25 Risk management with regard to financial instruments

Policy concerning financial risk management

The policy regarding managing financial risks is determined by the executive board. The key financial risks to which Q-Park is exposed are the market risk, the liquidity risk and the credit risk. The market risk can be further split into the interest exposure and the currency risk, and these risks are closely monitored internally. Instruments for managing these risks include financial derivatives. The company does not take speculative positions with financial instruments.

Interest exposure

Interest rate variations influence Q-Park's direct result and return on investment property. The group interest policy is designed to limit risks and can be explained as follows:

• interest-bearing debts have a fixed-interest rate part and a variable interest rate part, where the interest from the variable interest part is partly fixed by means of interest rate swaps. As from the 2014 financial year, hedge accounting is no longer applied;
• overall, at least 75% of the interest-bearing liabilities should be protected from interest rate fluctuations.

At the end of 2014, loan positions were hedged by means of IRS worth EUR 781.4 million (2013: EUR 1,064.6 million). The following table shows the hedging of the loan positions further specified by time to maturity of the interest rate derivatives.

Of the total interest-bearing liabilities amounting to EUR 1,334.0 million (2013: EUR 1,521.4 million), EUR 1,039.6 million (2013: EUR 1,335.9 million) is insensitive to interest rate fluctuations because there is either fixed-interest financing (EUR 258.2 million; 2013: EUR 271.3 million), or because the interest exposure is hedged by means of IRS (EUR 781.4 million; 2013: EUR 1,064.6 million). This means that 77.9% (2013: 87.8%) of the total interest-bearing debts is protected from interest rate fluctuations.

On balance, this means that Q-Park runs an interest rate risk for loans amounting to EUR 294.4 million (2013: EUR 185.5 million). In the sensitivity analysis for interest rate fluctuations, only a 1% rise or fall in interest rates is taken into account, all other factors are disregarded. The analysis is based on a minimum interest rate of 0% (no negative interest) and a tax rate of thirty per cent for the analysis of the net effect.

A summary of the exposure to interest rate fluctuations is given in the following table.

In previous sensitivity analyses, only the effect of interest rate fluctuations was simulated. Other variables were assumed to be constant.

Currency risk

Q-Park is exposed to exchange rate fluctuations with respect to its activities in Great Britain, Sweden, Norway and Denmark. This risk is not hedged, because, in the long run, (temporary) exchange rate fluctuations cancel each other out. In the sensitivity analysis (+1% and -1%) only the net effect of exchange rate fluctuations is taken into account, other factors are disregarded. The following table shows an analysis per currency of the sensitivity of the shareholders' equity to fluctuations in exchange rates.

Liquidity risk

Q-Park endeavours to limit the liquidity risk by ensuring the availability of sufficient credit facilities to support the operating activities and meet financial obligations. Given the solid cash flows and balance sheet positions, Q-Park has sufficient access to these facilities. In addition, Q-Park aims to minimize the refinancing risk through the staggered repayment schedules.

The following tables indicate the time to maturity of the contractual liabilities at the close of 2014 and 2013.

With the exception of the financial instruments, which are recognised at balance sheet value due to lack of information, all items stated in the previous tables are stated at face value, taking account of the redemption or settlement year as agreed per item with the other party.

Liabilities arising from loans – with the exception of the local bilateral loans – will be refinanced.

All other liabilities stated in the table are financed from working capital and operational cash flows. At balance sheet date, the lease obligations related to investment property have an average time to maturity of more than ten years.

Credit risk

Credit risk is the risk that a counterparty fails to meet its obligations arising from a financial instrument or contract with a client, causing financial damage. Q-Park is exposed to credit risk in connection with its operating activities (trade receivables in particular) and in connection with its financing activities, including deposits at banks and financial institutions, currency transactions and other financial instruments.

At the reporting date, the maximum exposure to credit risk is the book value of the receivables and cash and cash equivalents as explained in the respective notes. Q-Park considers the credit risk to be limited. The concentration of risks concerning trade receivables is low, as the customers are widely dispersed. Assets held at the bank concern only assets at reputable banks.

Fair value of financial instruments

Q-Park’s financial instruments mainly consist of financial instruments (receivables, cash and cash equivalents, monetary loans from third parties, other long-term liabilities and current liabilities) and of derived financial instruments (interest and currency derivatives).

Considering the short maturity of the current liabilities and the receivables and cash and cash equivalents stated under current assets, the book value is approximately equal to the fair value. The fair value of the other long-term liabilities is assumed to be equal to the book value. The fair value of the derivatives and monetary loans is based on (discounted value) calculations or third party quotations.

Given the above, in combination with the lack of an additional credit risk and the market conformity of interest charged, with the exception of the fixed-interest part of the monetary loans from third parties (EUR 258.2 million; 2013: EUR 271.3 million), the fair value at the end of the financial year can be set equal to the book value. The fair value of the fixed-interest part of the monetary loans from third parties amounted to EUR 243.7 million (2013: EUR 229.9 million) and is determined by discounting the future cash flows using current market rates appropriate to market players similar to Q-Park. The determination of the fair value of the fixed-interest part of the monetary loans belongs to level 2 in the fair value hierarchy.

Hierarchy in fair values

As per 31 December 2014, Q-Park held the financial instruments at fair value as explained in the following table, whereby the following hierarchy is applied when stating and determining the financial instruments, distinguished by valuation method:

• Level 1: Listed (not revised) rates on active markets for identical assets or liabilities;
• Level 2: Other methods whereby all variables have a significant effect on the fair value recognised and are directly or indirectly observable;
• Level 3: Methods whereby variables are applied that have a significant effect on the fair value recognised, yet are not based on observable market information.

The interest rate derivatives are placed in level 2 (not listed in an active market, but the key variables are observable, either directly or indirectly). In 2014, there were no transfers between valuations at fair value in level 1 and 2, nor were there transfers in or out of valuations at fair value in level 3.

The following table shows an overview of the book value of the financial derivatives, subdivided per type.

The value of the financial instruments is calculated by using prevailing interest rates to discount the expected future cash flows to their present value.

The movement in value of the interest rate swaps in 2014 amounted to EUR 10.1 million (2013: EUR 49.1 million). In 2014 this amount has been charged in full to the indirect result.

Capital management

The primary objective of Group capital management is to maintain good creditworthiness and to ensure that the operating activities are optimally supported, so that these operating activities can be conducted effectively, efficiently and profitably and so that shareholder value is created. Q-Park manages its capital structure and adjusts this to changes in economic circumstances. In order to maintain or modify the capital structure, Q-Park may adjust dividend payments to shareholders, repay capital or issue new shares.

The primary financing ratios as agreed with the syndicated loan are the ‘interest coverage ratio’ (ICR), the ratio ‘net bank debt / EBITDA’ and a healthy solvency (primary parameter is ‘gearing’). These ratios are monitored closely to support Q-Park's activities and to maximize shareholder value.

No significant modifications were made to the policy or processes in the financial years 2014 and 2013. At the close of 2013 the minimum ICR is set at 2.0. At the close of 2014 the ratio ‘net bank debt / EBITDA’, was 6.5 (2013: 7.5). The upper limit for 31 December 2014 was set at 7.5 and will be adjusted downwards to 7.0 in 2015. In the past few years, the decrease of this ratio has resulted in a lower spread on the interest. If, and in so far as, Q-Park is unable to comply with the ratios set, repayment of the syndicated loan is to be made up to an amount which brings the ratios back into the ranges set in the period concerned. Q-Park's policy is designed to maintain the gearing ratio under 1.25.

The ICR over the years 2014 and 2013 is as shown in the following table.

The ‘net bank debt / EBITDA’ ratio over 2014 and 2013 is shown in the following table.

The gearing ratio over 2014 and 2013 is shown in the following table.

In addition to the above-mentioned ratios associated with the syndicated loan, Q-Park has also agreed covenants in connection with two institutional loans for investment property in the Netherlands and Great Britain. The primary ratios for both these loans are the 'Debt Service Coverage Ratio' (DSCR) and the 'Loan-to-Value' ratio (LTV).

The ratios for the institutional loan for investment property in the Netherlands are explained in the following table.

The ratios for the institutional loan for investment property in the Great Britain are explained in the following table.

The covenants agreed for the aforementioned institutional loans are identical. According to the covenants, the DSCR must be at least 1.5. The upper limit for the LTV ratio is 0.8 for both loans. The ratios for the institutional loan covenants for investment property in the Netherlands is calculated based on the previous 12 months. For the loan concerning investment property in Great Britain, this the previous 6 months.