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 due to changes in SOFR. 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, 2024, we had $600 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, 2024 was also $600 million. The $200 million 2015 Term Loan Agreement matures in April 2028 and on August 1, 2024, three forward-starting interest rate swaps with a total notional amount of $200 million matured into active interest rate swaps and fixed $200 million of the outstanding principal over its remaining four-year term. The 2016 Incremental Term Loan Agreement and associated interest rate swaps mature in May 2026, and the 2021 Incremental Term Loan Agreement and associated interest rate swaps mature in June 2029. At this current borrowing and derivatives 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, 2024 was $451.6 million compared to the $514.8 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, 2024 would result in a corresponding decrease/increase in the fair value of our fixed rate debt of approximately $22 million and $23 million, respectively.
We estimate the periodic effective interest rate on our U.S. long-term fixed and variable rate debt to be approximately 2.3% after consideration of interest rate swaps and estimated patronage refunds and excluding unused commitment fees on the revolving credit facility.
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, 2024:
(Dollars in thousands) 2025 2026 2027 2028 2029 Thereafter Total Fair Value
Variable rate debt:
Principal amounts — $200,000 — $200,000 $200,000 — $600,000 $600,000
Average interest rate (a)(b) — 6.30% — 6.15% 6.20% — 6.21%
Fixed rate debt:
Principal amounts $19,442 $22,683 $22,683 — — $450,000 $514,808 $451,584
Average interest rate (b) 2.95% 3.64% 6.48% — — 2.75% 2.96%
Interest rate swaps:
Notional amount — $200,000 — $200,000 $200,000 — $600,000 $49,353
Average pay rate (b) — 1.50% — 1.37% 0.67% — 1.18%
Average receive rate (c) — 4.55% — 4.55% 4.55% — 4.55%
(a) Excludes estimated patronage refunds.
(b) Interest rates as of December 31, 2024.
(c) Average daily Simple SOFR rate as of December 31, 2024 based on a 30-day look back period.
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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.
Foreign Exchange Exposure
At December 31, 2024, the New Zealand subsidiary had foreign currency exchange contracts with a notional amount of $128 million and foreign currency option contracts with a notional amount of $132 million outstanding related to foreign export sales. The amount hedged represents a portion of forecasted U.S. dollar denominated export timber and log trading sales proceeds over the next 36 months and next 2 months, respectively.
The following table summarizes our outstanding foreign currency exchange rate risk contracts at December 31, 2024:
(Dollars in thousands) 0-1 months 1-2 months 2-3 months 3-6 months 6-12 months 12-18 months 18-24 months 24-36 months Total Fair Value
Foreign exchange contracts to sell U.S. dollar for New Zealand dollar
Notional amount $5,100 $3,000 $5,500 $14,000 $32,000 $23,000 $17,000 $28,000 $127,600 ($6,885)
Average contract rate 1.6667 1.6918 1.6636 1.6550 1.6430 1.6490 1.6771 1.6673 1.6582
Foreign currency option contracts to sell U.S. dollar for New Zealand dollar
Notional amount $4,000 $4,000 $4,000 $14,000 $24,000 $22,000 $22,000 $38,000 $132,000 ($2,164)
Average strike price 1.6445 1.6455 1.6463 1.6725 1.7247 1.6544 1.6871 1.6690 1.6780
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