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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | 9 Months Ended
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Sep. 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 September 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 September 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 nine months ended September 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) 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 a mounts 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 September 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) 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 September 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 (expense) income, net” as the contracts do not qualify for hedge accounting treatment. As of September 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 nine months ended September 30, 2020 and 2019:
|  |  | Three Months Ended September 30,
| Income Statement Location |  | 2020 |  | 2019
Derivatives designated as cash flow hedges: |  |  |  |  |
Foreign currency exchange contracts | Other comprehensive income (loss) |  | $1,946 |  |  | ($2,870) |
Foreign currency option contracts | Other comprehensive income (loss) |  | 358 |  |  | (300) |
Interest rate products | Other comprehensive income (loss) |  | 2,417 |  |  | (9,592) |
| Interest Expense |  | 3,783 |  |  | (549) |
|  |  | Nine Months Ended September 30,
| Income Statement Location |  | 2020 |  | 2019
Derivatives designated as cash flow hedges: |  |  |  |  |
Foreign currency exchange contracts | Other comprehensive income (loss) |  | $1,806 |  |  | ($1,971) |
Foreign currency option contracts | Other comprehensive income (loss) |  | 85 |  |  | (330) |
Interest rate products | Other comprehensive income (loss) |  | (91,203) |  |  | (38,558) |
| Interest Expense |  | 6,951 |  |  | (2,414) |
Derivatives not designated as hedging instruments: |  |  |  |
Foreign currency exchange contracts | Interest and other miscellaneous (expense) income, net |  | — |  |  | 135 |
Carbon option contracts | Interest and other miscellaneous income, net |  | 563 |  |  | 414 |
During the next 12 months, the amount of the September 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 gain of approximately $1.1 million. The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
| Notional Amount |
| September 30, 2020 |  | December 31, 2019 |
Derivatives designated as cash flow hedges: |  |  |  |
Foreign currency exchange contracts | $47,650 |  |  | $56,350 |  |
Foreign currency option contracts | 32,000 |  |  | 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 the end of the period. 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)
|  |  | September 30, 2020 |  | December 31, 2019
Derivatives designated as cash flow hedges: |  |  |  |
Foreign currency exchange contracts | Other current assets |  | $1,252 |  |  | $424 |
| Other assets |  | 1,293 |  |  | 390 |
| Other current liabilities |  | (96) |  |  | (172) |
Foreign currency option contracts | Other current assets |  | 563 |  |  | 151 |
| Other assets |  | — |  |  | 209 |
| Other current liabilities |  | (174) |  |  | (27) |
| Other non-current liabilities |  | — |  |  | (30) |
Interest rate swaps | Other assets |  | — |  |  | 2,614 |
| Other non-current liabilities |  | (61,308) |  |  | (11,068) |
Forward-starting interest rate swaps | Other non-current liabilities |  | (20,980) |  |  | — |
Derivative not designated as a hedging instrument: |  |  |  |
Carbon options | Other current liabilities |  | — |  |  | (607) |
Total derivative contracts: |  |  |  |  |
Other current assets |  |  | $1,815 |  |  | $575 |
Other assets |  |  | 1,293 |  |  | 3,213 |
Total derivative assets |  |  | $3,108 |  |  | $3,788 |
Other current liabilities |  |  | (270) |  |  | (806) |
Other non-current liabilities |  |  | (82,288) |  |  | (11,098) |
Total derivative liabilities |  |  | ($82,558) |  |  | ($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.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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