Fitch Warns Nigeria Against $5bn Abu Dhabi Loan, says Financing Method Poses Risks

Fitch Ratings has warned that Nigeria’s planned $5 billion financing arrangement with First Abu Dhabi Bank could increase sovereign debt risks and reduce transparency in public debt reporting.

On March 31, the national assembly approved President Bola Tinubu’s $6 billion external borrowing request.

Tinubu had sought approval for two separate facilities from the United Arab Emirates (UAE) and the United Kingdom.

One of the requests was for a structured total return swap (TRS) external financing programme of up to $5 billion from First Abu Dhabi Bank.

The president said the proposed borrowing would add to Nigeria’s public debt stock, which stood at $110.3 billion (about N159.2 trillion) as of December 31, 2025.

However, in a report titled ‘Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks,’ published on June 19, Fitch said the growing use of TRS structures by emerging economies could create hidden liabilities and expose countries to significant financial risks during periods of economic stress.

The rating agency cited Nigeria’s proposed $5 billion transaction, under which the country plans to pledge about $6.67 billion worth of naira-denominated bonds as collateral for hard-currency financing.

According to Fitch, while such arrangements can provide liquidity, diversify funding sources and lower borrowing costs, they often fall outside conventional debt-reporting frameworks and may weaken legislative oversight.

“Material gaps in transparency may also weigh on Fitch’s Issuer Default Rating assessment,” the agency said.

Fitch added that the opaque nature of such transactions can mask the true scale of a country’s liabilities and trigger sudden hard-currency demands during periods of economic stress.

‘NIGERIA FACES CURRENCY, REFINANCING RISKS’

Fitch said Nigeria’s proposed structure could expose the country to additional foreign exchange pressures if domestic bond yields rise or the naira weakens.

The agency noted that margin calls under the arrangement would likely be payable in US dollars despite the collateral being denominated in naira.

“A TRS can provide hard-currency liquidity even in difficult market conditions, broaden funding options and reduce borrowing costs relative to conventional market issuance. These advantages can be meaningful for sovereigns with constrained market access or heightened liquidity needs,” Fitch said.

“However, TRS may be structured under contractual agreements whose terms and conditions are only partly disclosed, reducing transparency of the true scale and terms of sovereign borrowing.”

The agency said it believes Nigeria’s proposed structure is driven by funding diversification and liquidity management objectives rather than a lack of access to international capital markets.

“Nigeria has approved and reportedly executed a TRS. Fitch believes that the proposed structure, which would pledge naira-denominated bonds against hard-currency financing, is similarly motivated by funding diversification and liquidity management rather than market access constraints,” the report said.

“Margin calls payable in US dollars against naira-denominated collateral could generate hard-currency pressure either if domestic yields rise or the naira weakens.”

Fitch added that such arrangements can become procyclical, forcing governments to provide additional collateral or repay financing at periods when external liquidity is already under pressure.

The agency also noted that Nigeria retains access to international capital markets and has previously raised funds through Eurobond issuances.

HOW TRS STRUCTURES WORK

Explaining the mechanism, Fitch said a TRS transfers the economic exposure of an asset without transferring ownership.

In emerging markets, however, governments increasingly use such structures as collateralised external financing arrangements.

“A government issues sovereign bonds without placing them in the market and transfers them to a counterparty in exchange for cash financing,” Fitch said.

“In most cases, only the cash loan is recorded as external debt, if it is recorded at all. The pledged bonds are usually worth more than the amount drawn and are generally treated as contingent liabilities and so are not captured in standard debt statistics.”

The rating agency said because the arrangements are legally structured as derivatives rather than conventional loans, they often fall outside normal disclosure requirements and may bypass standard parliamentary scrutiny.

Fitch warned that the lack of transparency could affect sovereign credit assessments and complicate debt sustainability analysis.

On June 10, the International Monetary Fund (IMF) also cautioned Nigeria over its plan to borrow up to $5 billion through a derivatives agreement with ‌First Abu Dhabi Bank.