42 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 still existing USD bond were eliminated by the simultaneous contracting of cross currency swaps. Fixed and expected purchase price payments in connection with the acquisition of Victoria Park were secured through the conclusion of foreign currency forwards. In addition, currency fluctuations from the operating business in Swedish kronor (SEK) are to be expected. Vonovia is subject to no further material currency risks in the scope of its usual 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 and caps, 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 [44] Cash Flow Hedges and Stand-alone Interest Rate Swaps.

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 rating 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 covenants 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 for the 2018 reporting year. The loan repayments shown for the following years contain only contractually fixed minimum repayment amounts:

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 year 2019, although the contractual term extends well beyond this period.

Credit Line

The framework loan agreements with Commerzbank and Société Générale concluded in December 2017, each with a volume of € 250 million, were terminated with effect from October 4, 2018. Vonovia has concluded a syndicated revolving credit facility of € 1,000 million with several banks, led by Commerzbank AG, via its Dutch financing company to replace these loan agreements. This unsecured credit line runs until October 2021 and is subject to interest on the basis of EURIBOR plus a mark-up. This credit line had not been used as of December 31, 2018.

Within the BUWOG subsidiaries, project-specific credit lines with various credit institutions were available in the amount of € 316.6 million on the reporting date, with € 62.3 million available for alternative use as a guarantee line. The nominal amount of these agreements totals € 609.7 million. These credit lines can be utilized based on the progress of the construction work, provided that corresponding evidence is furnished, taking the contractually agreed payment requirements into account.

Furthermore, there are two guarantee lines in place between Vonovia and Commerzbank, one for € 10 million, from which bills of exchange of approximately € 4.3 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. There are further guarantee credit lines within the conwert subgroup, namely with Raiffeisen Bank International AG in the amount of € 5 million and with Landesbank Baden-Württemberg in the amount of € 0.75 million. Approximately € 0.15 million of the latter had been drawn as of December 31, 2017. In addition, Commerzbank has issued Vonovia a bank guarantee of around € 334.4 million to secure the cash settlement entitlements of the minority shareholders of BUWOG AG as part of the squeeze-out.

Within the BUWOG subportfolio, there are four guarantee lines that can be used on a revolving basis and that correspond to a total amount of € 48 million with UniCredit Bank Austria AG, Atradius Credit Insurance N.V., Swiss Re International SE and VHV Allgemeine Versicherung AG. As of December 31, 2018, € 17.8 million of these guarantee lines had been used. In addition, four project-specific development financing arrangements with Berliner Volksbank eG, Berliner Sparkasse AG, HypoVereinsbank UniCredit Bank AG and UniCredit Bank Austria AG allow for the possibility of making use of bills of exchange, bonds and/or guarantees. On the reporting date, bills of exchange of € 6.6 million had been used. In addition, there are lines in the amount of € 18.6 million available at at least one of the credit institutions referred to above for project-specific payment guarantees, € 18.0 million of which had been used by the balance sheet date.

In November 2017, Vonovia concluded a master commercial paper agreement via its Dutch financing company with a total volume of € 500 million with Commerzbank AG as lead arranger and several banks as traders. This master program was increased to a total volume of € 1,000 million in September 2018. Issues in the amount of € 420 million were outstanding under this program as of December 31, 2018.

All in all, Vonovia has cash on hand and deposits at banking institutions of € 547.7 million on the reporting date (Dec. 31, 2017: € 266.2 million). The master credit agreements/the commercial paper program, together with the cash on hand, guarantee Vonovia’s ability to pay at all times.

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