On 31 March, the National Assembly approved the Federal Government’s request for USD6.00 billion in external financing, comprising a USD5.00 billion structured facility via a Total Return Swap (TRS) and a USD1.00 billion project-tied loan from UK Export Finance (UKEF). The TRS signals a departure from traditional Eurobond issuance, offering flexibility, phased disbursement, and execution certainty amid tighter global financial conditions.
While the structure provides near term support to external reserves and reduces reliance on volatile capital markets, it also introduces additional risks, including exposure to FX-linked margin obligations and less transparent cost dynamics. Ultimately, we believe the effectiveness of the facility will depend on the durability of exchange rate stability and broader macroeconomic conditions.
A New Approach to External Borrowing
The National Assembly approved USD6.00 billion in external financing, consisting of a USD5.00 billion TRS arrangement with First Abu Dhabi Bank (FAB) and a USD1.00 billion project-linked facility from UK Export Finance. The TRS-based facility is relatively novel in Nigeria’s context and may signal a shift away from conventional external borrowing strategies, particularly Eurobond issuance, toward privately structured financing arrangements.
According to the government, the TRS facility is intended to support (1) 2026 budget implementation, (2) development of priority infrastructure, (3) refinancing of relatively expensive domestic and external debt, and (4) meeting urgent fiscal obligations. In contrast, the UKEF-backed loan, arranged by CITI Bank, is specifically earmarked for the rehabilitation of the Lagos and Tin Can Island Port Complexes, with disbursements tied to project execution.
How the USD5.00 billion TRS Facility Works
A Total Return Swap (TRS) is an agreement between two parties: the asset owner (total return payer) and an investor (total return receiver). Under this arrangement, the asset owner transfers all returns from the asset — including interest payments and any changes in its market value — to the investor. In exchange, the investor makes regular payments based on a benchmark rate such as SOFR plus a spread. Although this reflects the contractual flow, the economic cost of the transaction ultimately depends on which party receives the upfront funding.
Over the life of the contract, the position is regularly revalued, and if the asset’s value moves unfavourably, additional collateral or margin calls may be required.
In Nigeria’s case, the government will use this structure to access up to USD5.00 billion in foreign currency and issue naira-denominated FGN bonds as collateral under the arrangement with First Abu Dhabi Bank (FAB). Nigeria will transfer the returns on these bonds (both interest and price movements) to FAB, while receiving USD funding in return, and therefore effectively bears the cost of the financing despite the derivative structure.
Overall, the arrangement provides immediate US dollar liquidity without issuing a traditional Eurobond, however, it exposes the government to risks linked to domestic bond performance and exchange rate movements.
Features of the USD5.00 billion TRS Facility
The following are key details of the TRS agreement:
- The facility has a six-year tenor, incorporating a three-year break clause and annual rollover options. However, this is subject to mutual agreement between the parties.
- There is an over-collateralisation requirement to mitigate counterparty risk. This is pegged at 133.3% of the loan value (USD5.00 billion).
- The pricing is benchmarked against the Secured Overnight Financing Rate (SOFR), which closed at 3.59% as of 9 April.
TRS Facility – Precedents in Frontier Markets
While such arrangements remain relatively uncommon, similar TRS arrangements have been deployed in other Frontier markets, particularly during periods of constrained access to international capital markets. Notably, Senegal implemented a comparable financing structure in 2025, raising approximately EUR650.00 million across multiple transactions involving Africa Finance Corporation (AFC) and First Abu Dhabi Bank (FAB).
Of this, around EUR300.00 million was sourced from FAB and secured with local CFA-denominated bonds, posted at an over-collateralisation rate of 133.3%. We note that the structure provided relatively cheaper funding (approximately 7.0%) than Eurobond issuance and offered timely liquidity support, although it attracted criticism due to its opacity and exposure to margin call risk.
Similarly, Angola executed a comparable — though not identical — USD1.00 billion TRS arrangement with JPMorgan between 2024 and 2025, using sovereign Eurobonds as collateral to access foreign currency liquidity. While the structure enabled Angola to raise funding without immediately recording the full bond issuance as on-balance-sheet external debt (the bonds were treated as contingent liabilities), it later faced margin calls of up to USD200.00 million in April 2025 following adverse movements in bond prices linked to falling oil prices and global risk-off sentiment. The government posted the additional collateral from reserves, which was later returned after bond prices recovered. This episode underscored the contingent risks inherent in such instruments.
Notably, Nigeria’s proposed USD5.00 billion facility would represent the largest sovereign transaction of this nature to date, thereby amplifying both its potential benefits and associated risks.
TRS Facility May Substitute for Eurobond Issuance in the 2026 Budget
We believe the structured facility could potentially substitute for the government’s planned Eurobond issuance (USD2.56 billion) under the 2026 budget (NGN68.32 trillion), particularly as the international bond market appears less accessible amid heightened geopolitical tensions, which have increased borrowing costs and reduced the attractiveness of conventional external financing.
While the cost of the facility (7.60% – 7.65%) appears broadly in line with the current Eurobond secondary market yield (7.48%) for the comparable tenor (2032), we note that a public issuance would likely require an additional new issue premium of c. 50 – 100bps, implying an effective borrowing cost in the range of 8.0% – 8.5%. Notably, as global inflationary pressures linked to the ongoing war in the Middle East materialise, upward pressure on global yields could necessitate a wider new issue premium relative to secondary market yields. In this context, the TRS structure provides a more flexible and privately arranged source of funding, enabling the government to secure financing at relatively competitive rates while mitigating exposure to adverse market timing and execution risks.
Moreover, the government may be operating under the expectation that the naira will remain relatively stable in the near to medium term. Under such conditions, overall funding risk within the structure is moderated, as exchange rate stability removes an additional source of volatility. Consequently, the valuation of the underlying bonds is driven primarily by interest rate movements, which tend to evolve more gradually, thereby reducing the likelihood of sharp mark-to-market losses that could trigger margin calls.
We expect drawdowns to be phased over a 1 to 3 year period, with the pace and timing contingent on the government’s financing requirements as well as prevailing global financial conditions, particularly interest rates and market pricing dynamics.
TRS Facility Poses Additional Risks to Liquidity and Funding Stability
In our view, while the structure offers clear advantages in flexibility and access to funding, it also introduces additional risks compared with traditional external borrowing. These risks include exposure to FX-linked margin requirements, which can translate into significant liquidity and funding pressures, particularly during periods of economic stress and uncertainty.
For instance, if the naira weakens due to large capital outflows, the USD value of the pledged naira-denominated collateral declines, thereby reducing the collateral coverage ratio below the agreed threshold. Similarly, a rise in domestic yields, often linked to rising inflation, monetary tightening and higher fiscal borrowings, would reduce the market value of pledged bonds. Given that the structure is marked-to-market with defined collateral coverage requirements, such valuation changes could trigger margin calls. In either case, the counterparty may issue a margin call, requiring the government to post additional collateral, in USD or in the form of additional securities, within a short timeframe to restore the required coverage level. This means that at a time when conditions are already tight, the government may face even greater liquidity pressure.
Furthermore, the structure entails greater complexity and less transparent cost dynamics relative to conventional borrowing. The effective cost is not fixed but varies with global benchmark rates (SOFR), movements in domestic bond yields, and exchange rate fluctuations, making it more difficult to predict and manage debt service obligations.
Accordingly, we believe the effectiveness of the facility will be highly contingent on the durability of exchange rate stability, a relatively stable domestic yield environment, and supportive external conditions, including sustained capital inflows and adequate FX liquidity.
Impact on External Position and Debt
Given a phase drawdown of the facility, the impact on external reserves and the balance of payments is likely to be gradual rather than front-loaded, with each tranche providing incremental support. Similarly, the effect on total public debt will materialise progressively as drawdowns occur, implying a more measured increase in the debt stock over time rather than a one-off spike, although cumulative obligations will still rise as the facility is fully utilised.
Impact on Fixed Income Yields
The over-collateralised value of the loan (USD5.00 billion) is equivalent to USD6.67 billion or NGN9.09 trillion at the exchange rate of NGN 1,363.00/USD as of 9 April. This implies that the Federal Government would need to issue or pledge approximately NGN9.09 trillion in naira-denominated FGN securities as collateral.
Nonetheless, while this increases the overall stock of government securities outstanding, these instruments are issued off-market and pledged directly to First Abu Dhabi Bank (FAB) rather than being auctioned to the public. Because no cash proceeds are received for these specific securities (unlike conventional domestic bond auctions), they are not recorded as additional domestic debt issuance in official public debt statistics. Instead, they are treated as contingent liabilities until a trigger event (such as an unmet margin call) occurs. As such, the direct impact on primary market supply and domestic yields is expected to be limited in the near term, particularly in the absence of spillovers into regular DMO auction activity.
That said, the pledged securities still increase the government’s total exposure and may contribute to a gradual repricing of sovereign risk if market participants begin to incorporate the associated contingent liabilities and potential future margin call obligations into their pricing. In the medium term, this could exert modest upward pressure on yields. In addition, margin calls triggered by naira depreciation or rising domestic yields could force the government to issue additional bonds or sell assets quickly, amplifying yield spikes precisely when the market is already under stress.
Cordros
