40 Cash Flow Hedges and Stand-Alone Interest Rate Swaps

The nominal volume of the euro interest rate swaps has fallen due to contractual reductions and premature terminations and came to € 582.0 million on the reporting date (Dec. 31, 2016: € 1,481.0 million). Interest rates vary between 0.14% and 3.760% with original swap periods of between two and ten years.

In connection with the acquisition of conwert Immobilien Invest SE, the nominal volume of the euro interest rate swaps increased by € 260.2 million. The negative market values of the ten interest rate swaps transferred amounted to € -21.2 million at the time of first-time consolidation. All of conwert’s hedging instruments were terminated for around € 18.6 million in the course of the reporting year.

In line with the early repayment of a mortgage-backed loan, another interest rate swap with a volume of € 146.5

million was terminated prematurely in the reporting year and an interest rate swap with a volume of € 750.0 million ended in December 2017.

For the three hedging instruments that are maintained within a so-called passive hedge accounting, € 9.6 million was reclassified to profit or loss in the reporting year in line with the expected cash flows from the underlying hedged items. This reduced the value recognized under OCI (other comprehensive income) to € 57.2 million.

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

 

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

 

 

 

 

 

 

 

 

Norddeutsche Landesbank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

 

82.0

 

Jun. 28, 2013

 

Jun. 30, 2023

 

3M EURIBOR margin 1.47%

Interest rate swaps

 

82.0

 

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 USD 1,000 million. The CCS, each for an amount of USD 375 million, fell due in October 2017 in line with the bonds. The hedging instruments, each for an amount of USD 125 million, originally had a term of ten years. Therefore, the EUR-USD currency risk resulting from the coupon and capital repayments is eliminated for the entire term of the bonds.

Key parameters of the cross currency swaps were as follows:

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

 

250.0

 

184.9

 

Oct. 2, 13

 

Oct. 2, 23

 

5.00%

 

 

 

 

CCS

 

250.0

 

184.9

 

Oct. 2, 13

 

Oct. 2, 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, 2017, were shown at their negative clean fair values totaling € -8.7 million (Dec. 31, 2016: € -19.1 million), whereas a positive clean fair value of € 5.0 million (Dec. 31, 2016: € 182.3 million) was reported for the cross currency swaps for the same period.

The corresponding deferred interest was shown at € +0.3 million (Dec. 31, 2016: € +2.1 million).

As a result of the valuation, € 24.4 million was credited to other comprehensive income in the fiscal year (2016: encumbrance of € 44.9 million).

Net interest was impacted by reclassifications in the amount of € 199.8 million in 2017 (2016: € 26.9 million).The elimination of exchange rate differences in the amount of € 186.4 million played a key part in this, in particular due to the maturity of the CCS/Yankee 750.

In the reporting year, after allowing for deferred taxes, negative cumulative ineffectiveness amounts to € 4.6 million (in 2016: a positive amount of € 0.7 million), deteriorating net interest by € 5.3 million.

On the basis of the valuation as of December 31, 2017, 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

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

+ 50 basis points

 

2.2

 

 

2.2

- 50 basis points

 

-2.2

 

 

-2.2

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

+ 50 basis points

 

5.8

 

0.1

 

5.9

- 50 basis points

 

-5.8

 

-0.1

 

-5.9

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 € -1.6 million (or € +0.6 million), while ineffectiveness affecting net income in the amount of € +1.4 million (or € -0.6 million) would result at the same time. In the previous year, a change in the other reserves not affecting net income of € -3.0 million (or € +2.6 million) was recognized in connection with ineffectiveness affecting net income in the amount of € +2.2 million (or € -2.0 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.