Legal Definitions - guaranteed stock

Guaranteed stock refers to a type of equity security where the payment of dividends is assured by an entity other than the issuing company itself. This guarantee typically comes from a financially stronger parent company, an affiliate, or a third-party guarantor. The purpose of such a guarantee is to reduce investment risk and make the stock more attractive to investors, as they are assured of receiving dividend payments even if the issuing company faces financial difficulties or does not generate sufficient profits.

Here are some examples to illustrate guaranteed stock:

• Example 1: Subsidiary Company Issuing Stock

  Imagine "Tech Innovations Inc." is a smaller subsidiary of a large, well-established conglomerate called "Global Holdings Corp." Tech Innovations Inc. wants to raise capital by issuing new shares to the public. To make these shares more appealing and secure for investors, Global Holdings Corp. steps in and formally guarantees that it will pay the dividends on Tech Innovations Inc.'s stock if Tech Innovations Inc. itself is unable to do so. In this scenario, the stock issued by Tech Innovations Inc. is considered guaranteed stock because the dividend payments are backed by the financial strength of its parent company, Global Holdings Corp.

• Example 2: Project-Specific Financing

  Consider a new renewable energy project, "Green Power Solutions," which is developing a large solar farm. To fund its construction, Green Power Solutions issues shares to investors. A major utility company, "National Grid Co.," which has a long-term contract to purchase all the electricity generated by the solar farm, agrees to guarantee the dividends on Green Power Solutions' stock. This means that if Green Power Solutions' revenues are insufficient to cover the promised dividends, National Grid Co. will make up the difference. This arrangement makes the stock more attractive to investors, as the dividends are guaranteed by a stable, established utility, making it a form of guaranteed stock.

• Example 3: Corporate Restructuring

  Suppose "Legacy Manufacturing Co." is undergoing a significant restructuring and spins off one of its divisions, "New Ventures Corp.," into a separate publicly traded entity. To ensure a smooth transition and attract initial investors to New Ventures Corp., Legacy Manufacturing Co. agrees to guarantee the dividend payments on New Ventures Corp.'s common stock for the first five years after the spin-off. This guarantee provides a safety net for early investors, assuring them of dividend income during New Ventures Corp.'s initial operational phase. Therefore, the stock of New Ventures Corp. during this period is classified as guaranteed stock due to the backing from Legacy Manufacturing Co.