Nigeria has accessed the first tranche of its $5 billion derivatives financing arrangement with the United Arab Emirates’ largest lender, marking the latest step in the Federal Government’s strategy to refinance expensive debt and bridge its budget financing gap.
This is according to a Bloomberg report published on Friday.
The Federal Government drew about $1.5 billion over the past two weeks through a Total Return Swap (TRS) transaction with First Abu Dhabi Bank (FAB).
The financing forms part of the broader $5 billion facility approved earlier this year.
What the report is saying
The report stated that Nigeria will provide naira-denominated securities valued at 133.3% of the loan amount as collateral for the transaction, while international financial institutions continue to express concerns about the risks associated with such derivative-based financing structures.
- The International Monetary Fund (IMF) warned that elements of the transaction “could give rise to political constraints on monetary or exchange rate policy.”
- Fitch Ratings noted that dollar-denominated margin calls against naira collateral could increase foreign exchange pressure if domestic yields rise or the naira depreciates.
Moody’s Ratings said such swap arrangements “introduce credit risks that are not present in traditional commercial borrowing.”
The report noted that officials from Nigeria’s Ministry of Finance and the Debt Management Office did not respond to requests for comment, while First Abu Dhabi Bank declined to comment on client transactions.
More Insights
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.
- The first tranche is priced at 395 basis points above the Secured Overnight Financing Rate (SOFR), rising to SOFR plus 400 basis points thereafter.
- Nigerian lawmakers previously described the pricing as competitive when approving the transaction in April.
- The transaction further expands Nigeria’s financial relationship with First Abu Dhabi Bank, which had earlier 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.
The financing comes as the Federal Government continues efforts to diversify its funding sources amid elevated borrowing costs in global financial markets.
The transaction provides Nigeria with access to sizeable external financing without issuing conventional Eurobonds, but it also introduces additional financial and foreign exchange risks.
What you should know
Nairametrics earlier reported that the IMF cautioned Nigeria over its plan to raise up to $5 billion through a derivatives-based financing arrangement with First Abu Dhabi Bank.
The IMF said such financing structures are often complex and lack transparency.
- The Senate approved the Total Return Swap arrangement earlier this year to refinance costly debt and fund critical infrastructure.
- In December, the Federal Government also secured about $1.2 billion in financing from the UAE to support the construction of a key section of the Lagos-Calabar Coastal Highway.
- Total Return Swaps gained global attention after similar derivative instruments were linked to the collapse of Archegos Capital Management in 2021.
The latest drawdown marks the first disbursement under the $5 billion facility and underscores the Federal Government’s increasing reliance on alternative financing instruments to meet its fiscal obligations.
SOURCE: Nairametrics
