Senegal has quietly borrowed approximately €650 million through total return swap agreements with the Africa Finance Corporation (AFC) and First Abu Dhabi Bank (FAB). Bank of America estimates that total swap-based borrowing in 2025 may reach up to $1 billion.

Documentation reviewed by the Financial Times hints at a further undisclosed deal with Société Générale. This borrowing pattern is an uncomfortable echo for a government that previously condemned $7 billion in hidden liabilities inherited from its predecessor.

Hidden Debt Structures Revealed

The AFC deal involved Senegal issuing €150 million in domestic CFA franc bonds and transferring legal title to AFC. In return, Senegal received €105 million in euro cash, absorbing a roughly 30 percent haircut upfront. Both this transaction and the FAB deal mature in 2028.

The First Abu Dhabi Bank transaction follows a similar template, with approximately €400 million in bonds pledged to receive €300 million in euro cash. Senegal pays a floating interest rate plus a fixed margin, reportedly between 3.5 to 4 percentage points above the floating rate on the AFC leg and approximately 5 percentage points on the FAB leg.

The International Monetary Fund (IMF) is aware of these swaps but has not received the terms, despite disclosure normally being required for debt sustainability analysis. Private bondholders reportedly learned of these transactions through informal ministry meetings, with no public communication from Dakar.

The Economic Implications of Total Return Swaps

A credit default swap (CDS) is a derivative where one party pays a regular fee for protection against a borrower's default or credit deterioration. The protection seller compensates the buyer if the borrower's bonds fall sharply in value.

In Senegal's case, the total return swap structure means AFC and FAB hold legal title to the pledged bonds and receive their economic return, including coupon payments and any price appreciation. They are also protected against losses if the bonds fall in value.

Senegal, conversely, receives upfront euros and assumes exposure to covering some or all of the lenders’ downside if those bonds lose value, as specified in the swap contracts. This is economically akin to Senegal selling credit default swaps on its own sovereign bonds, effectively selling protection on its own credit.

This means Senegal does not share in the upside when bond prices rise but absorbs losses when prices fall. If Senegal’s credit deteriorates, it could face wider spreads across its entire debt stock and additional cash payments under the swaps to compensate lenders for losses on the pledged bonds.

According to AFC documentation on similar structures, the lender might have the right to mark pledged collateral down sharply and call for immediate cash compensation from the sovereign in a default event. Such margin calls could add acute liquidity pressure to Senegal's fiscal position, though the precise margining terms in these specific contracts have not been publicly disclosed.