that insufficient disclosure could influence sovereign rating assessments, particularly where contracts include margin call provisions or early termination clauses that could be triggered during periods of financial stress.

Fitch noted that since the value of collateral is tied to sovereign bond prices, any decline in market confidence could trigger unexpected foreign currency obligations at a time when external liquidity is already strained.

The agency cautioned that failure to meet repayment obligations in cash upon termination of the swap could, under its criteria, be treated as a default event. Nigeria’s planned transaction follows similar structures used in Angola and Senegal, though Fitch stressed that the motivations and economic conditions differ across jurisdictions. “Angola, Nigeria and Senegal have used or plan to use TRS to raise financing, but in different contexts and for different purposes,” the report said.

It added that Angola’s earlier transactions occurred under limited market access conditions, while Nigeria and Senegal are more focused on diversification of funding sources and liquidity management. Senegal’s approach was also linked to lower financing costs compared with Eurobond issuance.

Fitch warned that the scale of exposure will be critical in assessing risk, noting that Nigeria’s five billion dollar facility could become more significant if such instruments expand as a share of total external debt.

Earlier in June 2026, the International Monetary Fund also cautioned Nigeria over the proposed derivatives based financing arrangement, warning that such transactions can be complex, less transparent and difficult to fully evaluate.