Nigeria has received the first $1.5 billion from a $5 billion financing agreement with First Abu Dhabi Bank (FAB), marking another step in the Federal Government’s effort to strengthen public finances and manage its growing debt obligations.
According to a Bloomberg report, the money was released over the last two weeks through a financial arrangement known as a Total Return Swap (TRS). The transaction is part of the larger $5 billion funding package that was approved earlier this year to help the country address its fiscal needs.
The financing comes at a cost of 395 basis points above the Secured Overnight Financing Rate (SOFR) for the first drawdown. Future withdrawals under the agreement will attract a slightly higher rate of SOFR plus 400 basis points.
As part of the agreement, Nigeria will provide naira-denominated government securities worth 133.3 percent of the borrowed amount as collateral. This means the value of the pledged local assets will be higher than the actual loan received.
Although the deal gives Nigeria access to much-needed foreign funding, it has also attracted attention from global financial institutions because of the structure used to secure the loan.
The International Monetary Fund (IMF) had earlier warned that financing arrangements involving derivatives, such as Total Return Swaps, could limit the country’s flexibility in making future monetary and exchange rate decisions. The organisation also noted that such transactions can be complicated and may not always be transparent.
Credit rating agency Fitch Ratings also expressed concern that if Nigeria’s domestic interest rates increase or the naira loses more value, the country could face additional pressure in meeting dollar-denominated margin requirements linked to the agreement. This could increase demand for foreign exchange and put further strain on the nation’s currency.
Moody’s Ratings also shared similar concerns, stating that the swap arrangement introduces credit risks that are different from those found in traditional commercial loans.
Despite these warnings, the Federal Government believes the financing will provide important support for the economy. The funds are expected to help refinance existing expensive debts, reduce borrowing costs, and close part of the country’s budget deficit.
Lawmakers approved the financing arrangement in April after describing the pricing as competitive compared with other available funding options.
The latest transaction also strengthens Nigeria’s financial relationship with First Abu Dhabi Bank. The bank had previously provided around $1.2 billion in financing to support part of the Lagos-Calabar Coastal Highway project.
Bloomberg also noted that other African countries, including Angola and Senegal, have used similar Total Return Swap arrangements to raise funds after finding it more difficult to access international capital markets.
The report added that derivative-based financing gained worldwide attention following the collapse of Archegos Capital Management in 2021, highlighting the potential risks associated with such financial instruments.
The release of the first $1.5 billion under the agreement reflects the Federal Government’s growing reliance on alternative financing methods as it seeks new ways to fund projects, manage debt, and bridge budget shortfalls while navigating challenging global financial conditions.
