XAI Octagon FR & Alternative Trust Stock Price, News & Analysis

XAI Octagon Floating Rate and Alternative Income Trust (NYSE: XFLT) is a diversified, closed-end management investment company in the financial services sector. Classified within asset management, the Trust’s stated investment objective is to seek attractive total return with an emphasis on income generation across multiple stages of the credit cycle. Its common shares of beneficial interest trade on the New York Stock Exchange under the ticker symbol XFLT.

The Trust reports that it seeks to achieve its investment objective by investing in a dynamically managed portfolio of opportunities primarily within the private credit markets. Under normal market conditions, it states that it will invest at least 80% of its managed assets in floating rate credit instruments and other structured credit investments. The Trust also discloses that its investment portfolio is primarily comprised of floating-rate credit instruments and that it invests in collateralized loan obligations (CLOs), which are a type of structured credit instrument.

Business focus and investment strategy

The Trust describes itself as focusing on floating-rate credit instruments and structured credit investments, including CLOs. It notes that its investments in CLOs are subject to complex tax rules and that taxable income attributed to investments in CLO subordinated notes can differ significantly from income calculated for financial reporting purposes under U.S. GAAP. The Trust emphasizes income generation across different stages of the credit cycle, reflecting its focus on credit-oriented assets within the private credit markets.

According to its public disclosures, common share distributions may be paid from net investment income (regular interest and dividends), capital gains and/or a return of capital. The Trust notes that its net investment income and capital gain can vary significantly over time, but that it seeks to maintain more stable common share monthly distributions. It also explains that distributions for any particular period may be more than the amount of net investment income for that period, so all or a portion of a distribution may be a return of capital.

Capital structure and preferred securities

In addition to its common shares, the Trust has issued preferred securities. It has disclosed 6.50% Series 2026 Term Preferred Shares, which were listed on the New York Stock Exchange under the symbol XFLTPRA, and 6.95% Series II 2029 Convertible Preferred Shares, as well as Series A Mandatory Redeemable Preferred Shares. The Trust has described the preferences, voting powers, restrictions, limitations as to dividends and distributions, conversion privileges, and terms and conditions of redemption of these preferred shares in its statements of preferences and related amendments.

The Trust reported that it entered into a securities purchase agreement for the issuance and sale of up to 7,300,000 Series A Mandatory Redeemable Preferred Shares with a liquidation preference of $10.00 per share. These preferred shares pay a quarterly dividend at an annual rate of 5.92% of the liquidation preference and are required to be redeemed on a specified term redemption date, subject to the availability of legally available funds. The Trust has indicated that it intends to use or has used proceeds from these preferred shares to refinance existing leverage, including the redemption of its 6.50% Series 2026 Term Preferred Shares, and for general corporate purposes.

The Trust has also disclosed that its 6.50% Series 2026 Term Preferred Shares were scheduled to be redeemed in full, and a Form 25 filing indicates the removal from listing and/or registration of that class of preferred shares from the New York Stock Exchange. The Trust notes that the preferred shares rank senior to its common shares in priority of payment of dividends and distribution of assets upon dissolution, liquidation or winding up of its affairs, and that they are senior securities that constitute shares of beneficial interest of the Trust.

Adviser and sub-adviser relationships

XA Investments LLC ("XAI") serves as the Trust’s investment adviser. XAI is described as a Chicago-based firm founded by XMS Capital Partners in 2016. XAI serves as the investment adviser for two listed closed-end funds and an interval closed-end fund: the XAI Octagon Floating Rate & Alternative Income Trust (NYSE: XFLT), the XAI Madison Equity Premium Income Fund (NYSE: MCN), and the Octagon XAI CLO Income Fund (OCTIX). XAI also provides investment fund structuring and consulting services focused on registered closed-end funds, including product development, market research, marketing, sales and fund management.

Octagon Credit Investors, LLC ("Octagon") serves as the Trust’s investment sub-adviser. Octagon is described in the Trust’s public communications as a below-investment grade corporate credit investment adviser focused on leveraged loan, high yield bond and structured credit (including CLO debt and equity) investments. Through fundamental credit analysis and active portfolio management, Octagon’s investment team seeks relative value opportunities across below-investment grade asset classes, sectors and issuers.

Regulatory status and tax considerations

The Trust is a registered investment company and notes that it is subject to a 4% excise tax if it does not distribute to common shareholders by the end of any calendar year at least specified percentages of its ordinary income and capital gains. It highlights that, as a registered investment company, it may elect to retain income or capital gain in certain circumstances if the Board of Trustees, in consultation with Trust management, determines this to be in the interest of shareholders.

The Trust emphasizes that common share distributions may include a return of capital, which is effectively a partial return of the amount a common shareholder invested in the Trust, up to the amount of the shareholder’s tax basis in their common shares. It notes that although a return of capital may not be taxable, it generally increases a shareholder’s potential gain or reduces potential loss on subsequent sale or disposition of common shares. The Trust also explains that its investments in CLOs are subject to complex tax rules, which can cause significant differences between GAAP income and taxable income.

Listing and trading

The Trust’s common shares of beneficial interest are registered under Section 12(b) of the Securities Exchange Act of 1934 and are listed on the New York Stock Exchange under the symbol XFLT. The Trust has also listed certain preferred share series on the New York Stock Exchange, such as the 6.50% Series 2026 Term Preferred Shares under the symbol XFLTPRA, although those particular preferred shares have been subject to redemption and a Form 25 filing for removal from listing and/or registration.

Risk disclosures and investor considerations

The Trust’s public communications highlight that investing involves risk, including the possible loss of the entire investment, and that there can be no assurance the Trust will achieve its investment objective. It notes that the Trust invests primarily in below investment grade credit instruments, commonly referred to as high yield or "junk" securities, and in CLOs and other structured credit investments, which may involve risks that differ from or are more acute than those associated with other types of credit instruments.

The Trust also states that its shares are not guaranteed or endorsed by any bank or other insured depository institution and are not federally insured by the Federal Deposit Insurance Corporation. It advises investors to consider the investment objectives and policies, risk considerations, charges and expenses of the Trust carefully before investing and indicates that more detailed information is available in its prospectus and related regulatory filings.

Relationship to the broader interval and tender offer fund market

Through its adviser, XA Investments, the Trust is associated with research and index development focused on interval and tender offer funds. XAI has launched the XAI Interval Fund Index and the XAI Interval Fund Credit Index (INTVL-C), which track the performance of interval and tender offer funds, including those with majority allocations to alternative credit investments. While these indices are separate from the Trust itself, they reflect XAI’s broader involvement in the closed-end and interval fund marketplace, including credit-focused strategies that relate to the type of assets in which the Trust invests.

Summary

In summary, XAI Octagon Floating Rate and Alternative Income Trust (XFLT) is a closed-end asset management vehicle that focuses on floating-rate credit instruments and structured credit investments, primarily within the private credit markets. With an investment objective centered on attractive total return and income generation, the Trust operates under the advisory of XA Investments LLC and the sub-advisory of Octagon Credit Investors, LLC, and its common shares are listed on the New York Stock Exchange.