To avalize is the act of having a third party (usually a bank or lending institution) guarantee the obligations of a buyer to a seller per the terms of a contract, such as a promissory note or purchase agreement. The bank, by "avalizing" the document (usually "by aval" will be written on the document itself), acts as a cosigner with the buyer in the transaction.

Breaking Down Avalize

To avalize means "to give one's accord." While rarely used, it can be an effective method of securing the rights of the receiving party in the transaction. This is an obligation that a bank will only take on with lucrative customers. It is seen as an act of good faith by both parties.

Examples that use avalize include working with a promissory note. A promissory note is a debt instrument that allows companies and individuals to obtain financing from a source other than a bank (although banks will also issue them on occasion). This alternative financing source may be an individual or a company willing to carry the note under agreed-upon terms. These terms typically pertain to indebtedness, including as the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature. Since anyone can conceivably issue a promissory note, avalizing with a third party can add an extra layer of security.

Avalizing and Purchase Agreements

In addition to supporting the creation of promissory notes, avalizing can come in handy with a range of purchase agreements, including a bond purchase agreement, cross-purchase agreement, and matched sale-purchase agreement.

A bond purchase agreement is a legally binding document between a bond issuer and an underwriter, which outlines the terms of a bond sale, including but not limited sale price, bond interest rate, bond maturity, bond redemption provisions, sinking fund provisions, and reasons why the agreement may be canceled.

A cross-purchase agreement allows a company's major shareholders to purchase the interest or shares of a partner who has deceased, has become incapacitated, or retiring. As with a bond purchase agreement and promissory note, the cross-purchase agreement document outlines specific terms. In this case, it is how shares will be divided or purchased by the remaining partners.

A matched sale-purchase agreement is an arrangement in which the U.S. Federal Reserve (Fed) sells government securities (U.S. Treasuries) to an institutional dealer or the central bank of another country. The party purchasing U.S. treasuries will agree to sell them back to the Fed within a short period of time (generally two weeks or less). The Fed repurchases the Securities for the same price at which they originally sold them. The purpose of this is to decrease banking reserves.

In all of these cases, the ability to avalize comes in handy for additional security.