26 Financial risk management objectives and policies

Vesteda’s principal financial liabilities, other than derivatives, are loans and borrowings. The main purpose of Vesteda’s loans and borrowings is to finance the Vesteda Companies' property portfolio. As part of its business strategy, Vesteda uses debt financing to optimise its equity return by utilising a conservative level of debt leverage.

The Vesteda Companies also have trade and other receivables, trade and other payables and cash and short-term deposits that arise directly from their operations.

Vesteda Residential Fund FGR is exposed to market risk, interest rate risk, credit risk and liquidity risk.

Vesteda fully incorporates risk management in its strategic and operational processes. The risk management framework addresses all levels and lines of business in order to strengthen ‘in control’ performance.

The Vesteda Managing Board assesses its proper functioning on a regular basis and continues to pursue further improvement and optimisation of the internal risk management and control procedures.

In addition to the risk management framework, Vesteda also actively manages market risk, interest rate risk, credit risk and liquidity risk as part of its treasury policy.

1) Market risk

Market risk is the risk that the fair value of financial instruments will fluctuate because of changes in market prices.

The financial instruments held by Vesteda Residential Fund FGR that are affected by market risk are principally the derivative financial instruments that are used for hedging interest risk on its loan portfolio. As per December 2017, Vesteda Residential Fund FGR has no derivative financial instruments outstanding.

2) Interest rate risk

Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Vesteda’s exposure to the risk of changes in market interest rates relates primarily to the Vesteda’s long-term debt obligations with floating interest rates.

Vesteda must at all times meet its obligations under the loans it has taken out including the interest cover ratio with a minimum of 2.0 and loan-to-value covenant with a maximum of 50%.

According to the VRF Terms and Conditions, Vesteda is required to hedge a minimum of 70% of existing interest rate exposure.

To manage its interest rate risk, Vesteda Residential Fund FGR enters into interest rate swaps or fixed rate debt. With respect to the interest rate swaps, Vesteda agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated as hedges of underlying debt obligations. As per December 2017, Vesteda Residential Fund FGR has no derivative financial instruments outstanding. At 31 December 2017, 77% of Vesteda’s borrowings are subject to fixed interest (2016: 92% hedged, including derivatives).

Sensitivity analyses of market and interest rate risk

Vesteda used an immediate increase by one percent point in the interest rate curve as at 31 December 2017 for an interest rate risk sensitivity scenario. The analysis has been prepared on the basis that the amount of net debt and the ratio of fixed-to-floating interest rates of the debt are constant. As Vesteda Residential Fund FGR has no derivative financial instruments outstanding as at the reporting date, no impact of the interest rate risk sensitivity on equity or the fair value of derivative financial instruments can be reported.

  • The sensitivity of the statement of comprehensive income is the effect of the assumed changes in interest rates on the net interest income for one year, based on the floating rate financial liabilities held at the reporting date.

An immediate increase of one percent point in the interest rates as at 31 December 2017 would increase the theoretical annual interest expense by €1.8 million, assuming that the composition of the financing is unchanged.

3) Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. Vesteda is exposed to credit risk from its leasing activities and its financing activities, including deposits with banks and financial institutions and derivatives.

Tenant receivables

Credit risk is managed by requiring tenants to pay rent in advance. The credit quality of tenants is assessed using an extensive credit rating scorecard at the time of entering into a lease agreement. Vesteda regularly monitors outstanding tenants’ receivables. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of financial asset.

Credit risk related to financial instruments and cash deposits

Vesteda’s treasury department manages credit risk from balances with banks and financial institutions. As part of its treasury policy, Vesteda maintains a formal counterparty policy in respect of those organisations from which it may borrow or with which it may enter into other financing or investment arrangements. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty.

Vesteda’s Managing Board reviews counterparty credit limits at least on an annual basis, and may update these at any time in the year should market conditions require any changes to the counterparty credit limits. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty failure.

As part of its treasury policy, Vesteda strives for adequate diversity in Vesteda’s counterparties and limit concentration risk.

4) Liquidity risk

Liquidity risk is the risk that (1) Vesteda will not be able to refinance maturing debt funding, or (2) if debt is refinanced, the maturity and interest rate of the financing will have a significant unplanned adverse effect on Vesteda’s cash flow and liquidity position. In addition, (3) Vesteda must at all times meet its obligations under the loans it has taken out including the interest cover ratio and loan-to-value covenant.

Vesteda limits these risks by conservative use of loan capital, ensuring sufficient headroom under its financial covenants and hedging at least 70% of its interest risk in order to mitigate adverse effects of interest rate volatility.  

Liquidity risk is managed by the treasury department with the objective of ensuring that Vesteda has sufficient funds available to meet its financial obligations. As part of its treasury policy, Vesteda aims to have adequate though not excessive cash resources, borrowing arrangements and overdraft or standby facilities to enable it at all times to have the level of funds available necessary for the achievement of its business objectives.

Vesteda’s objective is to maintain a balance between continuity of funding and flexibility. Vesteda funds itself with a diversity of financing instruments through banks loans and capital markets. Debt maturities are chosen in line with the long-term character of Vesteda’s assets taking into account a well spread maturity profile of its debt portfolio.

The table below summarises the maturity profile of the Vesteda’s financial liabilities based on contractual undiscounted payments.

Liquidity risk

 

On demand

< = 3 months

4-12 months

>1 year

Total

Year ended 31 December 2017

     

Interest-bearing loans and borrowings

-

-

-

1,177

1,177

Interest

-

1

23

96

120

Deposits from tenants

14

-

-

-

14

Finance leases

-

-

-

-

-

Financial derivatives

-

-

-

-

-

Trade and other payables

14

25

-

-

39

 

28

26

23

1,273

1,350

      

Year ended 31 December 2016

     

Interest-bearing loans and borrowings

-

-

-

1,237

1,237

Interest

-

9

26

170

205

Deposits from tenants

12

-

-

-

12

Finance leases

-

-

-

-

-

Financial derivatives

-

-

-

19

19

Trade and other payables

10

24

-

2

36

 

22

33

26

1,428

1,509

Estimated interest obligations for the revolving credit facility are based on the year-end outstanding amount.

Fair value of financial Instruments

This section describes the comparison between the carrying amounts of Vesteda Companies’ financial instruments and their estimated fair values. Trade and other receivables and Trade and other payables are carried at amortised cost, but given their short duration, the fair value does not significantly deviate from the carrying amount (Level 3 valuation).

Cash and cash equivalents are recognised at fair value. With respect to financial assets, management concluded that the carrying amount is an appropriate estimate of the fair value. The derivatives are carried at their fair values (Level 2 valuation). With respect to the floating rate financial liabilities (both short term and long term), these are carrying a variable interest based on Euribor plus a mark-up, which does also take into account the perceived credit risk of the Vesteda Companies. As a result, their carrying amount approximates the fair value.

The fair value measurement of senior public notes that are issued by Vesteda Finance B.V. can be qualified as Level 1 valuation. Inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.

The fair value measurement of the senior private notes that were placed by Vesteda Finance B.V. can be qualified as Level 2 valuation with inputs other than quoted market prices included within Level 1 that are observable for the asset or liability. In this case, interest rates and yield curves are observable at commonly quoted intervals.

The fair value measurement of the senior notes that were placed by Vesteda Finance B.V. under its EMTN programme as a private placement transaction can be qualified as Level 2 valuation with inputs other than quoted market prices included within Level 1 that are observable for the asset or liability. In this case, interest rates and yield curves are observable at commonly quoted intervals.

The senior public notes, the senior private notes as well as the senior notes privately placed under the EMTN programme are fixed rated.

Fixed rate debt is initially recognised at fair value net of transaction costs and subsequently measured at amortised cost using the effective interest method.

Financial instruments

Type

Notional amount

Estimated fair value amount

Level valuation

Senior public notes

600

630

1

Senior private notes

300

314

2

 

900

944

 

The €600 million senior public notes represent an equivalent fair value estimate per year-end 2017 of €630 million.

The €200 million of senior private notes represent an equivalent fair value estimate per year-end 2017 of €213 million.

The €100 million of senior notes issued under the EMTN programme as a private placement represent an equivalent fair value estimate per year-end 2017 of €101 million.

In terms of value hierarchy the senior public notes can be qualified as Level 1 and the senior private notes as well as the senior notes privately placed under the EMTN programme can be qualified as Level 2. The fair value of the senior public notes is determined based on quoted prices, the fair value of the senior private notes and the senior notes privately placed under the EMTN programme is determined based on inputs other than quoted prices.