Fitch Flags Debt, Liquidity Risks in Nigeria’s Proposed $5bn TRS

Fitch Ratings has raised concerns over Nigeria’s proposed $5 billion Total Return Swap (TRS), warning that the transaction could create additional 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.

According to the rating agency, sovereign TRS transactions can provide governments with alternative sources of financing and help diversify their funding base. However, the complexity and limited transparency surrounding some of these arrangements could make it more 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 obtain hard-currency liquidity.

Fitch said the proposed arrangement appears to be primarily aimed at diversifying Nigeria’s funding sources and managing liquidity rather than addressing an inability to access conventional international capital markets.

Fitch Identifies Three Major Risks

Fitch highlighted three key areas of concern associated with sovereign TRS transactions: transparency, liquidity management and creditor recovery.

On transparency, the agency noted that limited disclosure of TRS agreements could make it difficult to accurately assess a sovereign’s contingent liabilities and contractual obligations, particularly during periods of financial stress.

Provisions relating to margin calls and early termination could also create additional financial obligations at a time when government finances are already under pressure.

This means that while a TRS can provide immediate access to liquidity, changes in market conditions could potentially increase the sovereign’s financial obligations.

Collateral Could Create Liquidity Pressure

Fitch identified liquidity as another major risk, particularly when government securities are pledged as collateral.

If the value of the pledged bonds falls during a period of market stress, the transaction could trigger margin calls requiring the government to provide additional collateral or liquidity.

A significant decline in bond prices could also result in the early termination of the transaction.

Either scenario could place additional pressure on Nigeria’s foreign exchange and liquidity position at a time when financial conditions may already be challenging.

The risk illustrates one of the potential complications of collateralised sovereign financing: market volatility can transform what initially appears to be a liquidity-management instrument into an additional source of funding pressure.

Implications for Future Debt Restructuring

Fitch also warned that TRS transactions could affect how losses are distributed among creditors if a sovereign eventually needs to restructure its debt.

Because lenders involved in TRS transactions may hold pledged assets as collateral, they could potentially recover a larger proportion of their exposure by liquidating those assets.

This could leave unsecured creditors, including some bondholders, exposed to a greater share of potential losses during a restructuring.

The structure of such transactions could therefore complicate negotiations among different classes of creditors and influence recovery expectations in a sovereign debt restructuring.

Fitch and IMF Take Different Approaches

Fitch and the International Monetary Fund differ in how they account for sovereign TRS transactions when assessing public debt.

Fitch generally considers the government bonds pledged as collateral under such transactions to represent a contingent liability, while treating the financing proceeds received through the transaction as the principal debt obligation.

The distinction is important because the accounting treatment of these instruments can influence assessments of a country’s debt exposure and the risks associated with its financing strategy.

Balancing Funding Diversification With Risk

Nigeria’s proposed $5 billion transaction highlights the growing use of more sophisticated financing instruments by sovereign governments seeking to diversify funding sources and manage liquidity.

Such instruments can provide governments with additional financing options, particularly when traditional borrowing conditions are expensive or volatile.

However, Fitch’s assessment underscores the importance of transparency, effective collateral management and careful consideration of the obligations that could emerge if market conditions deteriorate.

For Nigeria, the challenge will be balancing the immediate liquidity and funding-diversification benefits of the proposed transaction against the potential longer-term implications for debt sustainability, foreign exchange liquidity and creditor relationships.