
11.	DEBT

Rayonier’s debt consisted of the following at December 31, 2011 and 2010:



	2011			2010
Senior Exchangeable Notes due 2012 at a fixed interest rate of 3.75% (a)	$	294,622		$	288,135
Senior Exchangeable Notes due 2015 at a fixed interest rate of 4.50% (a)	163,525			161,358
Installment note due 2011 at a fixed interest rate of 8.49% (retired in December 2011)	—			93,057
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)	88,582			—
Pollution control and solid waste bonds due 2012-2020 at variable interest rates of 1.60% to 1.65% at December 31, 2011	38,110			38,110
Term loan due 2015 at a variable interest rate of 3.02% at December 31, 2010 (retired in March 2011)	—			75,000
Revolving credit facility borrowings due 2016 at variable interest rates of 1.34% to 1.35% at December 31, 2011	150,000			—
Total debt	847,339			768,160
Less: Current maturities of long-term debt	(28,110		)	(93,057		)
Long-term debt	$	819,229		$	675,103

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



2012 (a)	$	323,110
2013	—
2014	112,500
2015	172,500
2016	150,000
Thereafter	99,000
Total Debt	$	857,110

(a)

Our Senior Exchangeable Notes maturing in 2012 were discounted by $5.4 million and $11.9 million as of December 31, 2011 and 2010, respectively, but upon maturity the liability will be $300.0 million. $295 million of these notes are included in long-term debt due to the ability and intent of the company to refinance them on a long-term basis. See the paragraph below regarding available borrowings under the revolving credit facility. Our Senior Exchangeable Notes maturing in 2015 were discounted by $9.0 million and $11.1 million as of December 31, 2011 and 2010, but upon maturity the liability will be $172.5 million.


(b)	The mortgage notes due in 2017 were recorded at fair value, which increased the book value by $4.6 million as of December 31, 2011. Upon maturity the liability will be $84.0 million.

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. In August 2011, the Company increased the revolving credit facility to $450 million from $300 million. The new facility has a borrowing rate of LIBOR plus 105 basis points plus a facility fee of 20 basis points and expires in April 2016. At December 31, 2011, the Company had $295 million of available borrowings under this facility, net of $5 million to secure our outstanding letters of credit.

$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. Concurrent with the acquisition, the Company prepaid $21.0 million of principal on the mortgage notes, the maximum allowed at this time without penalty. The notes were recorded at fair value on the date of acquisition. At December 31, 2011, the carrying value of the debt outstanding was $88.6 million, but upon maturity the liability will be $84.0 million. See Note 6 - Timberland Acquisitions for additional information regarding the transaction.

$75 Million Five-Year Term Loan Agreement

In March 2010, TRS borrowed $75 million under a five-year term loan agreement with a group of banks at LIBOR plus 275 basis points. The term note was repaid in March 2011.

4.50% Convertible 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 29.97 shares per $1,000 principal based on an exchange price of $33.37.

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 $39.85 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 $33.37. The holders of the warrants will receive net shares from Rayonier if the share price is above $39.85 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.

3.75% Convertible notes issued October 2007

In October 2007, TRS issued $300.0 million of 3.75% Senior Exchangeable Notes due 2012. The notes are guaranteed by Rayonier and are non-callable. The $300.0 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 subject to certain conversion provisions including the market price of the Company’s common stock and the trading price of the convertible notes. The current exchange rate is 27.47 shares per $1,000 principal based on an exchange price of $36.41.

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 $41.78 per share. On exercise of the hedge, TRS will receive shares of Rayonier common stock equal to the difference between the then market price and the strike price of $36.41. The holders of the warrants will receive net shares from Rayonier if the share price is above $41.78 at maturity of the warrants.

The purchased hedge 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 hedge 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.

The amounts related to convertible debt in the Consolidated Balance Sheets as of December 31, 2011 and 2010 are as follows:



	2011			2010
Liabilities:
Principal amount of debt
4.50% Senior Exchangeable Notes	$	172,500		$	172,500
3.75% Senior Exchangeable Notes	300,000			300,000
Unamortized discount
4.50% Senior Exchangeable Notes	(8,975		)	(11,142		)
3.75% Senior Exchangeable Notes	(5,378		)	(11,865		)
Net carrying amount of debt	$	458,147		$	449,493
Equity:
Common stock	$	28,092		$	28,092

The unamortized discounts for the 4.50% and 3.75% Senior Exchangeable Notes will be amortized through August 2015 and October 2012, respectively.

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:



	2011		2010		2009
Contractual interest coupon
4.50% Senior Exchangeable Notes	$	7,763	$	7,763	$	2,911
3.75% Senior Exchangeable Notes	11,250		11,250		11,250
Amortization of debt discount
4.50% Senior Exchangeable Notes	2,167		2,045		750
3.75% Senior Exchangeable Notes	6,487		6,115		5,767
Total interest expense recognized	$	27,667	$	27,173	$	20,678

The effective interest rate on the liability component of both issues for the years ended December 31, 2011, 2010 and 2009 was 6.21%.

Debt Covenants

In connection with the Company’s installment note and the $450 million revolving credit facility, covenants must be met, including ratios 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. The Company’s dividend restriction covenant limits the sum of dividends in any period of four fiscal quarters to 90 percent of Covenant Funds from Operations ("Covenant FFO") plus the aggregate amount of dividends permitted under Covenant FFO in excess of the amount of dividends paid during the prior four fiscal quarters. Covenant FFO is defined as Consolidated Net Income excluding gains or losses from debt restructuring and investments in marketable securities plus depletion, depreciation and amortization and the non-cash cost basis of real estate sold. Under a covenant relating to the $112 million installment note, Rayonier Forest Resources ("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, 2011, the Company is in compliance with all covenants.

The covenants listed below, which are the most significant financial covenants in effect as of December 31, 2011, 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		9.79 to 1		7.29
Total debt to Covenant EBITDA should not exceed	4.00 to 1		1.72 to 1		2.28
RFR cash flow available for fixed charges to RFR fixed charges should not be less than	2.50 to 1		14.98 to 1		12.48
Dividends paid should not exceed 90 percent of Covenant FFO	90	%	46	%	44	%

In addition to the financial covenants listed above, the installment note, mortgage notes and 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 March 2010, the excess proceeds exceeded the $50 million limit and as a result, repayment of $53 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 $37.5 million and $27.2 million at December 31, 2011 and 2010, respectively.