Despite warnings by the International Monetary Fund (IMF) on Nigeria’s plan to borrow from the United Arab Emirates (UAE) based on what it termed opacity of the country lenders’ terms, latest news report has confirmed that the Federal Government had accessed the first tranche of its $5 billion derivatives financing deal with the United Arab Emirates’ largest lender, First Abu Dhabi Bank (FAB).
A news report from Bloomberg published on Friday indicated that the government had drawn about $1.5 billion from the $5 loan over the past two weeks through a Total Return Swap (TRS) transaction with lender.
According to the news report, Nigeria will provide naira-denominated securities valued at 133.3% of the loan amount as collateral for the transaction even amid concerns raised by the IMF and some global rating agencies about the risks associated with such derivative-based financing structures.
For instance, while the IMF warned that elements of the transaction could raise political constraints on monetary or exchange rate policy of the CBN, Fitch Fitch Ratings cautioned that dollar-denominated margin calls against Naira collateral could increase foreign exchange (FX) pressure if domestic yields rise or the naira depreciates.
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Similarly, Moody’s Ratings said such swap arrangements usually introduce credit risks that are not present in traditional commercial borrowing.”
According to Bloomberg, efforts to get comments on the deal from Nigeria’s Ministry of Finance and the Debt Management Office (DMO) fails while officials of First Abu Dhabi Bank declined to comment on client transactions.
Available information on the transactions reflected that the first tranche of the $5 billion facility was priced at 395 basis points above the Secured Overnight Financing Rate (SOFR), rising to SOFR plus 400 basis points thereafter.
Earlier, the legislators in the upper chamber of the National Assembly (Senate) had in April while deliberating on the loan request from the Presidency described the pricing as competitive when approving the transaction to refinance costly debt and fund critical infrastructure.
The latest deal had now raised Nigeria’s debt liability to the First Abu Dhabi Bank, which had earlier loaned the Federal Government $1.2 billion to support the construction of a section of the Lagos-Calabar Coastal Highway.
