Step-down
Asset-Backed Securities glossary · Cash Flow Waterfalls & Triggers
Definition
The reduction of required subordination as a pool seasons, typically subject to performance trigger conditions.
Step-down in plain English
When a bond deal is new, the safest investors demand a thick cushion of protection (called subordination) underneath them in case loans go bad. A step-down is the point where that required cushion is allowed to shrink, because the pool has aged and proven it's performing well. The catch: it only happens if the deal passes health checks ("triggers") — if too many loans are delinquent, the step-down is blocked and the cushion stays thick. It's like a new driver being allowed to drop their extra insurance only after a few years of a clean record — and losing that privilege the moment they get a ticket.
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