More to the point, the super senior is a public transaction. Ever since the crash the CMBS transactions that have come to market have been private 144A registration deals. And while these public transactions provide investors with less information about the pools than they would with a 144A deal, "they open up the investor pool significantly," he says. The private market is limited in size, and it is feared that the investor allocation could be used up. Interestingly, the aborted Goldman deal had a super senior class, Somerville notes.

So what to make of the appearance of this transaction, DBUBS 2011-LC3? First, despite the turmoil and slow start to the CMBS market, there has been an underlying fear that liquidity might have been constrained if the issues remained in the 144A market, says Tom Zatko, managing director of Cornerstone Real Estate Advisers in Hartford. "The industry realizes that CMBS can grow only if there are more buyers," he says. "Super seniors and the public market are a way to attract new buyers to the sector." Second, the industry is falling into its previous pattern of whistling past the graveyard. There are valid concerns about liquidity, but these are, or should be, overshadowed by macro-economic and global developments.

"The word on the street is that issuers are trying to put out CMBS without rating-agency review in response to what S&P did," says William M. O'Connor, a partner at Crowell & Moring LLP in New York and chair of the firm's Financial Services group. "People forget that, following the banking crisis of the 1990s, the first CMBS securitizations were not AAA rated. It was only later when insurance companies wanted to invest that issuers came out with AAA and then super seniors."

The big concern then, and today as well, was aggressive underwriting, he continues, and "the rating agencies looking the other way or buying into the notion that these overly assertive underwriting practices were in fact worthy of investment grade."

S&P appears to have put its foot down, Lynn says. "They weren't willing to approve the underwriting," he notes. "That is why they pulled the rating. It was frightening but good for the market because it shows you can't just throw anything at the rating agencies now."

It was into this environment that Deutsche Bank and UBS sold their super senior security. It priced at a spread of 200 basis points above an interest-rate benchmark, which was slightly lower than anticipated, the Wall Street Journal reported.

A whole new set of issues will impact CMBS in the months ahead, according to Paul Daneshrad, CEO of StarPoint Properties in Beverly Hills. And these issues will all revolve around safety. "There's much uncertainty among investors, so much so that when S&P downgraded the US debt, interest rates came down because people were looking for safety, and our government bonds are seen as the safest in the world." This trend will intensify as the economy worsens, he says. Indeed, Daneshrad is convinced the economy is headed into a double dip, and eventually it will impact the demand for CMBS, including any other super seniors that might make it to market.

In the next six to 12 months, he predicts, the situation will have devolved to where only top-quality assets that are properly priced are getting securitized. According to Daneshrad, we are seeing the beginning of a tumultuous time, and the latest GDP figures were very telling. "Growth has slowed below 2%," he notes. "Our economy has never experienced a growth rate lower than 2% without going into recession. Our politicians are showing no signs of being able to cooperate, and so our debt and fiscal problems will remain unaddressed. Moody's will downgrade us and S&P will downgrade us again." In that environment, fundamentals will worsen, and no one is going to put money into CMBS pools if demand for commercial real estate declines.

Then there is the continued high unemployment. "Over the past 100 years, the average unemployment rate going into a recession has been 5% to 6%, and from there it climbs," Daneshrad says. "If we go into the next recession at 10%, what will that do to CMBS?" This is what it will do, he says: the risk premium will price it out of existence, until fundamentals and the economy improve again.

In mid-July, spreads were 230 basis points above swaps, he notes. In mid- August, "spreads are at 310 basis points. They've widened 80 basis points in the last 30 days, and 310 is one of the largest spreads we've seen in the past 10 to 15 years. Where do you think spreads will be in eight months?" But not everyone has such a dark view of the future.

Clarion Partner's Lynn acknowledges that investors are spooked right now. "But there's still investor demand for CMBS," he notes. "Spreads have come in, but the default rate hasn't increased materially. We're coming out of the dark side of the recession."

Lynn ticks off other reasons why he believes the worst is behind us: banks are in better positions now and have cash on the books. Europe is looking shaky but it is unlikely to default. The rating system, while not good, is better than it was before. Perhaps the best thing going for CMBS, he concludes, is that the global demand for yield never abates, even during choppy times. Also, despite much grumbling from the origination community, the rule-writing process of Dodd-Frank is not having as much impact as once feared.

"There are some good ideas in there, whether the industry wants to admit it or not, that will ultimately benefit CMBS," says Crowell & Moring's O'Connor. "The premium recapture concept is meant to get issuers to hold off on getting a takeout. It's a concept borrowed from other areas of structured finance, and it's been an effective tool."

Even risk retention, he continues, which many believe was overkill on the part of Congress, offers some upside. "It should mean that the B piece will sell for more, which will make that whole beginning part of the deal dance easier," he notes. It might even tempt more B-piece players back to the market.

Dodd-Frank isn't the cause of the current volatility in the CMBS market, Cornerstone's Zatko agrees, but neither will it do much to settle the market, at least in the short run, as some of its advocates believe.

"The uncertainty in the market is going to cause more gyrations and that will just have to play out," he states. The best case scenario, in Zatko's view, is that origination is substantially lower by the end of the year, but deals are still happening.

"It's inevitable that we'll see origination die down," Zatco says. "Maybe issuers with pools that are far along in the pipeline will originate deals, but it's very hard for issuers to hedge a pipeline of loans in this environment. Spreads are all over the place, which means an issuer could easily take a massive hit." He predicts another $10 billion in issues, which would bring the industry's total for the year to roughly $30 billion- a dismaying number given the cautious hopes that launched 2011. However given the current context and possible alternative scenarios, it feels downright lucky.

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