55 Cash Flow Hedges and Stand-alone Interest Rate Swaps

On the reporting date, the nominal volume of cash flow hedges held in euros amounts to € 1,117.4 million (Dec. 31, 2019: € 972.9 million). Interest rates on hedging instruments are between 0.064% and 3.760% with original swap periods of between 4.75 and 20 years.

An interest rate swap concluded between BUWOG – BAUEN UND WOHNEN GmbH and UniCredit Bank Austria AG in December 2014, which has been reported as a stand-alone interest rate swap, was terminated prematurely in September 2020 with a remaining face value of € 102.1 million. At the same time, the aforementioned company concluded a new interest rate swap with the same face value, the same counterparty, a term leading up to December 31, 2034, and a fixed interest rate of 0.064%, designating it as a cash flow hedge.

In addition, a new cash flow hedge with a nominal value of € 47.0 million was designated for an interest rate swap in connection with the acquisition of the Dritte D.V.I. Investment GmbH. The agreement has a term until November 30, 2038 and a fixed interest rate of 1.505%.

For three hedging instruments that are maintained within a so-called passive hedge accounting, € 9.6 million was reclassified affecting net income in the reporting year in line with the expected cash flows from the underlying hedged items. This reduced the value recognized in other comprehensive income to € 28.4 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 JP 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 1,000.0 million. The CCS, each for an amount of USD 375.0 million, fell due in October 2017 in line with the bonds. The hedging instruments, each for an amount of USD 125.0 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:

Hedge break costs of € 11.5 million were incurred in connection with the premature repayment of two stand-alone interest rate swaps concluded by BUWOG – BAUEN UND WOHNEN GmbH. These costs were offset by the reversal of negative market values of € 11.0 million that had been recognized in the past. As of December 31, 2020, the hedged nominal value of BUWOG’s remaining 14 stand-alone interest rate swaps came to € 351.4 million (Dec. 31, 2019: € 487.9 million).

On the reporting date, the Hembla Group recognized two stand-alone interest rate swaps and eight interest rate caps. The nominal value hedged in Swedish krona corresponds to a volume of € 967.6 million as of December 31, 2020 (Dec. 31, 2019: € 1,004.7 million), with the fair value amounting to € -0.7 million in total (Dec. 31, 2019: € -0.2 million). The embedded derivatives have been reduced to 18 loan termination rights with a positive fair value of € 2.7 million (Dec. 31, 2019: € 78.2 million).

On the reporting date, the Victoria Park Group recognized 19 stand-alone interest rate swaps and six interest rate caps. The nominal value hedged in Swedish krona corresponds to a volume of € 939.6 million as of December 31, 2020 (Dec. 31, 2019: € 1,964.0 million) with the fair value amounting to € -7.7 million (Dec. 31, 2019: € -2.6 million) in total. The embedded derivatives still relate to ten loan termination rights with a positive fair value of € 0.9 million (Dec. 31, 2019: € 1.5 million).

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 € -29.6 million as of December 31, 2020 (Dec. 31, 2019: € -21.6 million). The corresponding deferred interest amounted to € -1.7 million (Dec. 31, 2019: € -2.0 million). At the same time, positive market values from cross currency swaps in the amount of € 18.4 million (Dec. 31, 2019: € 29.1 million), together with positive market values in the amount of € 4.0 million (Dec. 31, 2019: € 81.5 million) from embedded derivatives and other interest rate derivatives of Victoria Park and Hembla were disclosed. The corresponding deferred interest amounted to € 0.4 million (Dec. 31, 2019: € 0.7 million). Financial liabilities also included negative fair values from stand-alone interest rate derivatives in the amount of € -47.1 million (Dec. 31, 2019: € -52.5 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 for cash flow hedges amounted to € 1.0 million (2019: € 0.6 million), deteriorating net interest by € 0.4 million.

On the basis of the valuation as of December 31, 2020, 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 € -0.2 million (or € +0.2 million), while ineffectiveness affecting net income in the amount of € +0.8 million (or € -0.7 million) would result at the same time. In the previous year, a change in the other reserves not affecting net income of € -1.0 million (or € +0.8 million) was recognized in connection with ineffectiveness affecting net income in the amount of € +1.1 million (or € -1.0 million).