54 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 Risk Management Structure and Instruments). 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 to be issued USD bond were eliminated by the contracting of cross currency swaps. Liquidity transfers from the German subgroup to Swedish subsidiaries are usually secured through the conclusion of foreign currency forwards. Nevertheless, currency fluctuations are expected to result from financing relationships with Swedish subsidiaries. The loans paid in Swedish krona to Swedish subsidiaries rose to SEK 20,271.3 million (Dec. 31, 2020: SEK 20,226.3 million). Based on the exchange rate as of December 31, 2021, a -5% change in the value of the Swedish krona against the euro would result in currency gains of € 9.9 million, while a change of +5% would result in a currency loss of € 9.8 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 [G56] Cash Flow Hedges and Stand-alone Interest Rate Swaps.

Other Risks

Vonovia also acts as an energy supply company through its subsidiary Vonovia Energie Service GmbH. Contracts used for procurement and in the context of sales do not constitute financial instruments under IFRS 9. However, because the contracts used are managed in a comparable manner, this business area is also presented below. Due in particular to the current strong fluctuations in energy procurement conditions, there is a risk that planned energy procurement prices may not be realized. This indirectly results in the risk of the energy sales business becoming loss-making. Vonovia hedges against these risks with a broad range of risk management instruments, which, in addition to a structured multi-year procurement strategy and systematic risk monitoring, also offers the option of price adjustments during the year. This has significantly reduced market price risks in the current highly dynamic situation on the energy procurement markets.

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 generally 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. In order to minimize credit risks, large amounts of cash on hand are avoided wherever possible. In the event that large reserves are necessary on a short-term basis due to pending investments or refinancing, these are distributed among various instruments and banking partners with good credit ratings.

The following table shows the forecast for undiscounted cash flows of the non-derivative financial liabilities and derivative financial instruments for the 2021 reporting year. The loan repayments shown for the following years contain only contractually fixed minimum repayment amounts:

Credit Line

Up until the end of September, there was an agreement in place on a syndicated revolving credit facility of € 1,000 million between Vonovia Finance B.V. and several banks, led by Commerzbank AG. This agreement, which was originally set to run until 2024, was terminated prematurely in September 2021 and replaced with a comparable master agreement with a volume of € 2,000 million between Vonovia SE and a banking consortium led by Commerzbank AG. An increase option of € 1,000 million was utilized in November, meaning that a total volume of € 3,000 million has been available through this credit facility ever since. Drawdowns can be made in euros or Swedish krona under the agreement, which will end in 2024, with interest based on the EURIBOR or STIBOR, plus an additional margin. This credit line had not been used as of December 31, 2021.

Project-specific credit lines totaling around € 49.8 million were available on the reporting date in connection with bank-financed development projects. The nominal amount of these agreements totals € 227.5 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.

In the Deutsche Wohnen subgroup, there are a total of six framework credit agreements with various banks and a total volume of € 450 million. Bills of exchange may also be issued under the terms of one of these agreements, concluded with Aareal Bank in a framework volume of € 10 million. As of the reporting date, bills of exchange with a total volume of around € 1.8 million were outstanding. Three of the credit facilities, with a total volume of € 400 million, are contractually due to end in 2022. There is also a guarantee framework agreement with Euler Hermes in the amount of € 50.0 million, with a volume of some € 31 million having been issued as of the reporting date.

There is also a guarantee credit agreement in place between Vonovia and Commerzbank that was increased from € 35.0 million to € 50.0 million in May 2021. Bills of exchange of approximately € 35.5 million had been drawn from this amount as of December 31, 2021. There is another guarantee credit agreement with Raiffeisen Bank International AG in the amount of € 5.0 million. It had not been drawn by the reporting date.

In December 2019, Vonovia SE concluded two guarantee lines that can be used on a revolving basis with Atradius Credit Insurance N.V. and Swiss Re International SE. 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 € 0.4 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, 2021 the total volume available under general guarantee agreements came to € 160.5 million, € 105.2 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. As of the reporting date of December 31, 2021 an amount of € 0.2 million had been used. As of the reporting date, a guarantee of Frankfurter Sparkasse of approx. € 2.9 million had been drawn, as had a guarantee of Kreissparkasse Gelnhausen of approx. € 0.25 million.

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, 2021.

All in all, Vonovia has cash on hand and deposits at banking institutions of € 1,134.0 million as of the reporting date (Dec. 31, 2020: € 613.3 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.