By Sujata Rao and Matthew Hill | Updated on Oct 07, 2026 at 12:58 PM
Some governments in need of money have been turning to an obscure financial product typically used by hedge funds, exposing bond investors to new risks.
Angola, Nigeria and Senegal have used so-called total return swaps to raise billions of dollars from commercial banks by offering their bonds as collateral. Problems can arise when a nation runs into trouble and needs to ask for debt relief. Because TRS holders may have a claim on a government’s assets in a debt restructuring, regular bondholders and other creditors could end up shouldering more losses than they would otherwise.
The risk has come to a head with Senegal, which has been struggling to repay what it owes and is proceeding with a debt restructuring. The West African country has borrowed $1.2 billion via TRS, and its bondholders are determined to make sure the banks involved in those deals don’t get favorable treatment.
An investor makes a deal with a bank in which it receives the income and capital gains or losses — the total return — on an asset like a bond or a stock, in exchange for a regular fee. The securities are held on the balance sheet of the bank.
Hedge funds that make complex investments, often on behalf of wealthy individuals, have long used TRS to gain exposure to an asset without owning it outright. TRS shot to notoriety in 2021, when banks including Credit Suisse, Morgan Stanley and Nomura suffered losses after bets made by Bill Hwang’s Archegos Capital went sour .
A government issues bonds but, instead of selling them to an investor, they become collateral to secure bank funding. The government pays the bank loan fees minus the bond coupons that the bank pays the government.
Sovereign TRS are similar to more common “repo” swap deals that countries including Argentina, Colombia and Ecuador have used to raise money from banks. With a repo, the bond is transferred to the lender, which then advances a sum of money back to the issuing government. If the bond later declines so much in capital value that the bank stands to make a loss on the deal, the government may have to reimburse it, a situation known as a margin call. The same applies to TRS, too.
For cash-strapped nations, these arrangements can provide speedy, no-questions-asked funding, often more cheaply than on bond markets. If the country repays the loan on time, the debt pledged as collateral is returned.
Unlike repo swaps, TRS are classed as derivatives rather than loans, so they won’t necessarily show up in financial reports. As these kinds of contracts are often kept under wraps, bondholders and credit ratings agencies may not know which nations have signed them, how much they borrowed and on what terms.
Another problem is that the face value of bonds issued as collateral often substantially exceeds the loan. In Angola, it was double the amount borrowed, while a deal struck by Ecuador in 2018 had a 240% collateralization ratio. In other words, Quito pledged $240 of debt for every $100 borrowed.
That leads to perhaps the most troubling feature of the instruments. Conventional derivative contracts are usually backed up by an asset such as gold or US Treasury bonds. With TRS, a borrower pledges a liability — its own bonds, said Lee Buchheit, a former Cleary Gottlieb Steen & Hamilton LLP lawyer who has overseen multiple sovereign-debt restructurings.
That’s a problem because those bonds, unlike regular collateral, will lose value if the nation’s finances worsen, worsening the collateral ratios stipulated in the deal. That may force the government to pledge more bonds or pay cash to avoid the issuer liquidating the contract. So the government needs to put up fresh money just when its finances are strained. Angola had to pay $200 million to JPMorgan in January as falling oil prices eroded the value of the collateral on its TRS.
If the bank sells the securities pledged as collateral, “the sovereign’s outstanding debt will increase by more — possibly much more — than the cash it received in the repo,” Buchheit said.
Senegal has outlined an ambitious timeline to restructure its debt. It’s being seen as a test case of how TRS fare in a debt revamp, with bondholders fearing they will be lower down the pecking order than TRS creditors.
The roots of the crisis stretch back to 2024, when an audit uncovered some $7 billion in unreported loans. Strapped for cash after the suspension of an International Monetary Fund program, Senegal used TRS to raise 721 billion CFA francs ($1.24 billion) from Africa Finance Corp., Société Générale and First Abu Dhabi Bank. It said borrowing costs were about 7% versus an estimated 11–12% on global markets.
The government disclosed in a presentation on Oct. 6 that its TRS debt amounted to $1.79 billion; in addition to the sum borrowed, this includes an “independent amount,” which it described as a buffer it would recover at maturity. Essentially, that implies about $500 million of excess collateral.
It hasn’t specified how it intends to treat TRS in the restructuring, saying only that it aims for “a tailored, orderly handling of its Total Return Swaps, reflecting the instruments’ structure and operational features.” It is yet unclear whether provisions in the deals give the banks the option to be reimbursed before the government strikes an agreement with its bondholders and other creditors.
The bondholders could argue that TRS should be part of the restructuring process because international investors provided the financing, which was also in foreign currency. The IMF considers them to be external debt. The bondholders have retained White & Case LLP to represent them in what could be a prolonged battle.
There is no known precedent for a restructuring of sovereign TRS. But Ecuador offers a cautionary parallel. In 2020, it repaid $1 billion to Goldman Sachs and Credit Suisse before restructuring dollar bonds.
In that case, bondholders absorbed bigger haircuts than would have been the case if the country’s bank creditors had contributed, Fitch Ratings said.
TRS could complicate future debt workouts, World Bank and IMF officials have warned. Collateralized loans, including those in Senegal and Angola, are “creating a new race toward seniority in the capital structure,” former World Bank President David Malpass said in a recent paper .
TRS are an important source of revenue for global banks, which bundle them within their equity and credit-derivative businesses. Sovereign repo loans are trickier to track, although analytics firm Crisil Coalition Greenwich estimates that their use has grown significantly. Revenue from the area of banking that includes sovereign lending, known as Structured & Financing, was approximately $3.5 billion in Latin America, Eastern Europe, the Middle East and Africa last year, up 40% from 2023, the data provider said.
Among individual banks, First Abu Dhabi Bank is shaping up as a major player, involved in Senegal as well as in Nigeria’s $5 billion deal, which has a 133.3% collateral ratio. Africa Finance Corp. is involved in both deals.
JPMorgan inked a $1 billion TRS with Angola in 2024, extending it this year for another $500 million. It was also among banks that lent Colombia $9.3 billion via TRS last year; Santander, BNP Paribas, Citi and Goldman Sachs were the others. Colombia has since unwound the TRS.
Standard Chartered has acknowledged it is involved in TRS but gave no details.