Nigeria is seeking to raise up to US$5 billion through a derivatives-based financing arrangement with UAE lender First Abu Dhabi Bank, as rising global borrowing costs linked to the Middle East conflict push the government to explore alternatives to traditional debt markets.
According to documents submitted to the National Assembly, the planned facility will take the form of a total return swap (TRS) and is expected to be used to finance infrastructure projects and refinance more expensive domestic and external debt obligations. The move comes at a time when many emerging and frontier market borrowers are finding it harder and costlier to issue Eurobonds amid elevated market volatility.
A total return swap is a financing structure that allows a borrower to access funding using an underlying asset—in this case, naira-denominated securities—without immediately resorting to a conventional bond issue. Under the arrangement outlined by the government, the collateral backing the loan would exceed the value of the borrowing by as much as 33.3 percent, offering a buffer to the lender against market swings.
The proposed loan would be drawn in tranches, with a six-year tenor and a three-year break clause, according to the filing. Pricing is set at SOFR plus 3.95 percent for the first tranche and 4 percent for subsequent tranches, which the government argues is competitive when compared with current Eurobond market yields.
The deal highlights the increasing pressure on African sovereign borrowers to find innovative ways to raise capital as external conditions deteriorate. Since the outbreak of war involving Iran in February, investors have become more cautious toward riskier assets, pushing up yields on international debt and slowing fresh issuance from developing economies.
While Nigeria has so far been shielded from the worst direct fallout of the conflict because of its status as Africa’s largest oil exporter, it has not escaped the broader tightening in global financing conditions. Higher oil prices have provided some relief to revenue expectations, but that benefit has been partly offset by the rising cost of capital and persistent fiscal pressures at home.
The government says the swap structure offers a more flexible route to funding and helps reduce immediate pressure on public finances. But the arrangement also carries risk. If the value of the pledged naira securities falls below agreed thresholds due to exchange rate or market movements, the government may be required to make U.S. dollar cash payments on demand to the lender. Conversely, if the collateral value rises above the issuance amount, the excess would be returned to the government.
That feature underscores both the appeal and the danger of such instruments: they can lower upfront financing costs and avoid the glare of volatile bond markets, but they also expose borrowers to currency and collateral risks if market conditions turn sharply against them.
Nigeria is not alone in pursuing such structures. Other African countries, including Senegal and Angola, have also turned to similar financing mechanisms over the past year as access to conventional international debt markets became more difficult.
Analysts say the popularity of TRS facilities and private placements could increase further if the geopolitical shock in the Middle East continues to keep Eurobond borrowing costs elevated. For Nigeria, the proposed facility represents both a tactical response to current market stress and a sign of the growing complexity of sovereign borrowing strategies in an era of higher rates and greater uncertainty.
If approved and executed, the deal could provide Abuja with a sizeable funding cushion. But it may also deepen scrutiny of how the government manages its debt, collateral exposure, and long-term fiscal sustainability in an increasingly fragile global environment.
