In general, it is a method to determine how the monthly interest and principal cash flows are allocated among all parties participating in a transaction. With respect to a structured deal, it refers to a system of payments in a collateralized debt obligation (CDO) structure. It entails that the tranches (consisting of both interest and principal payments) are paid in sequence using cash flows generated from the collateral, with highest-ranking tranches being paid first, then lowest tranches. Of course, the equity tranche is paid last.
This is also known as priority of payment, where the most senior tranches are paid in full before moving on to pay the most junior tranches.
