DEBT

Rayonier’s debt consisted of the following at December 31, 2013 and 2012:



	2013			2012
Senior Notes due 2022 at a fixed interest rate of 3.75%	$	325,000		$	325,000
Senior Exchangeable Notes due 2015 at a fixed interest rate of 4.50% (a)	127,749			165,821
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)	65,165			76,731
Solid waste bond due 2020 at a variable interest rate of 1.5% at December 31, 2013	15,000			15,000
Revolving Credit Facility borrowings due 2016 at a variable interest rate of 1.14% at December 31, 2013	205,000			275,000
Term Credit Agreement borrowings due 2019 at a variable interest rate of 1.67% at December 31, 2013	500,000			300,000
New Zealand JV Revolving Credit Facility due 2016 at a variable interest rate of 4.39% at December 31, 2013	193,311			—
New Zealand JV Noncontrolling interest shareholder loan at 0% interest rate	30,499			—
Total debt	1,574,224			1,270,052
Less: Current maturities of long-term debt	(112,500		)	(150,000		)
Long-term debt	$	1,461,724		$	1,120,052

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



2014	$	112,500
2015 (a)	130,973
2016	398,311
2017 (b)	63,000
2018	—
Thereafter	870,499
Total Debt	$	1,575,283


(a)	Our Senior Exchangeable Notes maturing in 2015 were discounted by $3.2 million and $6.7 million as of December 31, 2013 and 2012, respectively, but upon maturity the liability will be $131 million.


(b)	The mortgage notes due in 2017 were recorded at a premium of $2.2 million and $3.2 million as of December 31, 2013 and 2012, respectively. Upon maturity the liability will be $63 million.

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 receives 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 95 basis points after consideration of the patronage refunds. At December 31, 2013, the Company had $140 million of available borrowings under this 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, 2013, the Company had $243 million of available borrowings under this facility, net of $2 million to secure its outstanding letters of credit.

Joint Venture Debt

On April 4, 2013, Rayonier acquired an additional 39 percent interest in its New Zealand JV, bringing its total ownership to 65 percent and as a result, the New Zealand JV’s debt was consolidated effective on that date. See Note 4 — Joint Venture Investment for further information.

Senior Secured Facilities Agreement

The New Zealand JV is party to a $212 million variable rate Senior Secured Facilities Agreement comprised of two tranches. Tranche A, a $193 million revolving cash advance facility expires September 2016 and Tranche B, a $19 million working capital facility expires September 2014. Although the maximum amounts available under the agreement are denominated in New Zealand dollars, advances on Tranche A are also available in U.S. dollars. This agreement is secured by a Security Trust Deed that provides recourse only to the New Zealand JV’s assets; there is no recourse to Rayonier Inc. or any of its subsidiaries.

Revolving Credit Facility

As of December 31, 2013 the Senior Secured Facilities Agreement had $193 million outstanding on Tranche A at 4.39 percent due September 2016. The interest rate is indexed to the 90 day New Zealand Bank bill rate and is generally repriced quarterly. The margin on the index rate fluctuates based on the interest coverage ratio. The New Zealand JV manages these rates through interest rate swaps, as discussed at Note 6 — Derivative Financial Instruments and Hedging Activities. The notional amounts of the outstanding interest rate swap contracts at December 31, 2013 were $184 million, or 95 percent of the variable rate debt. The weighted average fixed interest rate resulting from the swaps was 4.9 percent. The interest rate swap contracts have maturities between one and seven years.

Working Capital Facility

The $19 million Working Capital Facility is available for short-term operating cash flow needs of the New Zealand JV. This facility holds a variable interest rate indexed to the Official Cash Rate set by the Reserve Bank of New Zealand. The margin ranges from 1.17 percent to 1.44 percent based on the interest coverage ratio and the length of time each borrowing is outstanding. At December 31, 2013, there was no outstanding balance on the Working Capital Facility.

Shareholder Loan

The shareholder loan is an interest-free loan from the noncontrolling New Zealand JV partner in the amount of $30 million. This loan represents part of the noncontrolling party’s investment in the New Zealand JV. The loan is secured by timberlands owned by the New Zealand JV and is subordinated to the Senior Secured Facilities Agreement. Although Rayonier Inc. is not liable for this loan, the shareholder loan instrument contains features with characteristics of both debt and equity and is therefore required to be classified as debt and consolidated. As the loan is effectively at par, the carrying amount is deemed to be the fair value. The entire balance of the shareholder loan remained classified as long-term debt at December 31, 2013 due to the ability and intent of the Company to refinance it on a long-term basis.

$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 both 2013 and 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, 2013, the carrying value of the debt outstanding was $65.2 million; however, the liability will be $63.0 million at maturity.

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 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 30.55 shares per $1,000 principal based on an exchange price of $32.74.

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 $39.10 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 $32.74. The holders of the warrants will receive net shares from Rayonier if the share price is above $39.10 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.

The $172.5 million 4.50% Senior Exchangeable Notes due 2015 were exchangeable at the option of the holders for all four calendar quarters ending in 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.

During the third quarter of 2013, three groups of note holders elected to exercise their right to redeem $41.5 million of the notes. As of December 31, 2013, all three redemptions have settled. In accordance with ASC 470-50, Modifications and Extinguishments [Debt], the fair value of the debt prior to redemption was compared to its carrying amount and the difference expensed, along with unamortized discount and issuance costs. As a result, Rayonier recorded a loss on the early redemption of $4 million.

Based upon the average stock price for the 30 trading days ended December 31, 2013, these notes again became exchangeable at the option of the holder for the calendar quarter ending March 31, 2014. The remaining balance of the notes is classified as long-term debt at December 31, 2013 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. The notes matured in October 2012 and the outstanding principal balance of $300.0 million was paid in cash. 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. The warrants sold in conjunction with the issuance of the 3.75% Senior Exchangeable Notes due 2012 began maturing on January 15, 2013 and continued to mature through March 27, 2013. In first and second quarter 2013, 8,313,511 of warrants were settled, resulting in the issuance of 2,135,221 Rayonier common shares. For information regarding the dilutive effect of the assumed conversion of the warrants, refer to Note 11 — Earnings per Common Share.

The amounts related to convertible debt in the Consolidated Balance Sheets as of December 31, 2013 and 2012 are as follows:



	2013			2012
Liabilities:
Principal amount of debt
4.50% Senior Exchangeable Notes	$	130,973		$	172,500
Unamortized discount
4.50% Senior Exchangeable Notes	(3,224		)	(6,679		)
Net carrying amount of debt	$	127,749		$	165,821
Equity:
Common stock	$	8,850		$	8,850

The 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:



	2013		2012		2011
Contractual interest coupon
4.50% Senior Exchangeable Notes	$	7,271	$	7,763	$	7,763
3.75% Senior Exchangeable Notes	—		8,682		11,250
Amortization of debt discount
4.50% Senior Exchangeable Notes	2,281		2,296		2,167
3.75% Senior Exchangeable Notes	—		5,378		6,487
Total interest expense recognized	$	9,552	$	24,119	$	27,667

The effective interest rate on the liability component of both issues for the years ended December 31, 2013, 2012 and 2011 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. Additionally, debt at subsidiaries (excluding Rayonier Operating Company LLC and TRS, which are borrowers under the agreement) is limited 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 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 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.

In connection with the New Zealand JV’s Senior Secured Facilities Agreement, covenants must be met, including generation of sufficient cash flows to meet a minimum interest coverage ratio of 1.25 to 1 on a quarterly basis and maintenance of a leverage ratio of bank debt versus the forest and land valuation below the covenant’s maximum ratio of 40 percent.

At December 31, 2013, 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, 2013, 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	13.31 to 1	10.81
Consolidated funded debt should not exceed 65 percent of consolidated net worth plus the amount of consolidated funded debt	65%	47.5%	17.5%
Subsidiary debt should not exceed 15 percent of Consolidated Net Tangible Assets	15%	6%	9%
RFR cash flow available for fixed charges to RFR fixed charges should not be less than	2.50 to 1	27.44 to 1	24.94
New Zealand JV's minimum interest coverage ratio should not be less than	1.25 to 1	2.08 to 1	0.83
New Zealand JV's leverage ratio of bank debt versus the forest and land valuation should not exceed	40%	31.7%	8.3%

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 million at December 31, 2013 and 2012, respectively.