DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. We use derivative financial instruments to mitigate the financial impact of exposure to these risks.

Accounting for derivative financial instruments is governed by ASC Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, we record our derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive loss (“AOCI”) and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the investment is partially or completely liquidated. The changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings.

FOREIGN CURRENCY EXCHANGE AND OPTION CONTRACTS

The functional currency of Rayonier New Zealand Limited, and the New Zealand subsidiary is the New Zealand dollar. The New Zealand subsidiary is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand subsidiary typically hedges 50% to 90% of its estimated foreign currency exposure with respect to the following twelve months forecasted sales and purchases, less distributions, and up to 75% of the forward 12 to 18 months. Additionally, the New Zealand subsidiary will occasionally hedge up to 50% of its estimated foreign currency exposure with respect to the following 18 to 48 months forecasted sales and purchases, less distributions, when the New Zealand dollar is at a cyclical low versus the U.S. dollar. Foreign currency exposure from the New Zealand subsidiary’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of June 30, 2020, foreign currency exchange contracts and foreign currency option contracts had maturity dates through April 2022 and August 2021, respectively.

Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments qualify for cash flow hedge accounting. We may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive loss for de-designated hedges remains in accumulated other comprehensive loss until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings.

INTEREST RATE SWAPS

We are exposed to cash flow interest rate risk on our variable-rate Term Credit Agreement, Incremental Term Loan Agreement and 2020 Incremental Term Loan Facility and use variable-to-fixed interest rate swaps to hedge this exposure. For these derivative instruments, we report the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassify them to earnings as interest expense in the same period in which the hedged interest payments affect earnings.

The following table contains information on the outstanding interest rate swaps as of June 30, 2020:

Outstanding Interest Rate Swaps (a)
Date Entered Into	Term	Notional Amount	Related Debt Facility	Fixed Rate of Swap (b)		Bank Margin on Debt		Total Effective Interest Rate (c)
August 2015	9 years	$170,000	Term Credit Agreement	2.20	%	1.60	%	3.80	%
August 2015	9 years	180,000	Term Credit Agreement	2.35	%	1.60	%	3.95	%
April 2016	10 years	100,000	Incremental Term Loan	1.60	%	1.90	%	3.50	%
April 2016	10 years	100,000	Incremental Term Loan	1.60	%	1.90	%	3.50	%
July 2016	10 years	100,000	Incremental Term Loan	1.26	%	1.90	%	3.16	%
June 2020	10 years	250,000	2020 Incremental Term Loan	1.10	%	1.85	%	2.95	%

(a)  All interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting.

(b) The interest rate swap entered in June 2020, was an off-market derivative, meaning it contained an embedded financing element, which the counterparties recovered through an incremental charge in the fixed rate over what would have been charged for an at-market swap.

(c) Rate is before estimated patronage payments.

TREASURY LOCKS

During the first quarter, we entered into treasury lock agreements, which were designated and qualified as cash flow hedges. These derivative instruments hedged the impact of changes in the benchmark interest rate to future interest payments associated with anticipated debt issuances. Prior to expiration, we de-designated and settled the treasury locks by converting them into interest rate swap lock agreements (discussed below). To the extent we de-designate or terminate a cash flow hedging relationship and the associated hedged item continues to exist, any unrealized gain or loss of the cash flow hedge at the time of de-designation remains in accumulated other comprehensive loss and is amortized using the straight-line method through interest expense over the remaining life of the hedged item. Amounts recorded in accumulated other comprehensive loss in connection with the settled treasury locks were ($20.8) million which will be reclassified to earnings through interest expense over the life of the anticipated issued debt.

The following table contains information on the expired treasury lock agreements entered into during the six months ended June 30, 2020:

Converted Treasury Rate Locks (a)
Date Entered Into	Term	Notional Amount	Rate	Related Debt Facility (b)	Expiration Date
January 2020	10 years	$100,000	1.53%	2020 Incremental Term Loan Facility	March 30, 2020
January 2020	10 years	100,000	1.53%	2020 Incremental Term Loan Facility	March 31, 2020
February 2020	10 years	50,000	1.35%	2020 Incremental Term Loan Facility	March 31, 2020

(a)  At inception, all treasury locks were designated as interest rate cash flow hedges and qualified for hedge accounting.

(b) On April 16, 2020, we entered into a Third Amendment and Incremental Term Loan Agreement which provided for a five-year $250 million senior unsecured incremental term loan facility (the “2020 Incremental Term Loan Facility”). See Note 7 — Debt for more information. We anticipate extending the term of the 2020 Incremental Term Loan facility for an additional five-year term upon maturity.

INTEREST RATE SWAP LOCKS

Upon de-designation, we converted the above treasury lock agreements to interest rate swap lock agreements to hedge the risk of changes in the interest payments attributable to changes in the benchmark LIBOR interest rate associated with anticipated issuances of debt. The interest rate swap locks were designated and qualified as cash flow hedges.

Prior to expiration, we de-designated and partially cash settled $11.1 million of the interest rate swap locks and converted them into interest rate swap agreements. To the extent we de-designate or terminate a cash flow hedging relationship and the associated hedged item continues to exist, any unrealized gain or loss of the cash flow hedge

at the time of de-designation remains in accumulated other comprehensive loss and is amortized using the straight-line method through interest expense over the remaining life of the hedged item. Incremental amounts recorded in accumulated other comprehensive loss in connection with the settled interest rate swap locks were ($1.4) million, which will be reclassified to earnings through interest expense over the life of the anticipated issued debt.

The following table contains information on the terminated interest rate swap lock agreements as of June 30, 2020:

Converted Interest Rate Swap Locks (a)
Date Entered Into	Term	Notional Amount	Fixed Rate of Swap Lock (b)	Related Debt Facility (c)	Termination Date
March 2020	10 years	$100,000	1.56%	2020 Incremental Term Loan Facility	June 30, 2020
March 2020	10 years	100,000	1.59%	2020 Incremental Term Loan Facility	June 30, 2020
March 2020	10 years	50,000	1.41%	2020 Incremental Term Loan Facility	June 30, 2020

(a)  All interest rate swap locks have been designated as interest rate cash flow hedges and qualify for hedge accounting.

(b) These interest rate swap locks were off-market derivatives, meaning they contained an embedded financing element, which the counterparties recovered through an incremental charge in the fixed rate over what would have been charged for an at-market swap lock.

(c) On April 16, 2020, we entered into a Third Amendment and Incremental Term Loan Agreement which provided for a five-year $250 million senior unsecured incremental term loan facility (the “2020 Incremental Term Loan Facility”). See Note 7 — Debt for information. We anticipate extending the term of the 2020 Incremental Term Loan facility for an additional five-year term upon maturity.

FORWARD-STARTING INTEREST RATE SWAPS

We are exposed to cash flow interest rate risk on anticipated debt issuances and use forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the anticipated issuance date. For these derivative instruments, we report the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassify them to earnings as interest expense in the same period in which the hedged interest payments affect earnings.

The following table contains information on the outstanding forward-starting interest rate swaps as of June 30, 2020:

Outstanding Forward-Starting Interest Rate Swaps (a)
Date Entered Into	Term	Notional Amount	Fixed Rate of Swap		Related Debt Facility	Forward Date	Maximum Period Ending for Forecasted Issuance Date
February 2020	10 years	$325,000	1.40	%	Anticipated refinancing of Senior Notes due 2022	April 2022	April 2022
March 2020	4 years	100,000	0.88	%	Term Credit Agreement	August 2024	N/A
May 2020	4 years	50,000	0.74	%	Term Credit Agreement	August 2024	N/A

(a)  All forward-starting interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting.

CARBON OPTIONS

The New Zealand subsidiary enters into carbon options from time to time to sell carbon assets at certain prices. Changes in fair value of the carbon option contracts are recorded in “Interest and other miscellaneous income, net” as the contracts do not qualify for hedge accounting treatment. As of June 30, 2020, all existing carbon option contracts have expired.

The following tables demonstrate the impact, gross of tax, of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2020 and 2019:

		Three Months Ended June 30,
	Income Statement Location	2020	2019
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income (loss)	$5,340	($219)
Foreign currency option contracts	Other comprehensive income (loss)	877	(107)
Interest rate products	Other comprehensive income (loss)	(14,469)	(18,371)
	Interest Expense	2,716	(913)
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Interest and other miscellaneous income, net	—	152
Carbon option contracts	Interest and other miscellaneous income, net	14	12

		Six Months Ended June 30,
	Income Statement Location	2020	2019
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income (loss)	($140)	$900
Foreign currency option contracts	Other comprehensive income (loss)	(273)	(30)
Interest rate products	Other comprehensive income (loss)	(93,621)	(28,966)
	Interest Expense	3,168	(1,866)
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Interest and other miscellaneous income, net	—	135
Carbon option contracts	Interest and other miscellaneous income, net	563	415

During the next 12 months, the amount of the June 30, 2020 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a loss of approximately $0.5 million.

The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:

	Notional Amount
	June 30, 2020	December 31, 2019
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	$61,500	$56,350
Foreign currency option contracts	36,000	22,000
Interest rate swaps	900,000	650,000
Forward-starting interest rate swaps	475,000	—
Derivative not designated as a hedging instrument:
Carbon options (a)	—	9,592

(a) Notional amount for carbon options is calculated as the number of units outstanding multiplied by the spot price as of June 30, 2020.

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:

	Location on Balance Sheet	Fair Value Assets / (Liabilities) (a)
		June 30, 2020	December 31, 2019
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other current assets	$310	$424
	Other assets	1,177	390
	Other current liabilities	(968)	(172)
	Other non-current liabilities	(17)	—
Foreign currency option contracts	Other current assets	275	151
	Other assets	172	209
	Other current liabilities	(305)	(27)
	Other non-current liabilities	(112)	(30)
Interest rate swaps	Other assets	—	2,614
	Other non-current liabilities	(65,381)	(11,068)
Forward-starting interest rate swaps	Other non-current liabilities	(22,832)	—
Derivative not designated as a hedging instrument:
Carbon options	Other current liabilities	—	(607)
Total derivative contracts:
Other current assets		$585	$575
Other assets		1,349	3,213
Total derivative assets		$1,934	$3,788
Other current liabilities		(1,273)	(806)
Other non-current liabilities		(88,342)	(11,098)
Total derivative liabilities		($89,615)	($11,904)

(a) See Note 16 — Fair Value Measurements for further information on the fair value of our derivatives including their classification within the fair value hierarchy.

OFFSETTING DERIVATIVES

Derivative financial instruments are presented at their gross fair values in the Consolidated Balance Sheets. Our derivative financial instruments are not subject to master netting arrangements, which would allow the right of offset.