Nigeria’s proposed $5billion total return swap financing arrangement could expose the country to additional debt-management and liquidity risks despite its potential benefits, global rating agency Fitch Ratings has warned.
Fitch said that while total return swaps can provide governments with hard-currency liquidity, diversify funding sources, and lower borrowing costs, the structure could create transparency concerns, increase exposure to market shocks, and weaken recovery prospects for conventional creditors if not carefully managed.
The report comes weeks after reports emerged that Nigeria had secured approval for a $5billion financing arrangement with First Abu Dhabi Bank using a total return swap structure backed by local-currency government bonds.
Fitch noted that total return swaps have become increasingly popular among some emerging-market sovereigns seeking alternative sources of financing outside traditional Eurobond markets
The rating agency explained that under such arrangements, governments pledge bonds as collateral in exchange for cash financing, with the pledged securities typically remaining outside standard debt statistics because they are treated as contingent liabilities rather than direct debt obligations.
