38 Financial Risk Management

In the course of its business activities, Vonovia is exposed to various financial risks. The Group-wide financial risk management system aims to identify any potentially negative impact on the financial position of the Group early on and take suitable measures to limit this impact. For the structure and organization of financial risk management, we refer to the management report (chapter “Structure and Instruments of the Risk Management System”). This system was implemented on the basis of Group guidelines, which were approved by the Management Board and which are continually reviewed. The risks associated with financial instruments and the corresponding risk management are described in detail as follows:

Market Risks

a) Currency Risks

The cash-effective currency risks arising in connection with the issuance of US-$ bonds were eliminated by the simultaneous contracting of cross currency swaps. Apart from the aforementioned, Vonovia is still not exposed to any material currency risks in its normal business activities.

b) Interest Rate Risks

In the course of its business activities, Vonovia is exposed to cash-effective interest rate risks as a result of floating-rate debt as well as new and follow-on loans. Within this context, the interest markets are continually monitored by the Finance and Treasury department. Its observations are incorporated into the financing strategy.

As part of its financing strategy, Vonovia uses derivative financial instruments, in particular EUR interest rate swaps, to limit or manage interest rate risks. Vonovia’s policies permit the use of derivatives only if they are associated with underlying assets or liabilities, contractual rights or obligations and planned, highly probable transactions.

Preceding this chapter, there is a sensitivity analysis with regard to purchase price liabilities from put options. A sensitivity analysis for cash flow hedges is provided under note [40] Cash Flow Hedges and Stand-Alone Interest Rate Swaps.

c) Deutsche Wohnen Share Price Risks

Vonovia holds 16.8 million shares in Deutsche Wohnen AG as stock. This stock is subject to standard market price fluctuations. On December 31, 2016, a drop in the relevant share price of 5% would have resulted in a reduction in equity of € 25.0 million without allowance for income taxes.

Credit Risks

Vonovia is exposed to a default risk resulting from the potential failure of a counterparty to fulfill its part of the contract. In order to minimize risks, financial transactions are only executed with banks and partners whose credit has been found by a rating agency to be at least equivalent to Vonovia’s. These counterparties are assigned volume limits set by the Management Board. The counterparty risks are managed and monitored centrally by the Finance and Treasury department.

Liquidity Risks

The companies of Vonovia are financed by borrowings to a notable degree. Due to their high volume, the loans are in some cases exposed to a considerable refinancing risk. The liquidity risks arising from financing transactions with high volumes (volume risks) have become apparent in the financial sector, especially in the wake of the financial crisis. In order to limit these risks, Vonovia is in constant contact with many different market players, continuously monitors all financing options available on the capital and banking markets and uses these options in a targeted manner. Moreover, Vonovia subjects its existing financings to an early review prior to the respective final maturity date in order to ensure refinancing.

Under the conditions of existing loan agreements, Vonovia is obliged to fulfill certain financial such as the debt service coverage ratio or debt-equity ratio. If financial covenants are violated, the breach is not rectified within so-called cure periods and no mutually acceptable agreement can be reached with the lenders, the financing may be restructured and the cost structure changed. Should all commonly practiced solutions be unsuccessful, the lenders could call in the loan. The fulfillment of these financial covenants is continually monitored by Finance and Treasury on the basis of current actual figures and budgetary accounting.

In order to ensure its ability to pay at all times, Vonovia has put a system-supported cash management system in place. This system monitors and optimizes Vonovia’s cash flows on an ongoing basis and provides the Management Board with regular reports on the Group’s current liquidity situation. Liquidity management is supplemented by short-term rolling, monthly liquidity planning for the current fiscal year, of which the Management Board is also promptly notified.

The following table shows the forecast for undiscounted cash flows of the non-derivative financial liabilities and derivative financial instruments. The loan repayments shown for the following years contain only contractually fixed minimum repayment amounts:

 

 

 

 

2017

 

2018

 

2019 to 2023

in € million

 

Carrying amount as of Dec. 31, 2016

 

Interest

 

Repay­ment

 

Interest

 

Repay­ment

 

Interest

 

Repay­ment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-derivative financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities to banks

 

3,439.4

 

93.6

 

169.3

 

64.6

 

734.6

 

106.2

 

985.3

Liabilities to other creditors

 

9,859.0

 

136.2

 

1,485.3

 

175.8

 

1,521.4

 

537.6

 

5,843.3

Deferred interest from other non-derivative financial liabilities

 

72.6

 

72.6

 

 

 

 

 

Liabilities from finance leases

 

99.2

 

5.9

 

 

5.9

 

 

31.2

 

Derivative financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase price liabilities from put options/rights to reimbursement

 

57.2

 

 

31.6

 

 

 

 

25.6

Cash flow hedges (interest)

 

19.1

 

16.7

 

 

5.2

 

 

13.2

 

Cash flow hedges (cross currency swap) US-$ in €

 

-182.3

 

-33.4

 

-712.4

 

-11.0

 

 

-52.5

 

-200.1

 

 

 

25.0

 

554.7

 

8.5

 

 

42.4

 

184.9

Deferred interest from swaps

 

-2.1

 

-2.1

 

 

 

 

 

In April 2014, Vonovia issued a subordinated hybrid bond with terms and conditions stating that the issuer has its first special right of termination after five years. In line with the principle of prudence, the nominal value of these bonds has been recognized in the repayments from the 2019–2023 period, although the contractual term extends well beyond this period.

Credit Line

In September 2015, Vonovia entered into an agreement with Commerzbank AG, Frankfurt worth € 300 million. This unsecured credit line runs until September 2018 and is subject to interest on the basis of EURIBOR plus a mark-up. It had not been utilized by December 31, 2016. Furthermore, there are two guarantee credit agreements in place between Vonovia and Commerzbank, one for € 10 million, from which bills of exchange of approximately € 0.9 million had been drawn as of the end of the fiscal year, and one for € 50 million, from which bills of exchange had been drawn in the full amount.

All in all, Vonovia has cash on hand and deposits at banking institutions of € 1,540.8 million on the reporting date (Dec. 31, 2015: € 2,108.0 million and commercial papers in the amount of € 999.9 million). Therefore Vonovia’s ability to service debt continues to be guaranteed at all times.

We refer to the information on financial risk management in the management report.

Strategic
The “Strategic” subportfolio contains locations that offer development potential that is above average and for which we are pursuing a value-enhancing property management strategy.
Rating
Classification of debtors or securities with regard to their creditworthiness or credit quality according to credit ratings. The classification is generally performed by rating agencies.
Covenants
Requirements specified in loan agreements or bond conditions containing future obligations of the borrower or the bond obligor to meet specific requirements or to refrain from undertaking certain activities.