Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in interest rates, commodity prices and foreign exchange rates. Our objective is to minimize the economic impact of these market risks. We use derivatives in accordance with policies and procedures approved by the Audit Committee of the Board of Directors. Derivatives are managed by a senior executive committee, whose responsibilities include initiating, managing and monitoring resulting exposures. We do not enter into financial instruments for trading or speculative purposes.
Interest Rate Risk
We are exposed to interest rate risk through our variable rate debt, primarily due to changes in LIBOR. However, we use interest rate swaps to manage our exposure to interest rate movements on our term credit agreements by swapping existing and anticipated future borrowings from floating rates to fixed rates. As of December 31, 2021, we had $550 million of U.S. long-term variable rate debt outstanding on our term credit agreements.
The notional amount of outstanding interest rate swap contracts with respect to our term credit agreements at December 31, 2021 was also $550 million. The Term Credit Agreement matures in April 2028, with the associated interest rate swaps maturing in August 2024. We have entered into forward starting interest rate swaps to cover $150 million of the Term Credit Agreement through the extended maturity date. The Incremental Term Loan Agreement and associated interest rate swaps mature in May 2026. At this borrowing level, a hypothetical one-percentage point increase/decrease in interest rates would result in no corresponding increase/decrease in interest payments and expense over a 12-month period.
The fair market value of our fixed interest rate debt is also subject to interest rate risk. The estimated fair value of our fixed rate debt at December 31, 2021 was $820.4 million compared to the $826.1 million principal amount. We use interest rates of debt with similar terms and maturities to estimate the fair value of our debt. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. A hypothetical one-percentage point increase/decrease in prevailing interest rates at December 31, 2021 would result in a corresponding decrease/increase in the fair value of our fixed rate debt of approximately $38 million and $41 million, respectively.
We estimate the periodic effective interest rate on our U.S. long-term fixed and variable rate debt to be approximately 3.0% after consideration of interest rate swaps and estimated patronage refunds and excluding unused commitment fees on the revolving credit facility.
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The following table summarizes our outstanding debt, interest rate swaps and average interest rates, by year of expected maturity and their fair values at December 31, 2021:
(Dollars in thousands) 2022 2023 2024 2025 2026 Thereafter Total Fair Value
Variable rate debt:
Principal amounts — — — — $200,000 $350,000 $550,000 $550,000
Average interest rate (a)(b) — — — — 1.75% 1.70% 1.72%
Fixed rate debt:
Principal amounts $325,000 — — $23,588 $27,519 $450,000 $826,107 $820,435
Average interest rate (b) 3.75% — — 2.95% 3.64% 2.75% 3.18%
Interest rate swaps:
Notional amount — — $350,000 — $200,000 — $550,000 ($15,582)
Average pay rate (b) — — 2.28% — 1.60% — 2.03%
Average receive rate (b) — — 0.10% — 0.10% — 0.10%
Forward-starting interest rate swaps
Notional amount — — — — — $350,000 $350,000 $11,482
Average pay rate (b) — — — — — 0.80% 0.80%
Average receive rate (b) — — — — — 0.10% 0.10%
(a) Excludes estimated patronage refunds.
(b) Interest rates as of December 31, 2021.
Foreign Currency Exchange Rate Risk
The New Zealand subsidiary’s export sales are predominantly denominated in U.S. dollars, and therefore its cash flows are affected by fluctuations in the exchange rate between the New Zealand dollar and the U.S. dollar. This exposure is partially managed by a natural currency hedge, as ocean freight payments and shareholder distributions are also paid in U.S. dollars. We manage any excess foreign exchange exposure through the use of derivative financial instruments.
Sales and Expense Exposure
At December 31, 2021, the New Zealand subsidiary had foreign currency exchange contracts with a notional amount of $149 million and foreign currency option contracts with a notional amount of $14 million outstanding related to foreign export sales and ocean freight payments. The amount hedged represents a portion of forecasted U.S. dollar denominated export timber and log trading sales proceeds over the next 24 months and next 2 months, respectively.
The following table summarizes our outstanding foreign currency exchange rate risk contracts at December 31, 2021:
(Dollars in thousands) 0-1 months 1-2 months 2-3 months 3-6 months 6-12 months 12-18 months 18-24 months Total Fair Value
Foreign exchange contracts to sell U.S. dollar for New Zealand dollar
Notional amount $12,000 $8,250 $8,000 $24,000 $45,000 $39,000 $13,000 $149,250 ($1,948)
Average contract rate 1.4738 1.4527 1.4598 1.4470 1.4422 1.4648 1.4829 1.4565
Foreign currency option contracts to sell U.S. dollar for New Zealand dollar
Notional amount — — — — — $2,000 $12,000 $14,000 ($42)
Average strike price — — — — — 1.4744 1.4941 1.4913
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