40 Cash Flow Hedges and Stand-Alone Interest Rate Swaps

The nominal value of the euro interest rate swaps has fallen due to contractual reductions and premature terminations and came to € 1,481.0 million on the reporting date (Dec. 31, 2015: € 6,653.2 million). Interest rates vary between 0.14% and 3.760% with original swap periods of between two and ten years.

In connection with the € 500-million bond with a variable coupon issued in September 2016, the company has used a corresponding interest rate hedging transaction to fix the interest rate at 0.14% for two years.

In line with the planned early repayment of selected mortgage-backed loans, nine interest rate swaps with a volume of € 2,945.0 million have been terminated prematurely in the reporting year.

In addition, the forward swaps with a nominal volume of € 2,700 million that were designated in October 2015 were terminated in June and December 2016. Three hedging instruments are maintained within a so-called passive hedge accounting and the changes in value previously reported outside profit or loss under OCI (other comprehensive income) will be reclassified to profit or loss in line with the expected cash flows from the underlying hedged items (two tranches of the bond issued on June 6, 2016, each with a volume of € 500 million, as well as the € 1,000 million bond issued on December 6, 2016). Since the originally intended hedged items for the other two hedging instruments are no longer associated with a high probability of occurrence, their termination prices totaling € 54.5 million were recognized with an direct effect on net income.

All derivatives are included in netting agreements with the issuing banks. Whereas the cross currency swaps were all recognized with positive market values, basically the euro interest rate swaps have an inherently negative market value as of the reporting date. No economic or accounting offsetting was performed in the reporting year.

Key parameters of the interest rate swaps were as follows:

in € million

 

Face value

 

Beginning of term

 

End of term

 

Current average interest rate (incl. margin)

 

 

 

 

 

 

 

 

 

Bonds (EMTN)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

 

750.0

 

Dec. 15, 2015

 

Dec. 15, 2017

 

3M EURIBOR margin 0.95%

Interest rate swaps

 

750.0

 

Dec. 15, 2015

 

Dec. 15, 2017

 

0.835%

 

 

 

 

 

 

 

 

 

Bonds (EMTN)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

 

500.0

 

Sep. 13, 2016

 

Sep. 13, 2018

 

3M EURIBOR margin 0.38%

Interest rate swaps

 

500.0

 

Sep. 13, 2016

 

Sep. 13, 2018

 

0.140%

 

 

 

 

 

 

 

 

 

Portfolio loans

 

 

 

 

 

 

 

 

Corealcredit Bank AG (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

 

147.7

 

Dec. 14, 2010

 

Dec. 31, 2018

 

3M EURIBOR margin 0.88%

Interest rate swaps

 

147.9

 

Apr. 13, 2011

 

Apr. 13, 2018

 

3.335%

 

 

 

 

 

 

 

 

 

Norddeutsche Landesbank (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

 

83.1

 

Jun. 28, 2013

 

Jun. 30, 2023

 

3M EURIBOR margin 1.47%

Interest rate swaps

 

83.1

 

Jun. 28, 2013

 

Jun. 30, 2023

 

2.290%

In 2013, two cross currency swaps were contracted in equal amounts with each of J.P. Morgan Limited and Morgan Stanley Bank International Limited; these hedging instruments (cross currency swaps/CCS) became effective on the issuance of two bonds for a total amount of US-$ 1,000 million. The CCS, each for an amount of US-$ 375 million, originally had a term of four years and the hedging instruments, each for an amount of US-$ 125 million, originally had a term of ten years. Therefore, the EUR-US-$ currency risk resulting from the coupon and capital repayments is eliminated for the entire term of the bonds.

The nominal volume of the CCS is still € 739.8 million at the reporting date. The interest rate for the transaction due in 2017 comes to 2.97% and the rate for the transaction due in 2023 comes to 4.58%.

in million

 

Face-value
US-$

 

Face-value

 

Beginning of term

 

End of term

 

Interest rate
US-$

 

Interest rate

 

Hedging rate
US-$/€

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

J.P. Morgan Securities plc Morgan Stanley & Co. International plc

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

 

750.0

 

554.9

 

02.10.13

 

02.10.17

 

3.20%

 

 

 

 

Hedged items

 

250.0

 

184.9

 

02.10.13

 

02.10.23

 

5.00%

 

 

 

 

CCS

 

750.0

 

554.9

 

02.10.13

 

02.10.17

 

 

 

2.97%

 

1.3517

CCS

 

250.0

 

184.9

 

02.10.13

 

02.10.23

 

 

 

4.58%

 

1.3517

The designation of the cash flow hedges as hedging instruments is prospectively determined on the basis of a sensitivity analysis, retrospectively on the basis of the accumulated dollar offset method. The changes of the hedged items are determined on the basis of the hypothetical derivative method. In the reporting year – as in the prior year – the impact of default risk on the fair values is negligible and did not result in any adjustments of the balance sheet item.

In the reporting year, the interest rate swaps as of December 31, 2016, were shown at their negative clean fair values totaling € -19.1 million (Dec. 31, 2015: € -144.5 million), whereas a positive clean fair value of € 182.3 million (Dec. 31, 2015: € 154.3 million) was reported for the cross currency swaps for the same period.

In addition, an embedded derivative that was identified as part of the takeover of GAGFAH S.A. was recognized at a positive fair value of € 0.2 million as of the reporting date.

The corresponding deferred interest was shown at € +2.1 million (Dec. 31, 2015: € -1.2 million).

As a result of the valuation, € 44.9 million was encumbered to other comprehensive income during the fiscal year (2015: credit of € 10.0 million).

Net interest was impacted by reclassifications in the amount of € 26.9 million in 2016 (2015: credit of € 45.3 million).

In the reporting year, after allowing for deferred taxes, positive cumulative ineffectiveness amounts to just € 0.7 million (2015: € 8.9 million), as a result the net interest deteriorated by € 8.2 million.

On the basis of the valuation as of December 31, 2016, Vonovia used a sensitivity analysis to determine the change in equity given a parallel shift in the interest rate structure of 50 basis points in each case:

 

 

Change in equity

in € million

 

Other reserves
not affecting net income

 

Ineffective portions
affecting net income

 

Total

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

+ 50 basis points

 

5.8

 

0.1

 

5.9

- 50 basis points

 

-5.8

 

-0.1

 

-5.9

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

+ 50 basis points

 

72.8

 

28.9

 

101.7

- 50 basis points

 

-75.8

 

-29.0

 

-104.8

A further sensitivity analysis showed that a change in the foreign currency level of -5% (+5%) would lead, after allowance for deferred taxes, to a change in the other reserves not affecting net income of € -3.0 million (or € +4 million), while ineffectiveness affecting net income in the amount of € +2.2 million (or € -2.0 million) would result at the same time. In the previous year, a change in the other reserves not affecting net income of € -3.6 million (or € +4.1 million) was recognized in connection with ineffectiveness affecting net income in the amount of € +3.4 million (or € -3.7 million).

Fair Value
Valuation pursuant to IAS 40 in conjunction with IFRS 13. The estimated value of an asset. The fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.