Nigeria has received the first tranche of a total return swap agreement valued at $5 billion with the largest bank in the United Arab Emirates. The agreement has attracted scrutiny due to its limited transparency. Sources familiar with the transaction, who requested anonymity because they are not authorized to speak to the media, indicated that the country has secured approximately $1.5 billion in recent weeks under the agreement with First Abu Dhabi Bank PJSC.
Africa’s largest oil producer will provide collateral amounting to 133.3% of the financing in naira-denominated securities. The International Monetary Fund (IMF), along with rating agencies Fitch Ratings and Moody’s Ratings, has previously highlighted the risks associated with such agreements due to a lack of transparency.
In its economic review of Nigeria published earlier this month, the IMF noted that certain terms of the agreement “may create political constraints for monetary or exchange rate policy”. Fitch warned that margin call requirements, payable in dollars against naira collateral, could exert additional pressure on the foreign exchange market if domestic rates rise or the naira depreciates.
Nigeria’s finance minister and the head of the Debt Management Office did not respond to requests for comment. A representative of First Abu Dhabi Bank stated that the bank does not comment on client relationships or individual transactions. Moody’s pointed out that such swaps, also utilized by Angola and Senegal, “create credit risks that are not present in traditional commercial borrowings”.
Use of Funds and Agreement Terms
The funds received are intended to refinance costly debts and address the budget deficit, as President Bola Tinubu prepares for elections in January, where he will seek a second four-year term. The cost of the first tranche is 395 basis points above the SOFR (Secured Overnight Financing Rate), while subsequent tranches will be priced at SOFR plus 400 basis points. Nigerian lawmakers described these terms as competitive when they approved the agreement in April.
Previous Ties and Precedents
The agreement also increases Nigeria’s financial exposure to this lender, which previously provided approximately $1.2 billion for the construction of part of a new coastal highway. The project is being carried out by a company linked to an ally of Tinubu.
Total return swaps gained significant attention in 2021 when similar derivative instruments contributed to the collapse of Archegos Capital Management LP. Last year, Senegal raised 721 billion CFA francs (about $1.3 billion) using such instruments after losing access to international capital markets. According to the IMF, Angola utilized similar swaps to raise around $1 billion by 2025.
Source: Bloomberg