Nigeria’s proposed $5bn Total Return Swap (TRS) could pose debt-management and liquidity risks for the country, Fitch Ratings has warned.
Fitch made the warning in its special report, Sovereign Total Return Swaps and Repo Transactions: Q&A 2026, published on September 14. The proposed deal with First Abu Dhabi Bank involves pledging local-currency government bonds as collateral to obtain hard-currency liquidity.
The arrangement appears to be driven by Nigeria’s desire to diversify its funding sources rather than an inability to access conventional international capital markets, Fitch noted. However, it said the complexity of TRS arrangements could make it difficult for investors and policymakers to determine the full extent of a government’s financial obligations.
Fitch identified transparency, liquidity management and creditor recovery as three major risks associated with sovereign TRS transactions. On transparency, it said limited disclosure could make it difficult to assess contingent liabilities, while provisions relating to margin calls and early termination could create additional liabilities during periods of financial stress.
The liquidity risk could become significant if the collateral used in the transaction loses value during periods of market stress, Fitch said. A decline in local bond prices could trigger margin calls or early termination of the transaction, potentially putting additional pressure on foreign exchange and liquidity when both are already constrained.
It also warned that TRS arrangements could affect the distribution of losses among creditors if a sovereign eventually restructures its debt. Secured lenders could potentially recover much of their exposure by liquidating pledged assets, leaving unsecured bondholders to bear a greater proportion of losses, Fitch said.
Fitch also noted differences between its approach and that of the International Monetary Fund to reporting such transactions. It generally treats pledged government bonds as a contingent liability, while considering the financing proceeds obtained through the transaction as the principal debt obligation.