
11.	DEBT

Rayonier’s debt consisted of the following at December 31, 2012 and 2011:



	2012			2011
Senior Notes due 2022 at a fixed interest rate of 3.75%	$	325,000		$	—
Senior Exchangeable Notes due 2012 at a fixed interest rate of 3.75% (retired in October 2012)	—			294,622
Senior Exchangeable Notes due 2015 at a fixed interest rate of 4.50% (a)	165,821			163,525
Installment note due 2014 at a fixed interest rate of 8.64%	112,500			112,500
Mortgage notes due 2017 at fixed interest rates of 4.35% (b)	76,731			88,582
Pollution control bond (retired in May 2012) and solid waste bond due 2020 at a variable interest rate of 1.57% at December 31, 2012	15,000			38,110
Revolving Credit Facility borrowings due 2016 at variable interest rates of 1.19% to 3.25% at December 31, 2012 (c)	275,000			150,000
Term Credit Agreement borrowings due 2019 at a variable interest rate of 1.71% at December 31, 2012	300,000			—
Total debt	1,270,052			847,339
Less: Current maturities of long-term debt	(150,000		)	(28,110		)
Long-term debt	$	1,120,052		$	819,229

Principal payments due during the next five years and thereafter are as follows:



2013 (c)	$	150,000
2014	112,500
2015	172,500
2016	125,000
2017	73,500
Thereafter	640,000
Total Debt	$	1,273,500


(a)	Our Senior Exchangeable Notes maturing in 2015 were discounted by $6.7 million and $9.0 million as of December 31, 2012 and 2011, respectively, but upon maturity the liability will be $172.5 million.


(b)	The mortgage notes due in 2017 were recorded at a premium of $3.2 million and $4.6 million as of December 31, 2012 and 2011, respectively. Upon maturity the liability will be $73.5 million.


(c)	Borrowings under the Revolving Credit Facility include $150 million classified in current liabilities due to the Company's intent to repay this amount in January 2013.

Term Credit Agreement

In December 2012, the Company entered into a $640 million senior unsecured term credit agreement with banks in the farm credit system, which is a network of cooperatives. The agreement matures in December 2019 and has a delayed draw feature that allows borrowings up to $640 million through December 2017 using a maximum of five advances. The periodic interest rate on the term credit agreement is LIBOR plus 150 basis points, with an unused commitment fee of 15 basis points. The Company expects to receive annual patronage refunds, which are profit distributions made by a cooperative to its member-users based on the quantity or value of business done with the member-user. The Company expects the effective interest rate to approximate LIBOR plus 100 basis points after consideration of the cash patronage refunds. At closing, TRS borrowed $300 million under the term credit agreement and used the proceeds to pay down its outstanding borrowings under the Company's existing revolving credit facility.

Revolving Credit Facility

In April 2011, the Company entered into a five year $300 million unsecured revolving credit facility, replacing the previous $250 million facility which was scheduled to expire in August 2011. The facility had a borrowing rate of LIBOR plus 105 basis points plus a facility fee of 20 basis points. In August 2011, the Company increased the revolving credit facility to $450 million from $300 million. In October 2012, the Company negotiated amendments to the facility providing for improved pricing with a borrowing rate of LIBOR plus 97.5 basis points and a facility fee of 15 basis points. The amended and restated credit agreement also eliminated all requirements for subsidiary guarantors, other than cross-guarantees of the borrowers. The covenants related to the facility were also amended to provide additional borrowing capacity and other changes. The April 2016 expiration date remained unchanged. At December 31, 2012, the Company had $171 million of available borrowings under this facility, net of $4 million to secure its outstanding letters of credit.

3.75% Senior Notes issued March 2012

In March 2012, Rayonier Inc. issued $325 million of 3.75% Senior Notes due 2022, guaranteed by certain subsidiaries. The guarantors were revised in conjunction with the October 2012 revolving credit facility amendment, leaving TRS and Rayonier Operating Company LLC as the remaining guarantors. Approximately $150 million of the proceeds were used to repay borrowings under the Company's revolving credit facility.

$105 Million Secured Mortgage Notes Assumed

In November 2011, in connection with the acquisition of approximately 250,000 acres of timberlands, the Company assumed notes totaling $105 million, secured by mortgages on certain parcels of the timberlands acquired. The notes bear fixed interest rates of 4.35 percent with original terms of seven years maturing in August 2017. The Company prepaid $21.0 million of principal on the mortgage notes concurrent with the acquisition and an additional $10.5 million during 2012, the maximum amounts allowed without penalty at the respective dates. The notes were recorded at fair value on the date of acquisition. At December 31, 2012, the carrying value of the debt outstanding was $76.7 million; however, the liability will be $73.5 million at maturity. See Note 6 - Timberland Acquisitions for additional information regarding the transaction.

4.50% Senior Exchangeable Notes issued August 2009

In August 2009, TRS issued $172.5 million of 4.50% Senior Exchangeable Notes due 2015. The notes are guaranteed by Rayonier, and are non-callable. The $172.5 million in principal will be settled in cash and any excess exchange value will be settled at the option of the Company in either cash or stock of Rayonier. Note holders may convert their notes to common stock of Rayonier, subject to certain provisions including the market price of the stock and the trading price of the convertible notes. The current exchange rate is 30.24 shares per $1,000 principal based on an exchange price of $33.07.

In separate transactions, TRS and Rayonier purchased exchangeable note hedges and sold warrants, respectively, based on 5,169,653 underlying shares of Rayonier. These transactions had the effect of increasing the conversion premium from 22.5 percent to 46 percent or to $39.50 per share. The exchangeable note hedge and warrant transactions are intended to limit exposure of potential dilution to Rayonier shareholders from note holders who could exchange the notes for Rayonier common shares. On exercise of the hedges, TRS will receive shares of Rayonier common stock equal to the difference between the then market price and the strike price of $33.07. The holders of the warrants will receive net shares from Rayonier if the share price is above $39.50 at maturity of the warrants.

The purchased hedges and sold warrants are not part of the terms of the notes and will not affect the note holders’ rights. Likewise, the note holders will not have any rights with respect to the hedge or the warrants. The purchased hedges and the sold warrants do not meet the definition of a derivative instrument because they are indexed to the Company’s own stock. They were recorded in shareholders’ equity in the Consolidated Balance Sheet and are not subject to mark-to-market adjustments.

As of December 31, 2012, the Exchangeable Notes due 2015 became exchangeable at the option of the holders for the calendar quarter ending March 31, 2013. Per the indenture, in order for the notes to become exchangeable, the Company's stock price must exceed 130 percent of the exchange price for 20 trading days in a period of 30 consecutive trading days as of the last day of the quarter. The entire balance of the notes remained classified as long-term debt at December 31, 2012 due to the ability and intent of the Company to refinance them on a long-term basis.

3.75% Senior Exchangeable Notes issued October 2007

In October 2007, TRS issued $300.0 million of 3.75% Senior Exchangeable Notes due 2012. In separate transactions, TRS and Rayonier, purchased an exchangeable note hedge and sold warrants, respectively, based on 8,239,920 underlying shares of Rayonier. These transactions had the effect of increasing the conversion premium from 22 percent to 40 percent or to $41.41 per share. The notes matured in October 2012 and the outstanding principal balance of $300.0 million was paid in cash, financed through borrowings on the Company's revolving credit facility. The exchangeable note hedges also matured and the associated shares were used to pay the excess exchange value of 2,221,056 shares of Rayonier stock. As a result, there was no impact on the number of shares outstanding. Warrants sold in conjunction with the issuance of the notes and hedges remain outstanding and have maturity dates in first quarter 2013. The holders of the warrants will receive net shares from Rayonier if the share price is above $41.41 at maturity of the warrants. For information regarding the dilutive effect of the assumed conversion of the warrants, refer to Note 9 — Earnings per Common Share.

The warrants are not part of the terms of the notes and the note holders will not have any rights with respect to the warrants. The warrants do not meet the definition of a derivative instrument because they are indexed to the Company’s own stock. They were recorded in shareholders’ equity in the Consolidated Balance Sheet and are not subject to mark-to-market adjustments.

The amounts related to convertible debt in the Consolidated Balance Sheets as of December 31, 2012 and 2011 are as follows:



	2012			2011
Liabilities:
Principal amount of debt
4.50% Senior Exchangeable Notes	$	172,500		$	172,500
3.75% Senior Exchangeable Notes	—			300,000
Unamortized discount
4.50% Senior Exchangeable Notes	(6,679		)	(8,975		)
3.75% Senior Exchangeable Notes	—			(5,378		)
Net carrying amount of debt	$	165,821		$	458,147
Equity:
Common stock	$	8,850		$	28,092

The discount for the 3.75% Senior Exchangeable Notes was amortized through maturity in October 2012 while the unamortized discount for the 4.50% notes will be amortized through August 2015.

The amount of interest related to the convertible debt recognized in the Consolidated Statements of Income and Comprehensive Income for the three years ended December 31 is as follows:



	2012		2011		2010
Contractual interest coupon
4.50% Senior Exchangeable Notes	$	7,763	$	7,763	$	7,763
3.75% Senior Exchangeable Notes	8,682		11,250		11,250
Amortization of debt discount
4.50% Senior Exchangeable Notes	2,296		2,167		2,045
3.75% Senior Exchangeable Notes	5,378		6,487		6,115
Total interest expense recognized	$	24,119	$	27,667	$	27,173

The effective interest rate on the liability component of both issues for the years ended December 31, 2012, 2011 and 2010 was 6.21%.

Debt Covenants

In connection with the Company’s $450 million revolving credit facility, covenants must be met, including an interest coverage ratio based on the facility’s definition of EBITDA ("Covenant EBITDA"). Covenant EBITDA consists of earnings from continuing operations before the cumulative effect of accounting changes and any provision for dispositions, income taxes, interest expense, depreciation, depletion, amortization and the non-cash cost basis of real estate sold. Modifications were made to other covenants through the October 2012 facility amendment. The leverage ratio was revised to provide additional borrowing capacity to permit funded debt of Rayonier Inc. and its subsidiaries up to 65 percent of consolidated net worth, plus the amount of consolidated funded debt. Previously, debt was limited to four times Covenant EBITDA. In addition, the Company can now transfer assets to any subsidiary, and any subsidiary can now transfer assets to other subsidiaries or to the Company. An additional covenant was added to limit debt at subsidiaries (excluding Rayonier Operating Company LLC and TRS, which are borrowers under the agreement) to 15 percent of Consolidated Net Tangible Assets. Consolidated Net Tangible Assets is defined as total assets less the sum of total current liabilities and intangible assets. The amended and restated credit agreement removed RFR as a borrower, but also eliminated specific negative covenants relating to RFR under this facility.

The term credit agreement, executed in December 2012, contains various covenants customary to credit agreements with borrowers having investment-grade debt ratings. These covenants are substantially identical to those of the credit facility, as revised in October 2012 and discussed above.

The Company's $112 million installment note includes covenants related to Rayonier Forest Resources ("RFR"). RFR may not incur additional debt unless, at the time of incurrence, and after giving pro forma effect to the receipt and application of the proceeds of such debt, RFR meets or exceeds a minimum ratio of cash flow to fixed charges. RFR’s ability to make certain quarterly distributions to Rayonier Inc. is limited to an amount equal to RFR’s "available cash," which consists of its opening cash balance plus proceeds from permitted borrowings.

At December 31, 2012, the Company was in compliance with all covenants. The covenants listed below, which are the most significant financial covenants in effect as of December 31, 2012, are calculated on a trailing 12-month basis:



	Covenant Requirement	Actual ratio	Favorable
Covenant EBITDA to consolidated interest expense should not be less than	2.50 to 1	12.57 to 1	10.07
Consolidated funded debt should not exceed 65 percent of consolidated net worth plus the amount of consolidated funded debt	65%	45%	20%
Subsidiary debt should not exceed 15 percent of Consolidated Net Tangible Assets	15%	0%	15%
RFR cash flow available for fixed charges to RFR fixed charges should not be less than	2.50 to 1	15.53 to 1	13.03

In addition to the financial covenants listed above, the installment note, mortgage notes, senior notes, term credit agreement and revolving credit facility include customary covenants that limit the incurrence of debt, the disposition of assets, and the making of certain payments between RFR and Rayonier, among others. An asset sales covenant in the RFR installment note related agreements requires the Company, subject to certain exceptions, to either reinvest cumulative timberland sale proceeds for individual sales greater than $10 million (the "excess proceeds") in timberland-related investments or, once the amount of excess proceeds not reinvested exceeds $50 million, to offer the note holders prepayment of the notes ratably in the amount of the excess proceeds. During April 2012, the excess proceeds exceeded the $50 million limit and as a result, repayment of $59.9 million was offered to the note holders. The note holders declined the offer and the excess proceeds were reset to zero. The amount of excess proceeds was $0 and $37.5 million at December 31, 2012 and 2011, respectively.

Subsequent Event

The warrants sold in conjunction with the issuance of the Senior Exchangeable Notes due 2012 began maturing on January 15, 2013 and will continue to mature through March 27, 2013. As of February 20, 2013, 4,156,775 of the 8,313,511 warrants have matured, resulting in the issuance of 998,689 Rayonier common shares.