The cruise lines are taking on water. The big three publicly traded operators, including Norwegian Cruise Line (NYSE:NCLH), were among the worst-performing stocks in the S&P 500 Index in the first half of 2022.

It has been a perfect storm for the industry. The novel coronavirus grounded the cruises since 2020. And just as things were starting to get back to normal, elevated food and fuel prices and a slowing economy threaten to nip the cruising recovery in the bud.

Here’s the bad news: Even after a big drop, the cruise line stocks such as NCLH stock aren’t necessarily cheap here. However, there is a different way to profit from the market’s current panic.

Investors Are Overly Fearful

The primary risks for cruise operators are two-fold. Either we get a bigger recession than currently expected, or oil prices continue to go sky-high. In a huge recession, travel demand would slump. And if fuel costs keep surging, that crushes cruise operators as well.

But let’s slow down for a minute. It seems unlikely that both of these would happen simultaneously. As we’ve seen over the past week, oil prices absolutely cratered on news of the Atlanta Fed GDP now indicator flipping into official recession territory along with bank analysts warning of oil dropping to the $60s in a recession. Say what you will about the Federal Reserve’s rate hiking campaign. But if they slow down the economy enough, fuel prices will slide as well.

Meanwhile, there’s little indication that the global rebound in travel is coming to an end yet either. People have been cutting back spending on discretionary goods. The key word there is goods. On the other hand, services and experience spend keeps recovering. This isn’t guaranteed to keep happening as the economy worsens, but the general trajectory is still pointing upward for the travel sector.

Debt Is Norwegian’s Anchor

While the cruise industry isn’t in as bad a shape as people might think, there is still an elephant in the room: Debt. Norwegian isn’t in the worst shape of the big three cruise operators. That being the case, it still has an ocean of liabilities.

Right now, Norwegian has a market capitalization of $5.2 billion. That might seem cheap for a company that reliably pulled in $6 billion or so a year of revenues prior to the pandemic. However, the company has a total enterprise value of $15.6 billion. This means the company has net liabilities of $10.4 billion.

And, as any creditor will tell you, bondholders get paid first before the stock owners see a dime. Right now, Norwegian has to make good on more than $10 billion of obligations. Given that the company only generated roughly $1.2 billion per year in operating income even during the good days prior to the pandemic, this will be a tall order.

The Solution? Buy Bonds Instead of Stock.

Most retail brokerages allow their clients to buy corporate bonds in addition to stocks and options. And Norwegian has offered corporate bonds to the general public, including its Dec. 15, 2024 maturity 3.625% yielding bonds. The way a corporate bond works, Norwegian will distribute that 3.62% interest rate on its bonds in semi-annual payments. And then, on Dec. 15, 2024, it will repay all the principle owed to its bondholders.

Now, 3.62% doesn’t sound like an appealing interest rate, and it’s not. However, that is based on the face value of a bond, which is 100. Given the uncertainty in the market right now, Norwegian bonds are being offered at 84 cents on the dollar today. This works out to a yield-to-maturity of 11.2%.

To give an example, suppose an investor bought $10,000 face value of those Norwegian 2024 bonds today. They’d pay $8,400 for that $10k of paper. For the next two years, they’d receive $362.50 per year in interest on their holding. And then, in a little over two years, they’d be repaid $10,000 of principal for their $8,400 investment, resulting in a $1,600 capital gain. Overall, this works out to a more than 11% annualized return. And there’s far more downside security in bonds than NCLH stock if the company’s financial outlook worsens.

NCLH Stock Verdict

It’s a fight for survival out there for the cruise lines. Yes, the global travel industry is swiftly recovering. People are engaging in what’s deemed “revenge travel” after being cooped up for so long. And now, with oil prices falling at last, that should aid the cruise lines as well. That said, there’s a massive hole for the cruise lines to dig out of given their terrible balance sheets.

Still, as long as cash flows are positive and improving, that’s what bondholders really care about. You can reasonably argue that the cruise line equities were way overvalued up until about a month ago. But it’s a far different proposition between a stock being cheap or expensive and a company having enough assets and cash flows to merely keep the lights on.

In the case of Norwegian, if you’re bullish on cruises picking back up, the company should be easily able to, at minimum, make its interest payments on its debt. That, in turn, is good enough to generate a juicy 11% yield-to-maturity on the company’s bonds. And, unlike stocks, if Norwegian runs into further hard times, the bondholders have some security from having a claim against the company in a potential bankruptcy situation.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. He does, however, own similar bonds issued by Royal Caribbean Cruises Ltd. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.