Fitch Ratings Cautions on Nigeria's $5 Billion TRS Risks

Fitch Ratings has issued a warning regarding Nigeria's proposed $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank, indicating that it may expose the country to significant debt management, liquidity, and future debt restructuring risks. This warning is part of Fitch's special report titled “Sovereign Total Return Swaps and Repo Transactions: Q&A 2026.” The agency noted that while TRS transactions can provide alternative funding and diversify financing sources, their complexity may obscure the full extent of government obligations.

The transaction involves using local currency government bonds as collateral to secure hard currency liquidity. Fitch identified three major risks: transparency, liquidity management, and creditor recovery.

Limited disclosure could hinder the assessment of contingent liabilities, while margin calls and early termination provisions could create additional liabilities. The agency also pointed out that the value of collateral could decline sharply during market stress, impacting liquidity.

Furthermore, Fitch's treatment of TRS transactions differs from that of the International Monetary Fund, affecting how investors view Nigeria's overall debt burden.