Fitch flags Nigeria’s $5bn TRS over debt, liquidity risks

Fitch Ratings has warned that Nigeria’s proposed $5bn Total Return Swap (TRS) could introduce significant risks to the country’s debt management, liquidity position and 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 14 September.

The rating agency said while TRS arrangements can give sovereigns access to alternative sources of funding and help diversify their financing base, their complexity could make it harder 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 obtain hard-currency liquidity.

Fitch said the arrangement appears to be driven largely by Nigeria’s desire to diversify its funding sources and manage liquidity rather than by 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 the limited disclosure of some TRS agreements could make it difficult to assess contingent liabilities and contractual obligations that may arise under stress.

The rating agency said provisions relating to margin calls and early termination could create additional liabilities for a sovereign at a time when its finances are already under pressure.

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The liquidity risk is particularly significant because the collateral used in such transactions can lose value during periods of market stress, Fitch said.

Where governments pledge their own bonds, a decline in bond prices could trigger margin calls or force early termination of the transaction, potentially creating additional pressure on foreign exchange and liquidity when both are already constrained.

Fitch also warned that TRS arrangements could change the distribution of losses among creditors if a sovereign eventually needs to restructure its debt.

The agency said lenders secured by pledged collateral could potentially recover much of their exposure by liquidating the assets, leaving unsecured bondholders to absorb a greater proportion of any losses.

Different treatment by Fitch, IMF

Fitch and the International Monetary Fund also take different approaches to how these transactions should be reflected in sovereign debt.

Fitch generally regards the pledged government bonds as a contingent liability and treats the financing proceeds obtained through the transaction as the principal debt obligation.