## Background Analysis 1.4. Frontier — External Debt: Beyond Bond

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### Overview
- Frontier market debt ratios have broadly stabilized, although lower-rated sovereigns continue to accumulate debt.
- Sovereigns still adding debt have debt-to-GDP ratios significantly higher than their higher-rated peers.
- From 2018 to 2024, eurobonds financed about one-fifth of the increase in external debt among sovereigns rated B− or higher but none of the debt increase in sovereigns rated CCC+ or below.
- Official creditors accounted for most of the external debt increase among the lower-rated borrowers.
- Forms of external financing other than bonds and official creditors are harder to observe: bilateral debt can be less visible, whereas collateralized and resource-backed loans are often not publicly disclosed; total return swaps may be recorded only to the extent that they generate cash.
- When underreported debt surfaced, it has done so abruptly and on a large scale.
- IMF staff recommend broadening debt transparency beyond conventional debt instruments, explicitly incorporating contingent collateral obligations into debt sustainability assessments, and conducting surveillance on financing compositions more closely to complement surveillance on sovereign spreads.

### Bond market access, debt paths, and recent issuance
- Primary debt markets remain open and have extended to lower-rated frontier sovereigns.
- Frontier sovereigns issued about $26 billion of eurobonds in the first half of 2026—the strongest first-half issuance since 2018.
- Several lower-rated borrowers and first-time issuers have been able to access international capital markets.
- Redemptions have absorbed roughly half of gross issuance, leaving a roughly 10 percent increase in outstanding eurobonds since end-2024.
- Median total public debt is projected around 62 percent of GDP in 2026, little changed from 2024, with roughly two-thirds of sovereigns on a declining debt path.
- Median frontier sovereign debt rose from 58 percent of GDP in 2018 to 63 percent in 2024, with 36 of 53 sovereigns on a rising path.
- Grouped by end-2019 composite rating, the median increase during 2019–20 was about 18 percentage points of GDP for sovereigns then rated CCC and below, 11 in the single-B bucket, and 9 among the strongest.
- Sovereigns rated CCC or below have accounted for most of the largest increases in debt ratios since 2024.

### Creditor composition and the role of bilateral lending
- Among performing sovereigns (those that have not gone through debt restructuring), bonds have accounted for about one-fifth of external public debt consistently since 2018.
- Bilateral credit accounts for a similar share as bonds among performing sovereigns.
- Official lending from multilateral institutions and the IMF holds the largest share of external debt.
- Among sovereigns that underwent debt restructuring or faced debt distress, bond financing declined from being the largest component of external debt in 2017 to a smaller share than official lending by 2024.
- Across performing sovereigns, lower-rated ones tend to have more bilateral debt: bilateral debt share of GDP rises from the highest to the lowest rating group, whereas eurobond exposure as a share of total public debt declines across ratings.
- For the 10 high-debt-growth sovereigns rated B− or above, external debt growth increased by close to 23 percentage points of GDP between 2018 and 2024, of which bonds accounted for about 5 percentage points and bilateral lending about 3.
- For the seven sovereigns rated CCC+ or below with large debt increases, external debt rose by about 17 percentage points of GDP between 2018 and 2024 while bond exposure fell slightly, with the increase financed overwhelmingly by official creditors.
- Argentina and Ukraine are about 55 percent of the restructured group’s external debt in 2024. Excluding them, the official share rises from 27 to 42 percent of external debt over 2018–24, against 32 to 53 percent for the group as a whole.

### Incomplete reporting, collateralized structures, and examples
- Some financing arrangements are difficult to capture in standard debt statistics: bilateral lending may be underreported; collateralized and resource-backed loans are often not publicly disclosed; structured instruments such as total return swaps (TRS) may be recorded only to the extent of the cash they generate.
- Angola:
  - In December 2024, the sovereign entered a $1 billion total return swap, collateralized by $1.9 billion of newly issued sovereign bonds that raised no cash.
  - The bonds are documented as ordinary senior unsecured eurobonds and amount to about one-tenth of Angola’s outstanding international bonds.
  - Statistical reporting recorded only the financing amount as external debt, treating the collateral bonds as contingent liabilities.
- Senegal:
  - Following an audit in 2024, central government debt for 2023 was restated from about 74 to 100 percent of GDP.
  - Successive vintages of the same debt statistics subsequently added roughly $2 billion of previously unreported bilateral disbursements, the largest component of the initially unrecorded external obligations, alongside off-budget bank borrowing and arrears.
  - Senegal’s spreads changed little around either disclosure, but repricing occurred later, as successive downgrades moved Senegal out of the single-B rating category.
- Reported TRS cases include Angola, Colombia, Nigeria, and Senegal.
  - Angola used TRS initially when market access was constrained and later as part of broader liquidity and refinancing management.
  - Nigeria approved a $5 billion TRS program in April 2026, with subsequent market reporting indicating that about $1.5 billion had been drawn.
  - Colombia’s TRS supported a bond buyback and liability-management operation rather than straightforward new financing.
  - Senegal reportedly executed several TRS transactions in 2025 amid financing pressures and rising borrowing costs.

### Financial stability implications
- Compressed sovereign spreads can mask vulnerabilities when structured, collateralized, or off-budget exposures are not fully captured in standard debt statistics; compressed spreads can reverse rapidly when financing conditions tighten.
- Detailed analysis of financing composition can reveal vulnerabilities that may not be apparent from spreads alone, particularly when structured, collateralized, or off-budget exposures are not fully captured.

### Conclusion and policy recommendations
- The largest frontier sovereign external debt buildups between 2018 and 2024 were financed predominantly outside bond markets, mostly by official creditors.
- Beyond bonds and official credit, the remaining layers of external financing are those that data capture the least, including bilateral lending, total return swaps, private placements, and most collateralized lending, and cannot capture liabilities held outside fiscal accounts.
- When exposures are not reported, the absence of a market response cannot be distinguished from the absence of information.

Policy recommendations:
- Broaden disclosure of sovereign financing.
  - Public debt reporting by authorities should cover collateralized debt, derivatives-linked borrowing, guarantees, and contractual risk triggers.
  - For structured instruments, disclosure should extend beyond headline amounts to collateral composition, over-collateralization, margin triggers, and early-termination provisions—the terms that determine when a claim crystallizes and in what order it is repaid.
- Treat contingent collateral exposures explicitly in debt sustainability analysis.
  - Over-collateralized structures generate claims that crystallize precisely when a sovereign is least able to meet them.
  - Treating such financing as equivalent to unsecured borrowing understates both liquidity and solvency risk.
- Focus surveillance on the composition of financing in addition to sovereign spreads.
  - Compressed spreads can reverse rapidly when financing conditions tighten.
  - Detailed analysis of financing composition can reveal vulnerabilities that may not be apparent from spreads alone, particularly when structured, collateralized, or off-budget exposures are not fully captured in standard debt statistics.

### Total return swaps (TRS) and sovereign financing

#### Structure and collateralization
- A common feature in TRS is substantial over-collateralization.
- In the transactions shown in Figure 1.4.1.1, collateral-to-financing ratios are around 1.3 to 1.6, though estimates vary depending on transaction dates, collateral valuation, and definitions.
- Across reported cases, collateral has included:
  - eurobonds and local-currency government bonds in Angola;
  - naira-denominated government bonds in Nigeria;
  - domestic government bonds and cash in Senegal;
  - global bonds, domestic treasury bonds and bills, and US Treasuries in Colombia.

#### Purposes and limits of TRS for sovereigns
- TRS can provide hard-currency liquidity in difficult market conditions.
- TRS can broaden the financing mix and reduce reliance on eurobond issuance.
- TRS can, in some cases, lower headline borrowing costs.
- Headline financing costs may not capture the full economic cost, including:
  - fees;
  - encumbered collateral;
  - margin-call exposure;
  - early-termination risk.

#### Financial stability concerns
- Disclosure is often incomplete:
  - Headline financing amounts and broad collateral types may be known, but pricing, fees, collateral valuation thresholds, margin triggers, early termination clauses, and collateral rights are generally not public.
  - This limits the ability of investors, legislatures, and official-sector creditors to assess the true scale, cost, and risk profile of sovereign borrowing and underscores the gap between recorded debt and underlying economic risk.
- TRS can create wrong-way liquidity risk:
  - When collateral comprises the sovereign’s own bonds, its value is directly linked to the sovereign’s credit standing.
  - A downgrade, a rise in yields, currency depreciation, or broader risk-off can reduce collateral value and trigger margin calls or early termination, precisely when liquidity buffers are most strained.
  - Angola’s December 2024 $1 billion TRS, collateralized by approximately $1.9 billion of sovereign bonds, reportedly required approximately $200 million of additional collateral in April 2025 when bond prices fell.
- TRS can complicate sovereign debt restructurings:
  - There is no established precedent for how TRS would be treated in a sovereign debt restructuring.
  - Depending on contractual terms and timing, TRS counterparties may have stronger incentives and mechanisms to recover through collateral enforcement, pre-restructuring repayment, or margin accounts than to participate alongside unsecured bondholders.
  - This can create de facto seniority and shift the burden of debt relief onto other creditors.
  - Such risks rise with scale: larger TRS exposures could materially reduce recoveries for conventional creditors, particularly if collateralized creditors are repaid or enforce collateral outside the restructuring perimeter.

*IMF staff authors: Andrew Ferrante, Xiang-Li Lim, and Esti Kemp.*

### Section 1

### Background Analysis 1.4. Frontier — External Debt: Beyond Bond

### Overview
- Frontier market debt ratios have broadly stabilized, although lower-rated sovereigns continue to accumulate debt. The sovereigns still adding debt have debt-to-GDP ratios significantly higher than their higher-rated peers.
- Frontier sovereigns with the largest increase in external debt have financed it mainly outside bond markets. From 2018 to 2024, eurobonds financed about one-fifth of the increase in external debt among sovereigns rated B− or higher but none of the debt increase in sovereigns rated CCC+ or below. Official creditors accounted for most of the external debt increase among the lower-rated borrowers.
- The forms of external financing other than bonds and official creditors are harder to observe. Bilateral debt can be less visible, whereas collateralized and resource-backed loans are often not publicly disclosed. Total return swaps may be recorded only to the extent that they generate cash.
- When underreported debt surfaced, it has done so abruptly and on a large scale. This calls for broadening debt transparency beyond conventional debt instruments, explicitly incorporating contingent collateral obligations into debt sustainability assessments, and conducting surveillance on financing compositions more closely to complement surveillance on sovereign spreads.

### Bond market access, debt paths, and recent issuance
- Primary debt markets remain open and have extended to lower-rated frontier sovereigns.
- Frontier sovereigns issued about $26 billion of eurobonds in the first half of 2026—the strongest first-half issuance since 2018.
- Several lower-rated borrowers and first-time issuers have been able to access international capital markets.
- Redemptions have absorbed roughly half of gross issuance, leaving a roughly 10 percent increase in outstanding eurobonds since end-2024.
- Median total public debt is projected around 62 percent of GDP in 2026, little changed from 2024, with roughly two-thirds of sovereigns on a declining debt path.
- Median frontier sovereign debt rose from 58 percent of GDP in 2018 to 63 percent in 2024, with 36 of 53 sovereigns on a rising path. Grouped by end-2019 composite rating, the median increase during 2019–20 was about 18 percentage points of GDP for sovereigns then rated CCC and below, 11 in the single-B bucket, and 9 among the strongest.
- Sovereigns rated CCC or below have accounted for most of the largest increases in debt ratios since 2024.

### Creditor composition and the role of bilateral lending
- Bond finance is a minor share of frontier external debt. Among sovereigns that have not gone through debt restructuring, or “performing” sovereigns, bonds have accounted for about one-fifth of external public debt consistently since 2018.
- Bilateral credit accounts for a similar share as bonds among performing sovereigns, while official lending from multilateral institutions and the IMF holds the largest share of external debt.
- Among sovereigns that underwent debt restructuring or faced debt distress, bond financing declined from being the largest component of external debt in 2017 to a smaller share than official lending by 2024.
- Across performing sovereigns, lower-rated ones tend to have more bilateral debt. Bilateral debt share of GDP rises from the highest to the lowest rating group, whereas eurobond exposure as a share of total public debt declines across ratings.
- For the 10 high-debt-growth sovereigns rated B− or above, external debt growth increased by close to 23 percentage points of GDP between 2018 and 2024, of which bonds accounted for about 5 percentage points and bilateral lending about 3.
- For the seven sovereigns rated CCC+ or below with large debt increases, external debt rose by about 17 percentage points of GDP between 2018 and 2024 while bond exposure fell slightly, with the increase financed overwhelmingly by official creditors.
- Argentina and Ukraine are about 55 percent of the restructured group’s external debt in 2024. Excluding them, the official share rises from 27 to 42 percent of external debt over 2018–24, against 32 to 53 percent for the group as a whole.

### Incomplete reporting, collateralized structures, and examples
- Some financing arrangements are difficult to capture in standard debt statistics: bilateral lending may be underreported; collateralized and resource-backed loans are often not publicly disclosed; structured instruments such as total return swaps (TRS) may be recorded only to the extent of the cash they generate.
- Angola: In December 2024, the sovereign entered a $1 billion total return swap, collateralized by $1.9 billion of newly issued sovereign bonds that raised no cash. The bonds are documented as ordinary senior unsecured eurobonds and amount to about one-tenth of Angola’s outstanding international bonds. Statistical reporting recorded only the financing amount as external debt, treating the collateral bonds as contingent liabilities.
- Senegal: Following an audit in 2024, central government debt for 2023 was restated from about 74 to 100 percent of GDP. Successive vintages of the same debt statistics subsequently added roughly $2 billion of previously unreported bilateral disbursements, the largest component of the initially unrecorded external obligations, alongside off-budget bank borrowing and arrears. Senegal’s spreads changed little around either disclosure, but repricing occurred later, as successive downgrades moved Senegal out of the single-B rating category.
- Total Return Swaps (TRS) reporting and reported cases:
  - Public reporting of sovereign TRS remains concentrated in a limited number of emerging market and frontier economies. Reported cases include Angola, Colombia, Nigeria, and Senegal.
  - Angola used TRS initially when market access was constrained and later as part of broader liquidity and refinancing management.
  - Nigeria approved a $5 billion TRS program in April 2026, with subsequent market reporting indicating that about $1.5 billion had been drawn.
  - Colombia’s TRS supported a bond buyback and liability-management operation rather than straightforward new financing.
  - Senegal reportedly executed several TRS transactions in 2025 amid financing pressures and rising borrowing costs.

### Financial stability implications
- Compressed sovereign spreads can mask vulnerabilities when structured, collateralized, or off-budget exposures are not fully captured in standard debt statistics; compressed spreads can reverse rapidly when financing conditions tighten.
- Detailed analysis of financing composition can reveal vulnerabilities that may not be apparent from spreads alone, particularly when structured, collateralized, or off-budget exposures are not fully captured.

### Conclusion and policy recommendations
- The largest frontier sovereign external debt buildups between 2018 and 2024 were financed predominantly outside bond markets, mostly by official creditors.
- Beyond bonds and official credit, the remaining layers of external financing are those that data capture the least, including bilateral lending, total return swaps, private placements, and most collateralized lending, and cannot capture liabilities held outside fiscal accounts.
- When exposures are not reported, the absence of a market response cannot be distinguished from the absence of information.

Policy recommendations:
- Broaden disclosure of sovereign financing.
  - Public debt reporting by authorities should cover collateralized debt, derivatives-linked borrowing, guarantees, and contractual risk triggers; for structured instruments, disclosure should extend beyond headline amounts to collateral composition, over-collateralization, margin triggers, and early-termination provisions—the terms that determine when a claim crystallizes and in what order it is repaid.
- Treat contingent collateral exposures explicitly in debt sustainability analysis.
  - Over-collateralized structures generate claims that crystallize precisely when a sovereign is least able to meet them. Treating such financing as equivalent to unsecured borrowing understates both liquidity and solvency risk.
- Focus surveillance on the composition of financing in addition to sovereign spreads.
  - Compressed spreads can reverse rapidly when financing conditions tighten. Detailed analysis of financing composition can also reveal vulnerabilities that may not be apparent from spreads alone, particularly when structured, collateralized, or off-budget exposures are not fully captured in standard debt statistics.

*IMF staff authors: Andrew Ferrante, Xiang-Li Lim, and Esti Kemp.*

### Section 2

### Total return swaps (TRS) and sovereign financing

### Structure and collateralization
- A common feature in TRS is substantial over-collateralization.
- In the transactions shown in Figure 1.4.1.1, collateral-to-financing ratios are around 1.3 to 1.6, though estimates vary depending on transaction dates, collateral valuation, and definitions.
- Across reported cases, collateral has included:
  - eurobonds and local-currency government bonds in Angola;
  - naira-denominated government bonds in Nigeria;
  - domestic government bonds and cash in Senegal;
  - global bonds, domestic treasury bonds and bills, and US Treasuries in Colombia.

### Purposes and limits of TRS for sovereigns
- TRS can provide hard-currency liquidity in difficult market conditions.
- TRS can broaden the financing mix and reduce reliance on eurobond issuance.
- TRS can, in some cases, lower headline borrowing costs.
- Headline financing costs may not capture the full economic cost, including:
  - fees;
  - encumbered collateral;
  - margin-call exposure;
  - early-termination risk.

### Financial stability concerns
- Disclosure is often incomplete:
  - Headline financing amounts and broad collateral types may be known, but pricing, fees, collateral valuation thresholds, margin triggers, early termination clauses, and collateral rights are generally not public.
  - This limits the ability of investors, legislatures, and official-sector creditors to assess the true scale, cost, and risk profile of sovereign borrowing and underscores the gap between recorded debt and underlying economic risk.
- TRS can create wrong-way liquidity risk:
  - When collateral comprises the sovereign’s own bonds, its value is directly linked to the sovereign’s credit standing.
  - A downgrade, a rise in yields, currency depreciation, or broader risk-off can reduce collateral value and trigger margin calls or early termination, precisely when liquidity buffers are most strained.
  - Angola’s December 2024 $1 billion TRS, collateralized by approximately $1.9 billion of sovereign bonds, reportedly required approximately $200 million of additional collateral in April 2025 when bond prices fell.
- TRS can complicate sovereign debt restructurings:
  - There is no established precedent for how TRS would be treated in a sovereign debt restructuring.
  - Depending on contractual terms and timing, TRS counterparties may have stronger incentives and mechanisms to recover through collateral enforcement, pre-restructuring repayment, or margin accounts than to participate alongside unsecured bondholders.
  - This can create de facto seniority and shift the burden of debt relief onto other creditors.
  - Such risks rise with scale: larger TRS exposures could materially reduce recoveries for conventional creditors, particularly if collateralized creditors are repaid or enforce collateral outside the restructuring perimeter.

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2026/october/english/backgroundanalysis14.pdf_