44 Cashflow Hedges and Stand-alone Interest Rate Swaps

On the reporting date, the nominal volume of cash flow hedges held in euros amounts to € 680.9 million (Dec. 31, 2017: € 582.0 million). The interest rates on the two remaining hedging instruments are 0.793% and 3.760% with original swap periods of 4.75 and 10 years.

In connection with the € 600 million bond with a variable coupon issued in March 2018, the company has used a corresponding interest rate hedging transaction to fix the interest rate at 0.793% for 4.75 years.

In line with the planned early repayment of the corporate bond that fell due in September 2018 with a variable coupon of € 500 million, the corresponding interest rate hedge was also terminated.

For the three hedging instruments that are maintained within a so-called passive hedge account, € 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 other comprehensive income to € 47.6 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 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. This means that the € EUR/USD currency risk resulting from the coupon and capital repayments was eliminated for the entire term of the bonds.

Key parameters of the cross currency swaps were as follows:

In connection with the acquisition of the BUWOG Group as of March 26, 2018, 22 stand-alone interest rate swaps with a nominal volume of € 918.9 million were assumed. In the course of the reporting year, one hedging instrument with a volume of € 24.2 million was terminated at due date, while another with a volume of € 3.5 million was terminated prematurely. As of December 31, 2018, the hedged nominal volume was € 880.2 million.

In connection with the acquisition of the Victoria Park Group as of June 28, 2018, 13 stand-alone interest rate swaps and 6 interest rate caps with a nominal volume of € 415.7 million were assumed. In the course of the reporting year, one interest rate cap (€ 24 thousand) was terminated on the one hand while, on the other, respectively two new interest rate swaps and interest rate caps (in a total amount of about € 0.1 million) were concluded. In addition, at the time of first-time consolidation, 14 embedded derivatives (loan termination rights) with a positive fair value of € 4.5 million had still been identified. The nominal value hedged in Swedish kronor corresponds to a volume of € 497.0 million as of the reporting date.

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 fair value 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 cash flow hedges held in euros were shown at their negative clean fair values totaling € -15.2 million as of December 31, 2018 (Dec. 31, 2017: € -8.7 million). The corresponding deferred interest amounted to € -4.6 million (Dec. 31, 2017: € -0.2 million). At the same time, positive market values from cross currency swaps in the amount of € 15.7 million (Dec. 31, 2017: € 5.0 million), together with positive market values in the amount of € 4.3 million from embedded derivatives and other interest rate derivatives of Victoria Park were disclosed. The corresponding deferred interest amounted to € 0.8 million (Dec. 31, 2017: € 0.5 million).

The impact of the cash flow hedges (after income taxes) on the development of other reserves is shown below:

The impact of the cash flow hedges (including income taxes) on total comprehensive income is shown below:

In the reporting year, after allowing for deferred taxes, negative cumulative ineffectiveness amounts to € 2.7 million (2017: € 4.6 million), improving net interest by € 1.9 million.

On the basis of the valuation as of December 31, 2018, 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:

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 € -1.5 million (or € +1.3 million), while ineffectiveness affecting net income in the amount of € +1.0 million (or € -1.0 million) would result at the same time. In the previous year, a change in the other reserves not affecting net income of € -1.6 million (or € +0.6 million) was recognized in connection with ineffectiveness affecting net income in the amount of € +1.4 million (or € -0.6 million).