Fitch Flags Debt, Liquidity Risks in Nigeria’s Proposed $5bn Total Return Swap Deal

By Adedapo Adesanya

Fitch Ratings has warned that Nigeria’s proposed $5 billion 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 that while TRS arrangements can provide sovereigns with alternative funding sources and help diversify their financing base, their complexity 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 transaction 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 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 emerge during periods of financial stress.

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

Fitch also highlighted liquidity risks, noting that collateral used in TRS transactions could lose value during periods of market stress.

According to the agency, when governments pledge their own bonds, a decline in bond prices could trigger margin calls or force early termination of the transaction, potentially increasing pressure on foreign exchange and liquidity at a time when both are constrained.

Fitch further warned that TRS arrangements could alter how losses are distributed among creditors if a sovereign eventually restructures 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 absorb a larger share of any losses.

Fitch and the International Monetary Fund (IMF) also differ in how they account for such transactions in sovereign debt.

Fitch generally considers the pledged government bonds a contingent liability, while treating the financing proceeds obtained through the transaction as the principal debt obligation.