Nigeria has accessed the first tranche of its $5 billion derivatives financing arrangement with the United Arab Emirates’ largest lender, drawing approximately $1.5 billion through a structured Total Return Swap (TRS) with First Abu Dhabi Bank over the past two weeks.
The drawdown comes despite repeated cautions from international financial institutions about the risks and lack of transparency associated with such derivative-based financing . The facility, approved by the National Assembly earlier this year, is part of the government’s strategy to refinance expensive debt and bridge the budget financing gap .
How the Swap is Structured
The Total Return Swap requires Nigeria to provide naira-denominated government securities valued at 133.3% of the loan amount as collateral to First Abu Dhabi Bank . The first tranche is priced at 395 basis points above the Secured Overnight Financing Rate (SOFR), rising to SOFR plus 400 basis points for subsequent drawings .
“The financing is expected to support the government’s debt management strategy by replacing more expensive borrowings while helping finance the country’s fiscal deficit,” a Bloomberg report stated, citing sources familiar with the transaction .
Concerns from Global Financial Institutions
The International Monetary Fund (IMF) has warned that elements of the transaction “could give rise to political constraints on monetary or exchange rate policy” . IMF mission chief for Nigeria, Christian Ebeke, previously stated, “Our view is that the transactions in these types of structures carry risks. Usually they are opaque, so the terms are not always very transparent” .
Fitch Ratings has cautioned that dollar-denominated margin calls against naira collateral could increase foreign exchange pressure if domestic yields rise or the naira depreciates . Similarly, Moody’s Ratings noted that such swap arrangements “introduce credit risks that are not present in traditional commercial borrowing” .
The financing structure includes provisions requiring Nigeria to make additional dollar cash payments “upon demand” if the value of the naira-backed collateral falls due to market or currency movements .
Strengthening UAE Ties
The transaction expands Nigeria’s financial relationship with First Abu Dhabi Bank, which had previously provided about $1.2 billion to support the construction of a section of the Lagos-Calabar Coastal Highway . Similar Total Return Swap arrangements have been used by Angola and Senegal to raise external financing after access to international capital markets became more difficult .
Lawmakers have described the pricing as competitive, noting that the facility provides Nigeria with access to substantial external financing without issuing conventional Eurobonds . The full $5 billion facility, carrying a six-year tenor with a three-year break clause, is being drawn in tranches to support the government’s fiscal obligations .
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