Fitch Ratings has expressed concern about Nigeria's increasing reliance on Total Return Swaps (TRS) and repo arrangements as alternative sources of sovereign financing, warning that the instruments could heighten transparency, liquidity, and creditor-recovery risks even as they help governments broaden their funding base.
The rating agency set out its position in a special report published on September 14, 2026, titled "Sovereign Total Return Swaps and Repo Transactions: Q&A 2026." The report, prepared by Fitch analysts Gabriel Comolet and Todd Martinez, reviews the expanding use of these structures among emerging-market sovereigns, including Nigeria, Angola, Senegal, Colombia, and Argentina.
Fitch observed that while TRS deals can give governments access to liquidity and alternative funding channels, they also introduce complexities that may hide the true size of sovereign liabilities and complicate debt management during periods of financial stress.
On motivations, the agency noted that Angola first turned to the instrument because of limited access to conventional capital markets. More recent transactions by both Angola and Nigeria, however, appear to be driven by funding diversification and liquidity management rather than an inability to borrow through traditional channels.
Fitch said headline borrowing costs on many sovereign TRS transactions are broadly comparable to prevailing Eurobond yields, but cautioned that the actual cost may be higher once the opportunity cost of pledged collateral, exposure to margin calls, and early termination provisions are taken into account.
The report also highlighted unease among international financial institutions. The International Monetary Fund (IMF) has specifically pointed to the opacity and potential risks of Nigeria's proposed TRS arrangement and has taken a more conservative approach when accounting for the collateral involved. Fitch additionally referenced former World Bank President David Malpass, who described such structures as creating "a new race toward seniority" in sovereign debt markets.
Fitch identified three main risks. On transparency, many TRS terms are only partially disclosed, limiting visibility into contingent liabilities and making it harder for investors, lawmakers, and market participants to assess potential exposures. On liquidity, collateral-backed structures are procyclical: because governments typically pledge their own bonds, the value of that collateral tends to fall during economic stress, meaning a sovereign could face margin calls or early termination precisely when foreign exchange and liquidity are constrained. On creditor recovery, TRS lenders may recover most or all of their exposure by liquidating pledged collateral rather than joining restructuring negotiations, leaving traditional unsecured bondholders to absorb larger losses.
