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Step-down

A step-down is a provision in a securitisation structure that allows for the payment of principal to more subordinated classes of debt securities (i.e., those with a lower priority) once certain triggers have been met.

In Australian English, a step-down is sometimes called a waterfall.

The step-down provision is designed to protect investors in more subordinated classes of debt securities by ensuring that they only receive principal repayment once the more senior classes of debt securities have been repaid in full.

Here are some of the applications of step-down in securitisation:

  • To protect investors: The step-down provision protects investors in more subordinated classes of debt securities by ensuring that they only receive principal repayment once the more senior classes of debt securities have been repaid in full.
  • To reduce risk: The step-down provision can help to reduce the risk of a securitisation by ensuring that the more senior classes of debt securities are repaid first. This is because the more senior classes of debt securities are typically considered to be less risky than the more subordinated classes of debt securities.
  • To improve liquidity: The step-down provision can improve the liquidity of a securitisation by making it more attractive to investors. This is because investors know that they will only receive principal repayment once the more senior classes of debt securities have been repaid in full.

Here are some examples of step-down in securitisation:

  • Mortgage-backed securities (MBS): MBS are a type of securitisation where the underlying assets are mortgages. MBS often have a step-down provision that allows for the payment of principal to more subordinated classes of debt securities once certain triggers have been met.
  • Collateralised debt obligations (CDOs): CDOs are a type of securitisation where the underlying assets are debt securities. CDOs often have a step-down provision that allows for the payment of principal to more subordinated classes of debt securities once certain triggers have been met.
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