Ndubuisi Francis in Abuja
The Debt Management Office (DMO) has explained that the federal government did not pledge oil revenues or strategic assets, such as ports or airports, as collateral for the $5 billion Total Return Swap (TRS) facility between the Federal Government of Nigeria (FGN) and First Abu Dhabi Bank PJSC (FAB).
According to the debt management agency, Nigeria pledged Naira-denominated Federal Government of Nigeria (FGN) Bonds, which are domestic securities it can manage through its own fiscal and monetary policy tools.
The agency promised that all drawdowns and collateral of the $5 billion will be disclosed quarterly in its published public debt data.
The $5 billion TRS is a six-year financial arrangement where Nigeria pledges naira-denominated government bonds as collateral to secure immediate US dollar liquidity.
It is not a traditional loan but a derivative-based total-return swap in which Nigeria hands over local FGN bonds valued at 133.3 per cent of the cash drawn (totalling roughly $6.65 billion if the full $5 billion is utilised).
Nigeria pays a floating interest rate pegged to the Secured Overnight Financing Rate (SOFR) plus a margin of roughly four per cent.
The FGN has already drawn an initial tranche of $1.5billion to $2billion to fund infrastructure and manage budget deficits from the deal, which includes a three-year review option, allowing Nigeria to exit, refinance, or continue the arrangement depending on market conditions.
But some stakeholders and development partners, including the International Monetary Fund (IMF), had raised concerns about transparency in sovereign TRS deals.
However, in its Frequently Asked Questions (FAQs) published at the weekend, the debt management agency remarked that such transparency concerns had been addressed in Nigeria’s case on two fronts.
According to the DMO, the terms of the borrowing were disclosed during approval under Section 20 of the DMO (Establishment, Etc.) Act 2003, and Nigeria’s broader debt-management practice, which already embraces transparency with TRS drawdowns and collateral to be published quarterly in the agency’s public debt data.
It said, “The transaction was approved by the Federal Executive Council and the National Assembly, with full disclosure of its terms at each stage. Drawdowns and collateral will be reported quarterly in the Debt Management Office (DMO) Public Debt Statistical Report.”
The DMO further explained that proceeds from the facility would be channeled into budget implementation, priority infrastructure, refinancing costlier domestic and external debt, and other urgent needs approved by President Bola Ahmed Tinubu.
The debt management body noted that a TRS helps a sovereign or corporate access US-dollar liquidity against pledged assets, adding that, in Nigeria’s case, it pledges naira-denominated FGN bonds to FAB, receives US-dollar funding, and pays interest at SOFR plus an agreed margin.
It stressed that TRS complements, rather than replaces, Eurobonds, noting that sovereigns have used its structures across emerging markets for over a decade.
“It gives Nigeria faster access to dollar liquidity and remains available during periods of market volatility, when Eurobond markets can become more expensive or constrained. It diversifies the FGN’s funding sources and reduces reliance on any single market,” the DMO said.
Regarding how the pricing compares with a Eurobond, it stated that both are commercial instruments priced based on prevailing market conditions at the time the funds are raised.
It stressed that the TRS has the added advantage of providing quicker access to liquidity and enabling the borrower to benefit from lower future interest rates, though with the downside risk of higher interest costs if rates rise.
The DMO said Nigeria pledged Naira-denominated FGN Bonds, which are domestic securities it can manage through its own fiscal and monetary policy tools, adding that no oil revenues or strategic assets, such as ports or airports, were pledged.
Explaining the 133.3 per cent over-collateralisation, the DMO stated that Nigeria pledged collateral worth about a third more than the dollars received, creating a buffer before any extra margin is required.
This, it argued, was a standard risk mitigant, and not a cost to the FGN.
“Comparable sovereigns have posted up to 166.67%, so Nigeria’s 133.3% reflects favourable terms,” the DMO said.
On when Nigeria would face a margin call, the debt manager disclosed that this can happen only if collateral value falls below the 133.3 per cent threshold, as any call is paid in US dollars.
“Nigeria negotiated monthly (rather than the market-standard daily) margin and a five-business-day cure period – both easing the operational burden of managing collateral,” it said.
The agency also noted that margin posted is held as collateral, not paid away, and is returned once the collateral position normalises or the TRS closes, consistent with standard derivatives practice.
On the three-year break clause, the DMO said it gives the FGN optionality, adding that at year three, Nigeria may continue, refinance, partially reduce, or exit the facility, depending on market conditions and its needs at the time rather than being locked into the full six-year term.
Providing further insight into what the $5 billion deal signifies for debt sustainability, the DMO said the TRS is a debt instrument and that drawdowns will be included in Nigeria’s Public Debt Statistics and its debt sustainability analysis.
On the question of what happens if the First Abu Dhabi Bank defaults, the DMO said: “Standard ISDA close-out protections apply: the transaction is closed out, exposures are netted, and Nigeria’s collateral is released or applied under the agreed mechanics – the purpose of using ISDA documentation is precisely to remove uncertainty in a default scenario.”
The main risks to the transaction, the DMO stated, are market, interest rate, FX, collateral valuation, counterparty, and refinancing risk.
Each is actively mitigated, it said, noting that counterparty risk is mitigated by FAB’s strong credit rating and ISDA protections. In contrast, e-financing risk is mitigated by the year-three break option and Nigeria’s access to other funding sources.
On collateral valuation risk, it pointed out that the naira-denominated collateral is exposed to local interest-rate and exchange-rate movements, but over-collateralisation and recent improvements in inflation reduce this risk.
On margin-call risk, the DMO said this is mitigated by improved external reserves, a USD 30 million minimum threshold below which a margin call is not triggered, and a five-business-day cure period.
Overall, the nation’s debt manager said the transaction complies with the Fiscal Responsibility Act 2007 (as amended) and the DMO (Establishment, Etc.) Act 2003, while approvals were secured from the FEC and National Assembly, and the Attorney-General of the Federation, who issued a formal opinion on the transaction.