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 market risk, liquidity risk and credit risk. Market risk can be further split into interest exposure and currency risk; 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 fluctuations 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 (IRS);
• overall, at least 50% of the interest-bearing liabilities should be protected from interest rate fluctuations.

At the end of 2016, loan positions were hedged, by means of IRS, for an amount of EUR 389.3 million (2015: EUR 658.8 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 1,126.5 million (2015: EUR 1,208.8 million), EUR 587.2 million (2015: EUR 909.9 million) is insensitive to interest rate fluctuations because there is either fixed-interest financing (EUR 197.9 million; 2015: EUR 251.1 million), or because the interest exposure is hedged by means of IRS (EUR 389.3 million; 2015: EUR 658.8 million). This means that 52% (2015: 75%) of the total interest-bearing debts is protected from interest rate fluctuations.

Q-Park therefore runs an interest rate risk for loans amounting to EUR 539.3 million (2015: EUR 298.9 million). Please note that in early 2017 additional derivative contracts start, mitigating the interest rate risk in 2017 up to 2021. Including these contracts the percentage of the bank debt insensitive to interest rate fluctuations increases significantly (to approximately 80%) in the first quarter of 2017.

In addition, as a result of the current negative state of the Euribor, Q-Park runs an additional risk on the variable interest rate in the existing interest rate derivatives. 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. Furthermore, a minimum interest rate of 0% (no negative interest) is assumed on the outstanding financing and a possible negative variable interest on the interest rate derivatives as a result of the current negative Euribor.

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 the United Kingdom, Sweden, Norway and Denmark. This risk is not hedged, as it is agreed with shareholders that they will hedge on their part. 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 minimise the refinancing risk through staggered repayment schedules.

The following tables indicate the time to maturity of the contractual liabilities at the close of 2016 and 2015.

With the exception of the financial instruments, which are recognised at fair value, all items stated in the previous tables are stated at face value, taking into account the moment of settlement.

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 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 aforementioned, 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 197.9 million; 2015: EUR 251.1 million), the fair value at the end of the financial year can be considered equal to the book value. The fair value of the fixed-interest part of the monetary loans from third parties amounted to EUR 186.0 million (2015: EUR 232.7 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 2016, 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 2016, 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 fair value of the financial instruments is calculated by discounting the future cash flows. Relevant variables applicable to the valuation of these interest rate derivatives are the present value of interest payments and the expected interest rate curves.

The total market value of the interest derivatives amounts to EUR 52.4 million consisting of interest rate caps with a positive market value of EUR 4.2 million and interest rate swaps with a negative market value of EUR 56.6 million.

• In 2016 Q-Park acquired two portions of interest rate caps to ensure a solid hedging ratio and insensitivity to interest rate volatility in future years (2017 until 2021). The acquisition price (and first valuation) of these caps amounted EUR 4.8 million which decreased to a market value of EUR 4.2 million at 31 December 2016 as a result of a further decrease in Euribor interest rate expectation. The decrease in fair value of EUR -0.6 million is charged to the result.
• The movement in the negative market value of the interest rate swaps in 2016 amounted to EUR -11.1 million (2015: EUR -41.8 million). This movement is recognised in favour of the result as a consequence of changes in fair value.

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 risks, as stated in the standing credit facility agreed in 2015, are the ‘interest coverage ratio’ (ICR) and the ‘net bank debt / EBITDA’ ratio. These ratios are monitored closely to support Q-Park's activities and to maximise shareholder value.

The minimum ICR is set at 2.0 and was 4.3 at the end of 2016 (2015: 3.3). The ‘Net bank debt / EBITDA’, was 5.6 at the close of 2016 (2015: 6.1) compared to the upper limit set of 7.0. The decrease in this ratio to under 6.0 will result 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 facility is to be made up to an amount which brings the ratios back into the ranges set in the period concerned.

The ICR over the years 2016 and 2015 is as shown in the following table.

1. Refers to the regular EBITDA corrected for incidental costs and gains.

The ‘Net bank debt / EBITDA’ over 2016 and 2015 is shown in the following table.

1. Refers to the regular EBITDA corrected for incidental costs and gains.

In addition to the aforementioned ratios associated with the standing credit facility, Q-Park has also agreed covenants in connection with two institutional loans for investment property in the Netherlands and United Kingdom. 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 United Kingdom are explained in the following table.

The covenants agreed for both the 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 the United Kingdom, this is the previous 6 months.