Health Net 2007 Annual Report Download - page 35

We continually evaluate options to refinance our outstanding indebtedness. 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. Recently, credit markets have experienced unusual
uncertainty, and liquidity and access to capital markets have tightened. Consequently, in the event we need to
access the credit markets to refinance our debt, there can be no assurance that we will be able to obtain financing
on acceptable terms or within an acceptable time, if at all. If we are unable to obtain financing on terms and
within a time acceptable to us it could, in addition to other negative effects, have a material adverse effect on our
operations, financial condition, ability to compete or ability to comply with regulatory requirements.
We are a holding company and a substantial amount of our cash flow is generated by our subsidiaries. Our
regulated subsidiaries are subject to restrictions on the payment of dividends and maintenance of minimum
levels of capital.
As a holding company, our subsidiaries conduct substantially all of our consolidated operations and own
substantially all of our consolidated assets. Consequently, our cash flow and our ability to pay our debt depends,
in part, on the amount of cash that we receive from our subsidiaries. Our subsidiaries’ ability to make any
payments to us will depend on their earnings, business and tax considerations, legal and regulatory restrictions
and economic conditions. In addition, in certain states our regulated subsidiaries are subject to risk-based capital
requirements, known as RBC. These laws require our regulated subsidiaries to report their results of risk-based
capital calculations to the departments of insurance in their state of domicile and the National Association of
Insurance Commissioners. Failure to maintain the minimum RBC standards could subject certain of our
regulated subsidiaries to corrective action, including increased reporting and/or state supervision. In addition, in
most states, we are required to seek prior approval before we transfer money or pay dividends from our regulated
subsidiaries that exceed specified amounts. Our regulated subsidiaries are currently in compliance with the risk-
based capital or other similar requirements imposed by their respective states of domicile. If our regulated
subsidiaries are restricted from paying us dividends or otherwise making cash transfers to us, it could have
material adverse effect on our results of operations and Health Net, Inc.’s free cash flow. For additional
information regarding our regulated subsidiaries’ statutory capital requirements, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—
Statutory Capital Requirements.”
Our revolving credit facility and our financing facility contain restrictive covenants that could limit our
ability to pursue our business strategies.
On June 25, 2007, we entered into a $900 million five-year revolving credit facility. See “Liquidity and
Capital Resources—Capital Structure—Revolving Credit Facility” for additional information regarding our
revolving credit facility. On December 19, 2007, we entered into a $175 million financing facility. See “Liquidity
and Capital Resources—Capital Structure—Amortizing Financing Facility” for additional information regarding
our financing facility. Our revolving credit facility and our financing facility require us to comply with various
covenants that impose restrictions on our operations, including our ability to incur additional indebtedness, pay
dividends, make investments or other restricted payments, sell or otherwise dispose of assets and engage in other
activities. In addition, our revolving credit facility and our financing facility require us to comply with certain
financial covenants, including a maximum leverage ratio and a minimum fixed charge coverage ratio.
The restrictive covenants under our revolving credit facility and our financing facility could limit our ability
to pursue our business strategies. In addition, any failure by us to comply with these restrictive covenants could
result in an event of default under the revolving credit facility, our financing facility, and, in some circumstances,
under the indenture governing our Senior Notes, which, in any case, could have a material adverse effect on our
financial condition.
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