Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market and Other Economic Risks
We are exposed to various market risks, primarily changes in interest rates, currency and commodity prices. Our objective is to minimize the economic impact of these market risks. We may use derivatives in accordance with policies and procedures approved by the Finance and Strategic Planning Committee of our Board of Directors.
Foreign Currency
We manage our foreign currency exposures by balancing certain assets and liabilities denominated in foreign currencies. We may also use foreign currency forward contracts to manage these exposures. The principal objective of such contracts is to minimize the potential volatility and financial impact of changes in foreign currency exchange rates. We do not utilize financial instruments for trading or other speculative purposes.
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Prices
The prices, sales volumes and margins of our High Purity Cellulose operating segment’s commodity products and all the High-Yield Pulp operating segment’s products have historically been cyclically affected by economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates. These products have fewer distinguishing qualities from producer to producer and competition is based primarily on price, which is determined by market supply relative to demand. The overall levels of demand for the products we manufacture, and consequently our sales and profitability, reflect fluctuations in end user demand. Our cellulose specialties product prices are impacted by market supply and demand, raw material and processing costs, changes in global currencies and other factors.
Certain key input costs, such as wood fiber, chemicals and energy, may experience significant price fluctuations, also impacted by market shifts, fluctuations in capacity and other demand and supply dynamics. We may periodically enter into commodity forward contracts to fix some of our energy costs that are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. Such forward contracts partially mitigate the risk of changes to our gross margins resulting from an increase or decrease in these costs. Forward contracts that are derivative instruments are reported in our consolidated balance sheets at their fair values, unless they qualify for the normal purchase normal sale exception and such exception has been elected, in which case, the fair values of such contracts are not recognized in the balance sheet.
Variable Interest Rates
At December 31, 2024, we had $702 million of variable rate debt subject to interest rate risk. In the fourth quarter of 2024, we secured variable-rate term loan financing of $700 million, which was used, together with cash on hand, to redeem the respective $453 million and $245 million outstanding principal balances of the fixed-rate 2026 Notes and the variable-rate 2027 Term Loan. The 2029 Term Loan bears interest at an annual rate equal to three-month Term SOFR plus an initial applicable margin of 7 percent. At this new borrowing level, a hypothetical one percent change in interest rates would result in a $7 million annual change in interest expense.
At December 31, 2023, we had $255 million of variable rate debt subject to interest rate risk, for which a hypothetical one percent change in interest rates would have resulted in a $2 million annual change in interest expense.
The fair market value of our long-term fixed interest rate debt may also be subject to interest rate risk when the debt becomes due or if we do not hold the debt until maturity. The estimated fair value of our fixed-rate debt at December 31, 2024 and 2023 was $75 million and $498 million, respectively, compared to their respective $75 million and $540 million principal amounts. We use quoted market prices to estimate the fair value of our fixed-rate debt. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise.