Reeling cruise behemoths Carnival Corp and Royal Caribbean Group have been staying afloat during the coronavirus downturn in a seemingly bottomless ocean of secured debt.

But even the deepest seas have a floor, and both companies are now at or near the limit on how much debt they can back by their assets.

Arnold Donald-led Carnival Corp, as of 14 July, reached a self-imposed 25% loan-to-value (LTV) ratio limit on first-priority notes by putting $7bn worth of them against $28bn in collateral value.

The New York and London-listed cruiseship owner also reached a 33% LTV ratio ceiling, as of 14 August, on second-priority notes by issuing $9.3bn of that debt.

Miami-based Carnival on 8 April closed a private offering of $4bn of 11.5% first-priority senior notes due 2023, backed by 86 vessels worth $28.6bn as of 29 February.

On 20 July, Carnival closed a dual private offering of $775m and €425m ($503m) of second-priority secured notes due 2026, followed by pricing a private offering $900m second-priority senior secured notes due 2027.

Carnival entered into agreements to sell six of the collateral vessels, however, bringing the collateral value, backed now by 80 ships, down to $28bn as of 31 July.

Carnival on 26 June also took out a $1.86bn term loan and an €800m term loan to help pay off the 2027 notes.

Will those liens get released?

At the same time, Carnival has also drafted a provision that triggers automatic release of liens on the 80 ships backing the secured debt if 25% of secured debt reaches tangible asset value.

Carnival, which did not return calls, is actually approaching that threshold as secured debt stands at $10.6bn, while 25% of tangible-asset value comes in at $12.4bn.

Carnival does not need to borrow more money right now, however, because it has about $11bn in liquidity to keep the bills paid for a year, said Peter Washkowitz, a covenant analyst for New York distressed debt research firm Reorg Research.

Beyond that, the company's tangible-asset value will get a boost from five newbuilding deliveries scheduled for next year, he said.

"Once the new ships come, regardless of if they're pledged, the total tangible assets will increase, so there will be more than $1.8bn of room, like $3bn or $4bn," he told TradeWinds.

Carnival has six ships with a total market value of $4.37bn on order through 2022, according to VesselsValue.

Washkowitz pointed out, however, that the tangible-asset value is on paper only because the market for laid-up ships is virtually non-existent.

"The ships might have been appraised at $28bn but they're not running right now, and who knows if they'll ever be running at maximum capacity," he said.

"The ships are only as valuable as the passengers on those ships."

In any event, the liens are protected from any LTV ratio fluctuations and can only be released if the tangible-asset value falls below $12.4bn, Washkowitz wrote in a client note on Carnival.

"We find that Carnival has likely exhausted its first lien and second lien debt capacity and that although all of its secured debt includes automatic lien release mechanics if outstanding secured debt exceeds 25% of total tangible assets, provisions under each piece of debt likely restrict the liens securing that piece of debt from being released," he wrote.

Only $600m on six ships?

Still, he is surprised that Carnival's asset value has only fallen $600m to $28bn with the sale of six vessels.

"A lot of this is the company's valuations," Washkowitz said.

"They're year-end audited, but a lot of it is really based on their good-faith determination."

Carnival is further protecting its liquidity buffer by returning some European-based ships back into service, analyst Paul Golding said.

It plans to begin resuming operations of Costa Cruises' 11 ships in Italy and AIDA Cruises' 13 vessels in Germany on 6 September.

The first Costa Cruises ship to set sail will be the 2,260-berth Costa Deliziosa (built 2010) on 6 September, offering weekly cruises from Trieste to Greece.

The 4,947-berth Costa Diadema (built 2014) will follow on 19 September, operating seven-day cruises in the Western Mediterranean from Genoa to Italy and Malta.

"The guidance that they provided and the commentary they provided would indicate that there's sufficient runway for the foreseeable future in a zero-revenue environment, which has upside already in the sense that they have resumed sailings," Golding told TradeWinds.

Silversea Cruises to Royal Caribbean's rescue?

Royal Caribbean may have also reached the limit on secured debt, although its latest acquisition may give it some wiggle room.

Per credit facility agreements, Royal Caribbean's total value of $12bn in pledged collateral value backing $3.32bn in secured notes cannot exceed $1.66bn.

"As such, Royal Caribbean is not currently permitted to incur any additional secured debt," Washkowitz wrote in a client note.

The company can back another $700m in unsecured debt under a $1.7bn unsecured guarantee cap, after it attained $1bn in unsecured debt due 2023 at 9.125% on 9 June.

This unsecured debt was backed by subsidiary RCI Holdings, which owns seven ships that have to stay under its control as part of the guarantees.

But Royal Caribbean plans to acquire perhaps up to another $620m in secured debt by creating a parent company over Silversea Cruises and its seven ships.

"We also find that to the extent Royal Caribbean created a holding company that owns the equity of its Silversea subsidiary, that holding company could likely guarantee a significant amount of debt," Washkowitz wrote.

Royal Caribbean declined to comment on its secured debt.