What is a step-up security?
A step-up security is a hybrid debt instrument (a combination of debt and equity) that pays a fixed interest rate or margin up until a specified date (the step-up date).
Step-up securities are very similar to capital notes in that the issuer is looking for the rating agencies to accept them as equity when considering the rest of the company's debt. In order to get this equity credit from the rating agencies, the step-up securities are generally subordinated (meaning they rank below other debt), non-cumulative, unsecured notes.
Beyond the specified date, if the security has not yet been redeemed by the issuer, the distribution payment may step-up to a higher rate (this step-up rate is fixed prior to the issue of the security). A single security can have more than one step-up date during the life of that security. The terms for this will be clearly set out in the Investment Statement for the Initial Public Offering.