53 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 (see 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

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. Liquidity transfers from the German subgroup to Swedish subsidiaries are generally secured through the conclusion of foreign currency forwards. In addition, currency fluctuations are expected to result from financing relationships with Swedish subsidiaries. The loans denominated in euros granted to Swedish subsidiaries (Dec. 31, 2019: € 1,268.1 million) were converted into SEK loans in the reporting year, meaning that the loans denominated in Swedish krona increased to SEK 20,226.3 million (Dec. 31, 2019: SEK 5,657.7 million). Based on the exchange rate as of December 31, 2020, a -5% change in the value of the Swedish krona against the euro would result in currency gains of € 10.1 million, while a change of +5% would result in a currency loss of € 10.0 million. Vonovia is subject to no further material currency risks in the scope of its usual business activities.

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 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.

A sensitivity analysis for cash flow hedges is provided under chapter [G55] 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 the Finance and Treasury department 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 2020 reporting year. The loan repayments shown for the following years contain only contractually fixed minimum repayment amounts:

In September 2019, a buyback offer was made to the investors holding two outstanding EMTN bonds due to mature in March and December 2020. This offer resulted in approx. 40% of the outstanding nominal volume of the two bonds being bought back, meaning that the maturity amounts of these instruments fell from an original amount of € 500.0 million to € 301 million in March, and from an original amount of € 1,250.0 million to € 752.0 million in December.

Credit Line

In October 2018, Vonovia concluded a syndicated revolving credit facility of € 1,000.0 million with several banks, led by Commerzbank AG, via its Dutch financing company. The term of an unsecured credit line was extended until the end of September 2024 as part of an amendment agreement concluded in September 2020. It bears interest at a rate that is based on the EURIBOR plus an additional margin. This credit line had not been used as of December 31, 2020.

Project-specific credit lines totaling around € 69.6 million were available on the reporting date in connection with bank-financed development projects. The nominal amount of these agreements totals € 243.2 million. These credit lines can be utilized based on the progress of the construction work, provided that corresponding evidence is submitted, taking the contractually agreed payment requirements into account.

There is also a guarantee credit agreement in place between Vonovia and Commerzbank that was increased from € 25.0 million to € 35.0 million in August 2020. Bills of exchange of approximately € 23.4 million had been drawn from this amount as of December 31, 2020. There is another guarantee credit agreement with Raiffeisen Bank International AG in the amount of € 5.0 million within the conwert subgroup. It had not been drawn by the reporting date.

In December 2019, Vonovia SE concluded agreements with Atradius Credit Insurance N.V. and Swiss Re International SE for two revolving lines of credit. Vonovia SE has granted a letter of comfort for a further, already terminated general guarantee agreement between BUWOG Bauträger GmbH and VHV Allgemeine Versicherung AG, under which guarantees of € 0.6 million are currently in force. No new guarantees will be issued under this agreement. Within the BUWOG subgroup, there is also a guarantee line that can be used on a revolving basis with UniCredit Bank Austria AG.

As of December 31, 2020, the total volume available under general guarantee agreements came to € 131.0 million, € 95.3 million of which had been drawn by the reporting date. In addition, a project-specific development financing arrangement with Berliner Volksbank eG allows for the possibility of making use of bills of exchange, bonds and/or guarantees. On the reporting date of December 31, 2020, an amount of € 0.7 million was used.

In April 2019, Victoria Park AB entered into a revolving line of credit of SEK 1,050.0 million with a two-year term with Commerzbank. Vonovia SE acts as the guarantor for this line of credit. SEK 850.0 million of this credit line had been used as of December 31, 2020.

In November 2017, Vonovia concluded a master commercial paper agreement via its Dutch financing company with a total volume of € 500.0 million with Commerzbank AG as lead arranger and several banks as traders. This master program was increased to a total volume of € 1,000.0 million in September 2018. No issues were outstanding as part of this program as of December 31, 2020.

All in all, Vonovia has cash on hand and deposits at banking institutions of € 613.3 million as of the reporting date (Dec. 31, 2019: € 500.7 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.