FGN leans toward external borrowings FGN plans two external borrowings: a $1.0 billion UK Export Finance (UKEF) covered loan facility needed for the rehabilitation of the Lagos and Tin Can Island ports, and a $5.0 billion debt swap deal with First Abu Dhabi Bank (FAB). The details of the swap include the following A few details on the debt swap deal 1. Total return swap: the deal will be a total return swap transaction, with FGN naira bonds provided as collateral. The value of the collateral was set at 133.3% of the actual amount drawn. 2. Margin call: If at any point the worth of the FGN bonds used as collateral falls below their original valuation in the deal, the government would be required to make an immediate top-up payment in US dollars (cash) to FAB upon demand. 3. The fund will be drawn by Nigeria in tranches, with each tranche comprising a corresponding confirmation and other ancillary agreements between the parties involved. 4. Transaction cost: the first tranche will be at SOFR+395bps, and subsequent tranches will be at SOFR+400bps. 5. Transaction period: is 6 years. 6. The proceeds from the deal are for budget funding, infrastructure developments, and repayment of relatively more expensive domestic and external debts. This is not new to the African space, as both Angola and Senegal have done Total return swaps in the past I have seen a few write-ups that believe that the swaps arrangement is cheaper than regular Eurobond borrowings. The argument is flawed, as the TOTAL RETURN swap structure of the transaction means that Nigeria will pay (1) transaction cost, which is about 7.6% - 7.7% (SOFR +395/400bps) and (2) all the coupons from the FGN naira bonds provided as collateral. By my calculations, the effective interest rate will settle at around 15.3% per year (see the table attached), assuming the naira remains stable over the 6-year period. That’s clearly expensive. Too many stringent rules for Nigeria. What if something goes wrong - If bond spreads widen for any reason, a margin call is placed on Nigeria. For example, Angola’s margin call in 2025 was $200bn on its swap with JPMorgan. By my estimate, if the interest rate increases by 200bps, Nigeria will have a margin call of $466 million. - If the naira depreciates, the USD-equivalent value of those naira bonds falls, which could trigger the margin call clause. By my estimate, if the naira depreciates by an average of 10% annual over the transaction period, Nigeria will need to provide an additional margin of $326 million. I know that the outlook for Naira is expected to remain largely positive over the near term, but there is a need for caution.