Rating agency warns proposed First Abu Dhabi Bank arrangement could increase debt vulnerabilities, obscure liabilities and expose the country to fresh currency risks….
Global credit rating agency Fitch Ratings has expressed concerns over Nigeria’s proposed $5 billion financing arrangement with First Abu Dhabi Bank, warning that the deal could create hidden debt obligations, weaken transparency and increase the country’s exposure to foreign exchange shocks.
The caution comes months after the National Assembly approved President Bola Tinubu’s request to secure up to $6 billion in external borrowing to support government financing needs and economic programmes.
Included in the approval was a proposed $5 billion Structured Total Return Swap (TRS) financing facility from First Abu Dhabi Bank, a transaction that has attracted growing scrutiny from international financial institutions and market analysts.
According to Fitch, while the arrangement could provide Nigeria with additional liquidity and diversify funding sources, it also carries risks that may not be immediately visible within conventional public debt reporting frameworks.
Concerns Over Hidden Liabilities
In a report titled Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks, the rating agency highlighted the increasing use of TRS structures by emerging economies seeking alternative financing options.
Fitch noted that Nigeria intends to pledge approximately $6.67 billion worth of naira-denominated government bonds as collateral in exchange for hard-currency financing under the proposed arrangement.
The agency warned that such transactions can create liabilities that are not always fully reflected in official debt statistics, making it more difficult for investors and policymakers to assess a country’s true financial obligations.
According to Fitch, gaps in transparency surrounding these structures could also influence sovereign credit assessments and raise concerns about the quality of public debt disclosure.
The agency said that while the financing may offer short-term advantages, its complexity could obscure the scale and terms of government borrowing.
Foreign Exchange Risks Emerge
A major concern raised in the report relates to potential foreign exchange pressures that could arise if market conditions deteriorate.
Fitch explained that although the collateral backing the transaction would consist of naira-denominated bonds, any margin calls triggered under the agreement could require settlement in US dollars.
This means that if domestic bond yields rise significantly or the naira weakens, Nigeria could face additional demand for foreign currency at a time when external liquidity is already under strain.
The agency cautioned that such arrangements can become procyclical, forcing governments to provide additional collateral or repay financing during periods of financial stress—precisely when access to hard currency may be most challenging.
Why Nigeria Is Considering the Deal
Despite its concerns, Fitch acknowledged that the proposed transaction appears to be driven primarily by liquidity management and funding diversification objectives rather than an inability to access international capital markets.
The agency noted that Nigeria has continued to access external financing through traditional channels, including Eurobond issuances and other international debt instruments.
For governments facing rising financing costs globally, alternative funding structures such as TRS arrangements can provide access to foreign currency at potentially lower costs than conventional borrowing.
However, Fitch stressed that the benefits must be weighed against the risks associated with transparency, refinancing obligations and exchange rate exposure.
Understanding the Total Return Swap Structure
A Total Return Swap is a financial arrangement that allows one party to transfer the economic performance of an asset without transferring ownership of the asset itself.
In the case of sovereign financing, governments can issue bonds and use them as collateral in exchange for cash funding from a financial institution.
Fitch explained that because these transactions are often structured as derivative contracts rather than traditional loans, they may fall outside standard disclosure frameworks and, in some cases, receive less legislative scrutiny.
The agency noted that the pledged bonds are typically worth more than the financing received and are frequently classified as contingent liabilities rather than direct debt obligations.
As a result, portions of the government’s financial exposure may not be fully reflected in headline debt figures.
IMF Previously Raised Similar Concerns
Fitch’s warning comes shortly after the International Monetary Fund (IMF) also expressed reservations about Nigeria’s plan to raise up to $5 billion through a derivatives-based financing structure involving First Abu Dhabi Bank.
The IMF cautioned that while innovative financing tools can help governments address short-term funding needs, they may also introduce additional fiscal and debt-management risks if not accompanied by robust transparency and disclosure measures.
With Nigeria’s public debt stock already standing at more than $110 billion as of the end of 2025, the debate over the proposed facility is expected to intensify as policymakers seek new funding sources while balancing debt sustainability concerns.
For investors and market observers, the key question remains whether the financing benefits of the deal will outweigh the long-term risks highlighted by both Fitch and the IMF.
