Fitch Warns $5bn TRS Could Raise Nigeria’s Debt, Liquidity Risks

Fitch Ratings has warned that Nigeria’s proposed $5 billion Total Return Swap (TRS) could expose the country to significant debt management, liquidity and future debt restructuring risks.

The warning was contained in Fitch’s latest special report, “Sovereign Total Return Swaps and Repo Transactions: Q&A 2026”. The rating agency said while TRS transactions could give sovereigns access to alternative funding and diversify their financing sources, their complexity could make it difficult for investors and policymakers to determine the full extent of government obligations.

Nigeria’s proposed transaction with First Abu Dhabi Bank involves using local currency government bonds as collateral to obtain hard currency liquidity. Fitch said the transaction appears driven mainly by Nigeria’s efforts to diversify funding sources and manage liquidity, rather than an inability to access conventional international capital markets.

It identified transparency, liquidity management and creditor recovery as the three major risks associated with 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.

It added that margin call and early termination provisions could create additional liabilities for a sovereign when its finances are already under pressure.

The agency also warned that the value of collateral could fall sharply during periods of market stress. Where governments pledge their own bonds, such declines could trigger margin calls or force early termination, putting additional pressure on foreign exchange and liquidity at a time when both are already constrained.

Fitch further warned that TRS arrangements could alter how losses are distributed among creditors if a sovereign eventually restructures its debt.

Creditors secured by pledged collateral could potentially recover much of their exposure by liquidating the assets, leaving unsecured bondholders to bear a larger share of the losses.

Fitch and the International Monetary Fund also differ in how they treat sovereign TRS transactions in assessing government debt. Fitch generally regards pledged government bonds as a contingent liability, while treating the financing proceeds obtained through the transaction as the principal debt obligation.

The distinction could affect how investors assess Nigeria’s overall debt burden and contingent obligations, particularly during periods of financial stress.

Fitch said the growing use of TRS and repo transactions reflects sovereign efforts to secure alternative funding and manage liquidity, but cautioned that the instruments can create risks that may not be immediately apparent from headline debt figures.

For Nigeria, the proposed $5 billion transaction therefore introduces another layer to its debt management strategy, with Fitch stressing the importance of transparency around the deal’s terms and potential obligations.