GlobeSt.com: There's a great deal of confusion over what exactly structured finance is. Why is that?

Myatt: There's the global definition, what the street is trying to push on the market, and there's a more accurate description. What is being pushed is the B and C piece of the capital structure--either the mezz or subordinated position--so anything junior to the senior portion of the capital structure is what the market calls structured finance. But the reality is that every deal is structured. It's anything that isn't plain-vanilla senior debt--bridge or interim situations, equity pieces, mezz pieces and hybrid structures.

GlobeSt.com: And that clearly has a growing roll in the capital markets today, correct?

Myatt: Yes, and there are a few reasons for that. Primarily, advance rates on the senior side have gotten more conservative over the years. Today, with more modest advance rates, the sponsor/equity contribution becomes more difficult to manage. But that creates opportunities that are being labeled structured finance.

GlobeSt.com: Can you quantify its presence?

Myatt: I don't know that I'm the person to do that. But there's a structured component in virtually every transaction we're doing today.

GlobeSt.com: To what extent is it being driven by a savvier consumer who simply expects more?

Myatt: You can be the typical lender that deals only with senior debt or you can provide broad access to capital. You can engage early in the lifecycle of a transaction and get the senior piece de facto. And, yes, the sponsors are driving that because they're smart enough to realize that they can lower their cost of capital by using a mezz piece that costs them Libor plus a spread vs. paying 35% to a preferred-equity guy.

GlobeSt.com: Are your sponsors shifting the type of product their targeting?

Myatt: There is a shift taking place. Over the past couple of years, most people were focused on multifamily or retail or condo transactions. But they're getting wary of the condo market and playing only in the real hotbeds on the Coast. We're starting to see hospitality burgeon and some office absorption. So the flow of funds is shifting the asset classes they are looking to finance. And that's going to impact the landscape. You won't see as many condo deals coming out of the ground. But after Sept. 11, if you got hospitality funding it would cost you your first-born child. Now people are sharpening their pencils again.

GlobeSt.com: Is there a preferred mix in the capital stack of fixed and other vehicles?

Myatt: In a perfect world, every sponsor will want to move as far up the leverage curve as possible to obtain the lowest cost of funds and then try and close any gap with as much mezz as they can--the next-lowest cost funds. Then they go to pari passu equity or preferred equity. But determining if that can exist in a specific transaction means evaluating market strength, sponsorship suitability, project quality and a whole litany of criteria.

GlobeSt.com: In a day of questionable sponsor loyalty, how do you gain traction?

Myatt: There was a time when it was a commoditized market. It was all about what you could provide and how cheap. But loyalty is coming back, and it's becoming relationship-driven again. But to get those relationships, we're launching a program this month called Pacific Elite, a preferred-borrower program akin to Frequent Flyer programs. It rewards sponsors who give us bulks of their business.

GlobeSt.com: Are we talking toasters and football phones?

Myatt: We're talking about flights in a MIG, fractional interests in Lear jets, Wimbledon vacations. But they have to give us a boatload of business.

GlobeSt.com: Define boatloads.

Myatt: We start with anyone who does $20 million a year. When you get above $100 million you move to a different level. Our goal is to provide red-carpet treatment of quality sponsors and give them as many reasons as we can, above skills sets, to do business with us.

GlobeSt.com: How big can this be?

Myatt: It can add as much as another billion dollars of transaction volume. That's our fondest hope.

Instant Insights /

Mike Myatt of Pacific Security Capital

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