n the context of subprime deals, it is a provision that entails the conversion of deal structure from sequential pay to pro-rata pay. The deal cannot be allowed to step down unless a lockout period has lapsed (lockout period provision). During the lockout period the subordinated bonds (as well as the mezzanine and the OC tranches) will not receive principal payments. Thereafter, principal payments can be distributed but only when credit enhancement limits are double their initial levels, and subject to a set of triggers (performance tests). This would imply the reduction of subordination to its levels before step-down.

By the step-down date, the deal collateral will be up for performance test. If the overall collateral performance is within expected ranges (e.g., low levels of cumulative losses), the deal will be allowed to step down.

Given the level of credit performance, there are two types of trigger that allow the credit support to be stepped-down (reduced): 1) loss trigger (whose occurrence will allow a step-down if cumulative losses exceeded a specific limit of the original principal – this is the so called principal loss test) and 2) delinquency trigger (whose occurrence will allow a step-down once the above 60-day delinquency rate surpassed a certain percentage of the pool balance at the time- the test is therefore known as delinquency test).