Health Net 2004 Annual Report Download - page 109

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 6—Financing Arrangements
Senior Notes Payable
Our Senior Notes payable balance was $ 397.8 million and $ 399.0 million as of December 31, 2004 and 2003, respectively.
We have $400 million in aggregate principal amount of Senior Notes outstanding. The interest rate payable on our Senior Notes
is subject to adjustment from time to time if either Moody’s or S&P downgrades the rating ascribed to the Senior Notes 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. 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 approximately $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+. 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. 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
Senior Credit Facility
• 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.
On June 30, 2004, we entered into a new 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. The
senior credit facility refinanced and replaced our previous $175 million 364-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.
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
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