56 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 € 1,109.5 million (Dec. 31, 2020: € 1,117.4 million). Interest rates on hedging instruments are between 0.064% and 3.760% with original swap periods of between 4.75 and 20 years.

For three hedging instruments that are maintained within 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 € 18.7 million.

All derivatives are included in netting agreements with the issuing banks.

Cross currency swaps were recognized at their positive fair values. While the interest rate swap redesignated by BUWOG – Bauen und Wohnen Gesellschaft mbH in the previous year also shows a positive fair value, each of the other euro interest rate swaps has a negative fair 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:

As of September 30, 2021, 15 euro interest rate swaps with a nominal value of € 657.8 million were adopted as stand-alone hedging instruments by the Vonovia Group in connection with the acquisition of Deutsche Wohnen SE. In total, the fair values amounted to € -28.9 million as of first-time consolidation. The hedged nominal value corresponds to a volume of € 652.9 million as of the reporting date; overall, the fair values decreased to € -20.8 million.

With the takeover of a borrowing to Aggregate Holdings S.A. in the amount of € 250 million, Vonovia concluded a call option for 13.3% of shares in Adler-Group S.A. with the company, with a term of eight months. There was a positive fair value of € 20.2 million for the call option at the time of addition on October 7, 2021. The subsequent measurement of the call option is carried out at fair value through profit and loss in accordance with the IFRS 9 classification model. As of December 31, 2021 the subsequent measurement results in positive net interest of € 6.1 million.

The hedged nominal volume of currently 13 stand-alone interest rate swaps of BUWOG amounted to € 312.3 million as of December 31, 2021 (Dec. 31, 2020: € 351.4 million).

On the reporting date, the Hembla Group still recognized two stand-alone interest rate swaps and eight interest rate caps. The nominal value hedged in Swedish krona corresponds to a volume of € 946.8 million as of December 31, 2021 (Dec. 31, 2020: € 967.6 million), with the positive and negative fair values balancing each other out overall: € 0.0 million (Dec. 31, 2020: € -0.7 million). Due to the high prepayment fees, embedded derivatives from loan termination rights were not longer recognized as of the reporting date. The positive fair value of the previous year in the amount of € 2.7 million was derecognized accordingly in profit or loss.

On the reporting date, the Victoria Park Group recognized 17 stand-alone interest rate swaps and four interest rate caps. The nominal value hedged in Swedish krona corresponds to a volume of € 721.4 million as of December 31, 2021 (Dec. 31, 2020: € 939.6 million) with the fair value amounting to € -1.0 million in total (Dec. 31, 2020: € -7.7 million). The positive fair value of the embedded derivatives from termination rights of loans from the previous year in the amount of € 0.9 million was also derecognized in profit or loss in the reporting year.

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 clean fair values totaling € -12.3 million as of December 31, 2021 (Dec. 31, 2020: € -29.6 million). The corresponding deferred interest amounted to € -2.0 million (Dec. 31, 2020: € -1.7 million).

At the same time, positive market values from cross currency swaps in the amount of € 35.2 million (Dec. 31, 2020: € 18.4 million), together with positive market values in a total amount of € 30.6 million (Dec. 31, 2020: € 4.0 million), were recognized from the Adler option and stand-alone interest rate derivatives of Hembla, Victoria Park and Deutsche Wohnen. The corresponding deferred interest amounted to € 0.6 million (Dec. 31, 2020: € 0.4 million).

Financial liabilities also included negative fair values from stand-alone interest rate derivatives in the amount of € -53.9 million (Dec. 31, 2020: € -47.1 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 € -0.1 million (2020: € 1.0 million), improving net interest by € 1.1 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 € -1.1 million (or € -0.9 million), while ineffectiveness affecting net income in the amount of € +1.6 million (or € +0.5 million) would result at the same time. In the previous year, a change in the other reserves not affecting net income of € -0.2 million (or € +0.2 million) was recognized in connection with ineffectiveness affecting net income in the amount of € +0.8 million (or € -0.7 million).