Health Net 2005 Annual Report Download - page 111

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 6—Financing Arrangements
Senior Notes Payable
Our Senior Notes payable balance was $388.0 million and $397.8 million as of December 31, 2005 and
2004, respectively.
We have $400 million in aggregate principal amount of Senior Notes outstanding. The interest rate payable
on our Senior Notes depends on whether the Moody’s or S&P credit rating applicable to the Senior Notes is
below investment grade (as defined in the indenture governing the Senior Notes). On September 8, 2004,
Moody’s announced that it had downgraded our senior unsecured debt rating from Baa3 to Ba1, which triggered
an adjustment to the interest rate payable by us on our Senior Notes. As a result of the Moody’s downgrade,
effective September 8, 2004, the interest rate on the Senior Notes increased from the original rate of 8.375% per
annum to an adjusted rate of 9.875% per annum, resulting in an increase in our interest expense of $6 million on
an annual basis. On November 2, 2004, S&P announced that it had downgraded our senior unsecured debt rating
from BBB- to BB+, and on March 1, 2005 S&P further downgraded our senior unsecured debt rating from BB+
to BB. On May 16, 2005, Moody’s further downgraded our senior unsecured debt rating from Ba1 to Ba2. The
adjusted interest rate of 9.875% per annum will remain in effect for so long as the Moody’s rating on our senior
unsecured debt remains below Baa3 (or the equivalent) or the S&P rating on our senior unsecured debt remains
below BBB- (or the equivalent). During any period in which the Moody’s rating on our senior unsecured debt is
Baa3 (or the equivalent) or higher and the S&P rating on our senior unsecured debt is BBB- (or the equivalent) or
higher, the interest rate payable on the Senior Notes will be equal to the original rate of 8.375% per annum.
Semi-annual interest is payable on April 15 and October 15 of each year.
The Senior Notes are redeemable, at our option, at a price equal to the greater of:
• 100% of the principal amount of the Senior Notes to be redeemed; and
• the sum of the present values of the remaining scheduled payments on the Senior Notes to be redeemed
consisting of principal and interest, exclusive of interest accrued to the date of redemption, at the rate in
effect on the date of calculation of the redemption price, discounted to the date of redemption on a
semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable yield
to maturity (as specified in the indenture governing the Senior Notes) plus 40 basis points plus, in each
case, accrued interest to the date of redemption.
Senior Credit Facility
We have a $700 million senior credit facility under a five-year revolving credit agreement with Bank of
America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JP Morgan Chase Bank, as
Syndication Agent, and the other lenders party thereto. As of December 31, 2005 and 2004, no amounts were
outstanding under our senior credit facility.
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 the 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) London
Interbank Offered Rate (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. 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. We are currently in compliance with all
covenants related to our senior credit facility.
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