Addax Bioenergy’s financing for a Eu267 million ($352 million) ethanol plant in Makeni, Sierra Leone has attracted considerable market and civil society attention for the way it manages the environmental and social risk. But its commercial and financial structure will also serve as a useful precedent for other biofuels and biomass projects that Addax and its peers are pursuing on the continent.

The project involves the construction of an ethanol plant with a capacity of 85,000 cubic metres per year and a bagasse-fired power plant with an output of 100,500MWh per year. Some of the output will serve the ethanol project’s parasitic load, and the rest will go to the country’s National Power Authority.

The ethanol project will sell its output to the parent of its controlling shareholder, the Addax & Oryx Group. The group has been present in Sierra Leone for almost 10 years, arriving shortly after the end of the country’s civil war to rehabilitate a tank farm. While it is comfortable with riskier jurisdictions, and has been an active borrower in the trade finance, corporate finance and reserves-based lending markets, it has a limited project finance track record.

Addax first started looking at ethanol in 2007, roughly five years after the end of Sierra Leone’s civil war, and in 2008, after finishing pre-feasibility work, approached development finance institutions about committing to the financing. At the end of 2008 it mandated BNP Paribas as financial adviser, but thanks to an earlier meeting with Swedfund about an equity investment, which had led to preliminary discussions with FMO, it was already familiar with the priorities of the development finance institutions that dominate Sub-Saharan project finance.

By July 2009 the sponsors, which consisted of Addax & Oryx (78.34%), Swedfund (8.66%), and FMO (13%), assembled a core group of lenders that includes FMO, the Emerging Africa Infrastructure Fund and DEG, joined later by the African Development Bank. The banks and sponsors signed a term sheet in late 2010, and signed the financing documents for the project in June 2011. Once the project met its 160 conditions precedent (a possible record), in late November, it was ready to fund.

At signing the Eu133 million financing broke down into a Eu19 million loan from EAIF, a Eu19 million loan from the Cordiant- managed Infrastructure Crisis Facility, a Eu24 million loan from the African Development Bank, a Eu24 million loan from FMO, a Eu10 million loan from Belgium’s BIO, which shared financing documentation with FMO, a Eu20 million loan from DEG and a $29 million loan from South Africa’s IDC.

The financing complemented Eu105 million in sponsor equity, and Eu19 million of cashflow during construction, for a total cost of Eu257 million at close, but subsequent cost increases took the debt and equity totals to Eu140 million and Eu107 million, respectively. The developer considered taking out political risk insurance on its equity investment, but felt that the cost did not justify the benefit over and above having a large number of development lenders participating in the project’s debt. The sponsors had to add some additional protections to the deal, including a completion guarantee, and strong debt service coverage ratios.

The project is designed to satisfy growing demand in Europe for biofuels, primarily for blending with petrol. Sierra Leone, as one of the world’s poorest countries, benefits from reciprocal access to the European market, a status only recently reaffirmed in EU/Ecowas negotiations. European governments might change their policies on biofuels or market access, but doing so would crimp a promising new industry in highly-indebted poorer countries. Locating the project in Sierra Leone, then, protects against European political risks.

To make sure that it retains both access to the European market and the support of the development lenders, the project needed to stick to environmental and social responsibility standards that are difficult to fault. These include avoiding diverting land from food production or displacing local residents, and setting up a robust system to protect land-rights, which are frequently poorly-defined where the project is located.

Because Sierra Leone has not attracted as much attention from agribusiness interests as many neighbours, it was easy for the sponsor to put in place these protections. Still, the country does have some experience of large-scale sugarcane production, going back to a 1980s-vintage Chinese-backed plantation. With 30% GDP growth per year, Sierra Leone may one day be a viable biofuels market in its own right.

To an oil and gas sponsor like Addax & Oryx, the pace at which the Makeni financing came together looked painful. Due to the lack of market template there was little other option than to work up the financing from scratch. Now, with Makeni closed, a sponsor should be able to put an outline term sheet in front of lenders for tightening or adaptation.

For Sierra Leone, its first project financing outside the mining sector could open up the country to development in other sectors. The Addax project is almost incidentally its first independent power project, accounting for 20% of its generation fleet, and the country is now actively pursuing an unbundling programme in power. Says Nikolai Germann, managing director at Addax Bioenergy, “this deal serves as a template not just for other biofuels plants but also related projects like biomass.”

Addax Bioenergy Sierra Leone
STATUS: Signed 16 June 2011, closed 29 November 2011
TOTAL PROJECT COST: Eu267 million
DESCRIPTION: Development of a greenfield sugarcane plantation, the construction of an ethanol refinery and a biomass- fuelled power plant in Makeni, northern Sierra Leone
SPONSORS: Addax & Oryx Group, Swedfund, FMO
DEBT: Eu140 million
PROVIDERS: FMO, EAIF, ICF, AfDB, BIO, DEG, IDC
MATURITY: 12 years
FINANCIAL ADVISER TO THE SPONSOR: BNP Paribas
LEGAL ADVISER TO THE LENDERS: Norton Rose
LEGAL ADVISERS TO THE SPONSOR: Eversheds and SNR Denton (international and commercial); Basma and Macaulay (local)
LENDERS’ TECHNICAL ADVISER: SGS
LENDERS’ AGRICULTURAL ADVISER: Schaffer & Associates
LENDERS’ INSURANCE ADVISER: INDECS Consulting
LENDERS’ ENVIRONMENTAL CONSULTANT: NKUK
SPONSOR CONSTRUCTION CONTRACTOR: De Smet
MODEL/TAX AUDITOR: PKF