Health Net 2004 Annual Report Download - page 61

day credit facility (which matured June 22, 2004) and $525 million revolving five-year credit facility (which was scheduled to mature
June 28, 2006).
Borrowings under our senior credit facility may be used for general corporate purposes, including acquisitions, and to service
our working capital needs. We must repay all borrowings, if any, under our senior credit facility by June 30, 2009, unless the maturity
date under the senior credit facility is extended. Interest on any amount outstanding under the senior credit facility is payable monthly
at a rate per annum of (a) LIBOR plus a margin ranging from 50 to 112.5 basis points or (b) the higher of (1) the Bank of America
prime rate and (2) the federal funds rate plus 0.5%, plus a margin of up to 12.5 basis points. We have also incurred and will continue
to incur customary fees in connection with the senior credit facility. As of December 31, 2004, no amounts were outstanding under
our senior credit facility and the maximum commitment level under our senior credit facility was $700 million.
We can obtain letters of credit in an aggregate amount of $200 million under our senior credit facility. We transferred all
existing letters of credit under our previous five-year credit facility to the new senior credit facility. As of December 31, 2004, these
letters of credit totaled $13.2 million in the aggregate. No amounts had been drawn on any of these letters of credit as of December
31, 2004. As a result of issuing these letters of credit, the maximum amount that can be drawn under our senior credit facility is
$686.8 million as of December 31, 2004. In January 2005, we secured additional letters of credit under our senior credit facility of
$4.7 million to guarantee workers’ compensation claim payments to certain external third-party insurance companies in the event that
we do not pay our portion of the workers’ compensation claims. Due to the additional letters of credit secured, the maximum amount
that can be drawn under our senior credit facility as of the date of the filing of this Annual Report on Form 10-K was $682.1 million.
Our senior credit facility requires us to comply with certain covenants that impose restrictions on our operations, including the
maintenance of a maximum leverage ratio, a minimum consolidated fixed charge coverage ratio and minimum net worth and a
limitation on dividends and distributions. On September 8, 2004, Moody’s downgraded our senior unsecured debt rating from Baa3 to
Ba1 and on November 2, 2004, S&P downgraded our senior unsecured debt rating from BBB- to BB+. Because the Moody’s rating
on our senior unsecured debt is below Baa3 and the S&P rating is below BBB-, we are currently prohibited under the terms of the
senior credit facility from making dividends, distributions or redemptions in respect of our capital stock in excess of $75 million in
any consecutive four-quarter period, are subject to a minimum borrower cash flow fixed charge coverage ratio rather than the
consolidated fixed charge coverage ratio, are subject to additional reporting requirements to the lenders, and are subject to increased
interest and fees applicable to any outstanding borrowings and any letters of credit secured under the senior credit facility. The
minimum borrower cash flow fixed charge coverage ratio calculates the fixed charge on a parent company only basis. In the event
either Moody’s or S&P upgrades our senior unsecured debt rating to at least Baa3 or BBB-, respectively, our coverage ratio will
revert back to the consolidated fixed charge coverage ratio.
On March 1, 2005, we entered into an amendment to our senior credit facility. The amendment, among other things, amends the
definition of Consolidated EBITDA to exclude from the calculation of Consolidated EBITDA during the five fiscal quarter periods
commencing with the fiscal quarter ended December 31, 2004 and ending with the fiscal quarter ended December 31, 2005, up to
$375 million relating to cash and non-cash, non-recurring charges in connection with litigation and provider settlement payments, any
increase in medical claims reserves and any premiums relating to the repayment or refinancing of our Senior Notes to the extent such
charges cause a corresponding reduction in Consolidated Net Worth (as defined in the senior credit facility).
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