Nigeria’s proposed $5bn Total Return Swap with First Abu Dhabi Bank has come under renewed scrutiny after Fitch Ratings warned that the complex financing arrangement could create significant risks for the country’s debt management, foreign-exchange liquidity and any future restructuring of sovereign obligations.
In its latest special report, Sovereign Total Return Swaps and Repo Transactions: Q&A 2026, published on September 14, the global rating agency acknowledged that such transactions can provide governments with alternative sources of funding and diversify their financing base.
However, it cautioned that their complexity could make it difficult for investors, legislators and policymakers to establish the full scale of a sovereign’s financial commitments.
Nigeria’s transaction involves the use of naira-denominated Federal Government securities as collateral for hard-currency liquidity from First Abu Dhabi Bank. The Debt Management Office has previously said the facility has a maximum size of $5bn and is intended to provide additional funding flexibility.
Fitch’s latest assessment comes after earlier concerns from the International Monetary Fund over the use of derivatives-based financing by Nigeria. IMF Nigeria representative Christian Ebeke said in June that such structures carry risks and are “usually” opaque, with terms that may not always be sufficiently transparent.
Transparency remains a key concern
According to Fitch, transparency is one of the three principal risks associated with sovereign Total Return Swaps, alongside liquidity management and creditor recovery.
The agency said some TRS agreements contain contractual provisions that may not be fully visible to the wider market. These can include collateral requirements, margin calls, valuation thresholds, fees and early-termination provisions.
Such provisions become particularly important during periods of financial stress.
A sovereign whose pledged securities decline sharply in value could be required to provide additional collateral or meet other contractual obligations. The resulting demands could arise at precisely the point when the government is already facing tighter liquidity and reduced access to foreign exchange.
Fitch has previously noted that reduced transparency can make it harder for markets and legislators to assess the “true cost, scale and structure” of sovereign borrowing.
Market stress could intensify liquidity pressure
The structure of the Nigerian transaction means that movements in the value of the underlying government bonds could have implications beyond the domestic debt market.
If the value of pledged securities falls sufficiently, the government could face a margin call or other obligations under the swap agreement. Fitch warned that this could amplify liquidity pressures during an economic shock.
That risk is particularly relevant for emerging-market sovereigns because the deterioration in bond prices that triggers additional collateral requirements can occur alongside currency weakness and tighter access to foreign-currency funding.
Rather than providing relief during a crisis, a heavily collateralised financing structure could therefore create additional demands on government liquidity.
The Nigerian government has maintained that the arrangement provides another channel for accessing dollar liquidity and diversifying its funding sources. The DMO has said the transaction is secured by eligible Federal Government securities and that no oil revenues or strategic national assets are pledged.
Fitch highlights possible creditor-recovery implications
The rating agency also drew attention to what could happen if a sovereign using TRS financing eventually needs to restructure its debt.
Unlike conventional unsecured bondholders, a lender with pledged collateral may have access to assets that can be liquidated to recover its exposure.
Fitch said this could alter how losses are distributed among creditors during a restructuring.
In practical terms, if collateral-backed creditors are able to recover a substantial portion of their claims, unsecured creditors could potentially bear a larger share of losses. Fitch therefore considers the size of TRS exposure relative to a sovereign’s overall debt an increasingly important factor when assessing potential recovery outcomes.
This does not mean that Nigeria is facing a debt restructuring. Rather, Fitch's warning concerns how the contractual structure could affect creditors if restructuring were ever required.
Fitch, IMF differ on debt treatment
Another issue highlighted by the discussion around sovereign swaps is how international institutions classify and account for the transactions.
Fitch generally treats the government bonds pledged under a TRS as a contingent liability, while considering the financing proceeds obtained through the transaction to be the principal debt obligation.
The IMF has its own statistical and debt-reporting framework for derivatives and collateralised transactions, meaning the treatment of a particular structure can differ depending on the purpose of the assessment.
The distinction matters because how an obligation is recorded can influence perceptions of a country's debt burden, contingent liabilities and fiscal risks.
Government sees swap as an additional financing channel
The Federal Government has defended the arrangement as part of a broader strategy to diversify financing sources and manage its liquidity needs.
The DMO's August FAQ said the facility has a six-year tenor and can be drawn in phases rather than requiring Nigeria to immediately take the entire $5bn. It said proceeds could be used for budget implementation, priority infrastructure, refinancing relatively expensive domestic and external debt and other approved financing needs.
The government's position contrasts with concerns raised by international financial institutions about the complexity of the arrangement.
The IMF previously noted that Nigeria still has access to conventional financing channels, including Eurobond issuance and multilateral financing.
Fitch, meanwhile, recognises that TRS transactions can provide hard-currency liquidity and broaden financing options, but warns that the benefits have to be weighed against the additional contractual and market risks they introduce.
A growing financing trend
The debate over Nigeria's transaction comes as Total Return Swaps become an increasingly visible financing tool among emerging-market sovereigns.
Fitch has previously described TRSs as an emerging source of external financing that can provide hard-currency liquidity and, in some cases, reduce borrowing costs, while also creating risks around transparency, liquidity and creditor recoveries.
For Nigeria, the central issue is therefore not simply whether the $5bn facility provides access to dollars, but how the associated collateral, margin and termination provisions behave if market conditions deteriorate.
Fitch's latest report puts particular emphasis on the possibility that an instrument designed to diversify government financing could also introduce new obligations that become most demanding during periods of financial stress.
The warning adds another layer to an ongoing debate over how Nigeria should balance its need for financing with transparency, liquidity management and the protection of its broader debt position.