What is an Aval Credit?

An aval credit (also referred to as a bank guarantee or bond) is a guarantee or surety issued by a bank or a surety insurer on behalf of a company (the obligor) in favor of a third party (the beneficiary). Unlike a traditional liquidity loan, an aval credit does not involve the disbursement of funds; instead, it constitutes the assumption of a contingent liability.

The bank or insurer undertakes to satisfy the obligor’s contractual obligations in the event of default. An aval credit therefore represents a secured payment or performance undertaking, which is typically granted in return for a guarantee fee.

What are the Key Advantages of an Aval Credit?

The principal advantage of an aval credit lies in its preservation of liquidity. Unlike cash deposits or traditional collateral arrangements, no liquid funds need to be tied up. Instead, the obligor incurs only ongoing guarantee fees.

In addition, banks and surety insurers apply fundamentally different risk assessment methodologies. Banks are required to allocate regulatory capital for guarantees in the same manner as for conventional loans, in accordance with applicable prudential regulations (e.g. BaFin / CRR). Surety providers, by contrast, follow a distinct underwriting approach. They combine the company’s creditworthiness assessment with statistical default probabilities specific to each type of guarantee. In practice, this leads to material differences in collateral requirements, guarantee limits, and overall cost structures.

Bonds

Advance Payment Guarantee: Security for advance payments made by the principal to the contractor.
Performance Bond: Security for claims arising from the proper performance of contractual obligations, including potential damages claims.
Construction Contractor’s Security pursuant to § 650f BGB: Protection of the contractor against non-payment by securing the agreed remuneration.
Delivery and Performance Guarantee: Security covering obligations until full performance of services or delivery of goods.
Warranty Bond: Security for warranty and defect claims, commonly used in construction and plant engineering projects.
Rent Guarantee: Provision of a bank or insurance guarantee in lieu of a cash security deposit under lease agreements.
Litigation Bond: Provision of security in the context of court proceedings, for example to avoid or suspend enforcement measures.
Bill of Exchange Guarantee: Enhancement of the creditworthiness of a bill of exchange through the additional liability assumed by a guarantor.
Customs Bond: Guarantee securing customs duties and tax liabilities vis-à-vis customs authorities.

Further guarantee types commonly used in practice:

• Bid Bond
• Supplier and Supply Guarantees
• Tax Bonds
• Environmental and Decommissioning Bonds