Fitch warns Nigeria’s $5 billion TRS could complicate debt restructuring

Fitch Ratings has warned that Nigeria’s proposed $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank could obscure sovereign debt risks and complicate any future debt restructuring.

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, seen by Nairametrics.

Earlier in 2026, the Nigerian Senate approved the proposed transaction to refinance expensive debt and fund critical infrastructure projects, marking the country’s entry into a financing instrument already explored by Angola and Senegal.

What they are saying

The deal, approved in April and expected to mature in 2032, would pledge N6.67 billion worth of local-currency bonds as collateral in exchange for hard-currency liquidity.

Fitch noted that while Total Return Swaps can provide cheaper financing and diversify funding sources, they also carry significant structural and transparency risks.

• “A TRS can provide hard-currency liquidity even in difficult market conditions, broaden funding options and reduce borrowing costs relative to conventional market issuance. These advantages can be meaningful for sovereigns with constrained market access or heightened liquidity needs.”
• “However, 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 believes that the proposed structure, which would pledge naira-denominated bonds against hard-currency financing, is similarly motivated by funding diversification and liquidity management rather than market access constraints.

• “Margin calls payable in U.S. dollars against naira-denominated collateral could intensify liquidity pressures if domestic yields rise or the naira weakens.”

More insights

Total Return Swap transactions are structured as derivatives and may not always be recorded as conventional public debt. Fitch warned that limited disclosure of their terms could raise concerns about transparency, governance and the true scale of sovereign borrowing.

• Fitch said material gaps in transparency could weigh on its Issuer Default Rating assessment, particularly where the terms include margin calls or early termination clauses that may be activated during periods of financial stress.
• Most TRS arrangements involve sovereign bonds being pledged as collateral, meaning that the value of the collateral is directly linked to the government’s credit profile. Falling bond prices could generate unplanned demands for hard-currency payments at a time when the country’s external liquidity is already under pressure.

Fitch warned that if a government cannot repay the financing amount in cash when a TRS is terminated, the development could constitute a default under its sovereign rating criteria.

Nigeria’s proposed deal follows similar transactions in Angola and Senegal, although Fitch said the countries adopted the financing structure under different economic circumstances.

• “Angola, Nigeria and Senegal have used or plan to use TRS to raise financing, but in different contexts and for different purposes.”
• “Angola’s initial transactions took place in a context of reduced market access, while its later operations and Nigeria’s proposed deal are more focused on diversifying funding and supporting liquidity management.”

Angola’s earlier reliance on the instrument highlighted the risks associated with margin calls, which forced the government to draw from its reserves. Senegal’s transactions, on the other hand, were driven by efforts to secure financing at lower costs than prevailing Eurobond yields.

Fitch also said the scale of a country’s TRS exposure would be important in determining the level of risk. Although Nigeria’s proposed $5 billion facility is significant, the risk could increase if TRS financing grows as a proportion of the country’s total external debt.

What you should know

Earlier in June 2026, the International Monetary Fund also cautioned Nigeria over its plan to raise up to $5 billion through the derivatives-based financing arrangement with First Abu Dhabi Bank. The IMF warned that such transactions are often complex and may lack sufficient transparency.

• The Fund said the terms of derivatives-based sovereign financing arrangements could be difficult to assess. It warned that the transactions could expose participating countries to significant fiscal and liquidity risks.
• The financing structure could create additional pressure where repayment obligations are linked to market movements or exchange-rate changes.

The warnings from Fitch and the IMF highlight concerns that, although the proposed deal could give Nigeria access to hard-currency liquidity at a lower cost, its structure may create additional debt, transparency and refinancing risks.