Fitch Ratings has flagged debt-management and liquidity risks associated with Nigeria’s $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank, warning that the financing structure could expose the government to additional pressure during periods of market volatility.
The transaction allows the Federal Government to obtain dollar liquidity by pledging naira-denominated Federal Government securities as collateral.
According to the Debt Management Office (DMO), the facility has a six-year tenor, while collateral must equal 133.3 percent of the amount drawn.
This means full utilisation of the $5 billion facility would require about $6.67 billion equivalent in government securities as collateral.
Fitch identified transparency, liquidity management and creditor recovery as key risks associated with sovereign TRS arrangements.
One concern is the potential for margin calls. A decline in the value of securities pledged by Nigeria could require additional collateral, potentially creating liquidity pressure during periods when financial markets are already under stress.
Currency movements could also affect the arrangement because Nigeria is pledging naira-denominated securities against dollar financing.
The DMO said the facility does not involve pledging Nigeria’s oil revenues, ports, airports or other strategic national assets. The first tranche is priced at SOFR plus 3.95 percent, while subsequent tranches are priced at SOFR plus 4 percent.
Fitch nevertheless acknowledged that such transactions can provide governments with additional liquidity and diversify funding sources.
For Nigeria, the arrangement provides access to as much as $5 billion in foreign-currency financing without relying exclusively on conventional Eurobond issuance.
The trade-off is that the government assumes collateral-management obligations that could become more demanding if domestic bond prices or the naira weaken significantly.
Fitch’s assessment therefore highlights the need for Nigeria to manage the facility’s collateral, liquidity and disclosure requirements throughout its six-year life.