Health Net 2005 Annual Report Download - page 66

On February 20, 2004, we entered into Swap Contracts to hedge against interest rate risk associated with our
fixed rate Senior Notes. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for
additional information regarding the Swap Contracts.
In an effort to lower our interest expense on the Senior Notes, we are currently considering our financing
alternatives, including refinancing or repurchasing our Senior Notes. Our ability to obtain any financing, whether
through the issuance of new debt securities or otherwise, and the terms of any such financing, are dependent on,
among other things, our financial condition, financial market conditions within our industry and generally, credit
ratings and numerous other factors. See “Item 1A. Risk Factors—We have a material amount of indebtedness
and may incur additional indebtedness, or need to refinance existing indebtedness, in the future, which may
adversely affect our operations.”
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, no amounts were outstanding
under our senior credit facility and our maximum commitment level under our senior credit facility was $700
million.
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. 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.
We can obtain letters of credit in an aggregate amount of $200 million under our senior credit facility,
which reduces the maximum amount available for borrowing under our senior credit facility. As of December 31,
2005, we had an aggregate of $102.9 million in letters of credit issued pursuant to the senior credit facility
primarily to secure surety bonds issued in connection with litigation (see “—Contractual Obligations” below). In
addition, we secured a letter of credit effective January 1, 2006 in the amount of $10.0 million to cover risk of
insolvency for the State of Arizona. No amounts have been drawn on any of these letters of credit. As a result of
the issuance of these letters of credit, the maximum amount available for borrowing under the senior credit
facility was $587.1 million as of January 1, 2006.
Due to the Moody’s and S&P downgrades of our senior unsecured debt rating as discussed above, 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.
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