Fitch Ratings has expressed concerns over Nigeria’s use of Total Return Swaps (TRS) and repo transactions as alternative financing tools, warning that the structures could create transparency, liquidity, and creditor-recovery risks to the fiscal system, despite offering the the governments diversified funding sources.
The global rating agency expressed its concerns on the Nigerian government’s fiscal strategy in a special report titled “Sovereign Total Return Swaps and Repo Transactions: Q&A 2026.” And published on Monday September 14, 2026
Authored by the agency’s analysts Gabriel Comolet and Todd Martinez, the report appraised the growing use of these instruments by emerging-market countries, including Nigeria, Angola, Senegal, Colombia, and Argentina.
According to the report, while TRS transactions could provide governments with access to liquidity and alternative funding channels, they also introduced complexities that may obscure the true scale of sovereign liabilities and complicate debt management during periods of financial stress.
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The Fitch analysts noted that the motivations behind TRS transactions differed across countries and had evolved over time.
They reported that while Angola initially turned to the instrument because of limited access to traditional capital markets, the more recent transactions by both Angola and Nigeria appeared to be driven by funding diversification and liquidity management objectives rather than an inability to borrow through conventional channels.
Fitch observed that the headline borrowing costs associated with many sovereign TRS transactions were broadly comparable to prevailing Eurobond yields, cautioning, however, that the true cost of such arrangements may be higher than advertised.
In addition, the agency noted borrowing costs can be understated when factors such as the opportunity cost of pledged collateral, exposure to margin calls, and early termination provisions are taken into account, and pointed to growing concerns among international financial institutions regarding the use of these financing structures.
The rating agency further reported that the International Monetary Fund (IMF) had specifically highlighted the opacity and potential risks associated with Nigeria’s proposed TRS arrangement and had adopted a more conservative approach when accounting for the collateral involved.
It cited comments by former World Bank President David Malpass, who previously described such structures as creating “a new race toward seniority” in sovereign debt markets, reflecting concerns about how swap-backed financing could alter the hierarchy of creditor claims, to support the report’s findings.
According to Fitch, the risks associated with sovereign TRS transactions fall into three major categories, namely transparency, liquidity management, and creditor recovery.
On transparency, the agency stated the terms of many TRS agreements were often only partially disclosed, limiting visibility into contingent liabilities and making it difficult for investors, lawmakers, and market participants to accurately assess potential risks.
It, therefore, cautioned that reduced disclosure could weaken oversight and obscure the possibility of future obligations arising from margin calls or contractual triggers embedded within the agreements.
Similarly, on liquidity Fitch highlighted the procyclical nature of collateral-backed structures as governments typically pledge their own bonds as collateral, the value of those assets tends to decline during periods of economic or financial stress, implying that a sovereign could face margin calls or early termination provisions precisely when access to foreign exchange and liquidity is already constrained.
The agency also raised concerns about creditor recovery prospects in a potential debt restructuring scenario, noting that TRS lenders may be able to recover most or all of their exposure by liquidating pledged collateral rather than participating in restructuring negotiations.
It maintained that this could leave traditional unsecured bondholders bearing a larger share of losses if a sovereign debt restructuring were ever required.
