Health Net 2006 Annual Report Download - page 69

Senior Notes
In the second quarter of 2006, we began a series of transactions for the purpose of refinancing our 8.375%
Senior Notes due 2011. The Senior Notes were issued pursuant to an indenture (the Senior Notes Indenture)
dated as of April 12, 2001 between us and U.S. Bank Trust National Association, as Trustee (the Trustee).
The Senior Notes were 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 Senior Notes Indenture) plus 40 basis points plus, in each case, accrued
interest to the date of redemption.
The interest rate payable on our Senior Notes was dependent on whether the Moody’s or S&P credit rating
applicable to the Senior Notes was below investment grade (as defined in the Senior Notes Indenture). In late
2004 and throughout the first half of 2005, Moody’s and S&P downgraded our senior unsecured debt rating to
below investment grade. As a result of the downgrades, 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. The adjusted interest rate of 9.875% per annum remained in
effect for so long as the Moody’s rating on our Senior Notes remained below Baa3 (or the equivalent) or the S&P
rating on our Senior Notes remained below BBB- (or the equivalent).
On June 23, 2006, we entered into a First Supplemental Indenture (the Supplemental Indenture), which
amended and supplemented the Senior Notes Indenture. The Supplemental Indenture, among other things,
authorized the Trustee to enter into a Security and Control Agreement by and among us and the Trustee for the
registered holders of our Senior Notes, and U.S. Bank National Association, as securities intermediary, for the
purpose of securing and facilitating the redemption of our Senior Notes.
On June 23, 2006, we borrowed $200 million under a Bridge Loan Agreement and $300 million under a
Term Loan Agreement in connection with the Senior Notes redemption. See “—Bridge Loan Agreement” and
“—Term Loan Agreement,” below. We used the net proceeds from these borrowings to purchase approximately
$500 million in U.S. Treasury securities that we pledged (the Pledged Securities) as collateral to secure the
Senior Notes. The Pledged Securities, originally purchased for $497 million, together with approximately
$9 million in investment gains and interest income earned thereon, represented funds in the aggregate amount of
approximately $506 million at August 14, 2006, the date of redemption of the Senior Notes. These funds were
sufficient to redeem the Senior Notes for approximately $451 million, including a redemption premium of
approximately $51 million, and to pay the accrued interest on the Senior Notes to the redemption date in the
aggregate amount of $12 million. A portion of the remaining $43 million provided by the sale of the Pledged
Securities was used to cover $11.1 million in costs for the termination and settlement of our Swap Contracts and
to pay approximately $3 million of professional fees and other expenses related to the refinancing of the Senior
Notes. The remaining $29 million of the proceeds from the sale of the Pledged Securities was returned to the
Company’s general operating fund to be used for general working capital purposes.
As a result of our pledge of the Pledged Securities to secure the Senior Notes, Moody’s and S&P upgraded
their ratings on the Senior Notes to investment grade (Baa1 and BBB, respectively) effective June 28, 2006
because the Senior Notes were effectively secured. The increase in the ratings on the Senior Notes caused the
interest rate on the Senior Notes to decrease from 9.875% to 8.375% pursuant to the terms of the Senior Notes
Indenture. On June 30, 2006, we issued a notice to redeem all of the outstanding Senior Notes, and we completed
the redemption on August 14, 2006. Semi-annual interest was payable on the Senior Notes on April 15 and
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