XAI Octagon Floating Rate & Alternative Income Trust Q4 FY2025 earnings call

• Introductions: Kevin Davis from XA Investments heads Sales and Distribution, Lauren Law from Octagon Credit is a Senior Portfolio Manager covering fund performance and market outlook, and Kim Flynn is President of XA Investments walking through financial highlights. - Background: Octagon Credit is an industry leader in CLO issuance and fund management with over $33 billion AUM as of 12/31, XFLT launched in 2017 as Octagon's first public registered fund, XA Investments is a Chicago-based boutique alternative manager with $866 million in managed assets as of end of last year, having proprietary funds and a consulting/research practice. - Recent developments: Competitor CLO-focused listed funds announced significant distribution cuts (e.g., CCIF cut by 43%, OCCI by 57%), concerns about BDC liquidity indirectly impact the market, XFLT has a daily NAV unlike many competitors, and it has a mix of assets including loans, CLO debt, and CLO equity with 40% in CLO equity. - Distribution: XFLT made a distribution cut of 14% at the start of January, while other CLO equity-dominated funds have larger distribution cuts. - Sector updates: Software sector under pressure due to AI, chemical sector under pressure from China's capacity build-out and Middle East activity, industrial sector has encouraging start with ISM PMI over 50. - Governance: Fund Board is focused, shareholders include inside investors like SIT and Eagle Point, and management is focused on improving NAV and price performance, and considers shareholder input on matters like distribution and share repurchases.

For the period ended 12/31 (fourth quarter), NAV was a negative 4.65% and price was a negative 5.4% relative to the fund's leveraged-loan benchmark index which finished the quarter up 1.84%. The portfolio has about 40% in CLO equity, 10% in CLO debt, and 50% in loans. CLO equity mark price was at $45.18 and CLO debt pricing was closer to par at 99.48%. The fourth quarter was challenging due to events impacting the credit market starting in September, with CLO equity performance being a significant negative driver. In terms of revenue contribution, the mix includes CLO equity, CLO debt, and loans.

• Mark-to-market volatility for CLO equity, with significant declines in mark prices starting in September and continuing into March. - Concerns about liquidity in related markets like BDCs, which indirectly impact the CLO market. - Spread compression in the loan market impacting the portfolio's earnings potential, especially for CLO equity due to timing mismatch in non-call protection between loans and CLO liabilities. - Sector-specific risks such as the impact of AI on the software sector and other related sectors, and pressure on the chemical sector.

Q: What is the average price of the CLO equity currently?

A: Difficult to give on the fly without detailed context as CLO equity is not a par asset and its price is influenced by multiple factors.

Q: How is CLO equity debt senior loans different than a BDC structure?

A: BDCs invest in private credit with direct loans to various companies, while XFLT focuses on the broadly-syndicated loan market which is the universe of loans for its CLO equity and debt collateral, with Octagon focusing on broadly-syndicated loans unlike some retail products in the middle-market loan segment.

Q: Do you have a long-term average level of defaults you've experienced in all CLO equity pools you've invested in, and an average 'final' liquidation cents on the dollar?

A: We analyze default and recovery experience of managers we invest in, and the managers we invest in over the long term have had default and recovery experience that outperforms standardized market assumptions, with lower defaults and higher recoveries.