SEC Form N-CSRS filed by XAI Octagon Floating Rate & Alternative Income Trust

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

811-23247

(Investment Company Act File Number)

XAI Octagon Floating Rate & Alternative Income Trust

(Exact Name of Registrant as Specified in Charter)

321 North Clark Street, Suite 2430

Chicago, IL 60654

(Address of Principal Executive Offices)

Benjamin D. McCulloch, Esq.

XA Investments LLC

321 North Clark Street, Suite 2430

Chicago, IL 60654

(Name and Address of Agent for Service)

(312) 374-6930

(Registrant’s Telephone Number)

Date of Fiscal Year End: September 30

Date of Reporting Period: March 31, 2024

Item 1. Reports to Stockholders.

(a)

TABLE OF CONTENTS

XAI Octagon Floating Rate & Alternative Income Trust

SHAREHOLDER LETTER
March 31, 2024 (Unaudited)

Dear Shareholder:

We thank you for your investment in the XAI Octagon Floating Rate & Alternative Income Trust (the “Trust”). This report covers the six months ended March 31, 2024 (the “Period”). During the Period, we observed sustained and moderately elevated levels of inflation and a pause in interest rate hikes by the U.S. Federal Reserve (the “Fed”). The Consumer Price Index started the Period at 3.7% and ended the Period at 3.5%.¹ Despite the economic uncertainty surrounding the path of interest rates and inflation, the U.S. economy remained resilient, as evidenced by strong employment and positive GDP growth.

During the Period, the U.S. added approximately 1.4 million jobs,² as measured by nonfarm payroll figures, while the March 2024 unemployment rate stood at a healthy 3.8%.³ Q4 2023 real GDP increased 3.4% quarter-over-quarter, while the advance estimate of Q1 2024 real GDP increased 1.6% quarter-over-quarter as of May 6, 2024.⁴ The outcome of the Fed’s monetary tightening, its impact on the U.S. economy, and the future path of inflation, should drive subsequent monetary policy action and the level of base interest rates in the U.S. economy. Rate changes will be an important consideration with respect to the Trust, as it invests primarily in floating-rate securities including loans, collateralized loan obligation (“CLO”) debt tranches and CLO equity.

Amidst the backdrop of an elevated interest rate environment, the Morningstar LSTA US Leveraged Loan Index (the “Morningstar LLI”) returned 13.32% in 2023— the strongest annual return for the asset class since 2009—followed by a 2.46% quarterly return in Q1 2024.⁵ Broadly, the strong performance in the loan market was driven by elevated reference rates, a positive economic outlook providing support for credit fundamentals, strong corporate earnings results, and favorable market technicals. The trailing 12 month default rate for the Morningstar LLI decreased to 1.14% as of March 31, 2024, from 1.34% as of September 30, 2023.⁶

For the Period, the S&P 500 Index, the Bloomberg Barclays U.S. High Yield 1% Issuer Capped Index, and the Trust’s benchmark, the Morningstar LSTA US Leveraged Loan 100 Index, generated total returns of 23.48%, 8.77%, and 5.28%, respectively.⁷

The Trust’s net asset value (“NAV”) increased during the Period by 4.05% from $6.67 per common share to $6.94 per common share as of March 31, 2024, resulting in a total return (including the reinvestment of dividends) of 12.02%.

During the Period, the Trust declared monthly distributions totaling an aggregated $0.51 per common share. The monthly distribution of $0.085 per common share declared on March 1, 2024, represented an annualized distribution rate of 14.39% based on the Trust’s closing market price of $7.09 per common share on March 31, 2024.

The market price per common share of $7.09 on March 31, 2024, represented a 2.16% premium to the Trust’s NAV of $6.94 per common share. During the Period, the Trust’s common shares traded on average at a 4.75% premium to NAV. From the Trust’s IPO on September 27, 2017, through March 31, 2024, the Trust’s common shares have traded on average at a 3.41% premium to NAV.

We continue to seek operational scale by increasing the Trust's common assets. During the Period, the Trust issued an additional 4,980,443 common shares pursuant to an at-the-market (“ATM”) offering program, resulting in $34,887,185 of net proceeds to the Trust. It is important to note that all ATM share sales are executed at a premium to the Trust’s NAV, meaning they are accretive to the Trust’s shareholders. In addition, on February 1, 2024, the Trust sold 3,546,854 common shares in a registered direct placement, raising approximately $25,000,000. The offering, which was accretive to shareholders, was also executed at a price above the Trust’s NAV per common share. Finally, $10,000,000 of the Trust’s 6.00% Series 2029 Convertible Preferred Shares were converted to common shares in two separate conversions at respective conversion prices above NAV, resulting in the accretive issuance of an additional 1,446,179 common shares.

On October 26, 2023, the Trust announced that the Trust’s Board of Trustees unanimously approved two proposals: a term amendment, and a new sub-advisory agreement (together, the “Proposals”). Following a shareholder vote at the Trust’s December 19, 2023 special meeting of shareholders, which was adjourned to January 24, 2024, the Proposals were approved.

The term amendment eliminated the Trust's termination date of December 31, 2029, making it a perpetual closed-end fund. The change became effective on February 1, 2024, and the Trust was renamed to the XAI Octagon Floating Rate & Alternative Income Trust. The Term Amendment allows the Trust’s shareholders to maintain a fully invested portfolio without requiring the Trust to wind down its investments or leverage. As a perpetual trust, the Trust can continue to pursue growth and scale efficiencies through accretive ATM share offerings and strategic follow-on share offerings.

The approval of a new sub-advisory agreement among the Trust, XA Investments LLC, and Octagon Credit Investors, LLC (“Octagon”) allowed Octagon to remain as the Trust’s sub-adviser following the closing of Generali Group’s acquisition of Octagon’s parent company, Conning Holdings, which was completed on April 3, 2024.

We appreciate your investment and look forward to serving your investment needs in the future. For the most up-to-date information on your investment, please visit the Trust’s website at www.xainvestments.com/XFLT.

Sincerely,

Kimberly Flynn

President

XA Investments LLC

May 15, 2024

XAI Octagon Floating Rate & Alternative Income Trust

SHAREHOLDER LETTER
March 31, 2024 (Continued) (Unaudited)

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
March 31, 2024 (Unaudited)

XA Investments LLC (“XAI”) serves as the investment adviser to the XAI Octagon Floating Rate & Alternative Income Trust (the “Trust”). Octagon Credit Investors, LLC (“Octagon”) serves as the Trust’s investment sub-adviser and is responsible for the management of the Trust’s portfolio of investments.

Lauren B. Law, Senior Portfolio Manager at Octagon and a member of Octagon’s Investment Committee serves as lead portfolio manager of the Trust. Ms. Law is supported by a team of Octagon investment professionals in the day-to-day management of the Trust’s portfolio, including the following members of Octagon’s Investment Committee: Andrew D. Gordon (Octagon’s co-founder and Executive Chair), Gretchen M. Lam (Chief Executive Officer), Michael B. Nechamkin (Chief Investment Officer and Senior Portfolio Manager), Sean M. Gleason (Portfolio Manager), and Maegan Gallagher (Head of Trading and Capital Markets). On January 1, 2024, Ms. Law assumed the role of lead portfolio manager of the Trust from Ms. Lam, while Ms. Lam succeeded Mr. Gordon as Chief Executive Officer of Octagon.

What is the Trust’s investment objective and how is it pursued?

The Trust’s investment objective is to seek attractive total return with an emphasis on income generation across multiple stages of the credit cycle. The Trust seeks to achieve its investment objective by investing in a dynamically managed portfolio of opportunities primarily within the private credit markets. The Trust invests primarily in below investment grade credit instruments that are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and to repay principal. The Trust may invest without limitation in credit instruments that are illiquid. Under normal market conditions, the Trust will invest at least 80% of its Managed Assets in floating-rate credit instruments and other structured credit investments. "Managed Assets" means the total assets of the Trust, including assets attributable to the Trust's use of leverage, minus the sum of its accrued liabilities (other than liabilities incurred for the purpose of creating leverage).

The Trust’s investments may include (i) structured credit investments, including collateralized loan obligation (CLO) debt and subordinated (i.e., residual or equity) securities; (ii) traditional corporate credit investments, including leveraged loans and high yield bonds; (iii) opportunistic credit investments, including stressed and distressed credit situations and long/short credit investments; and (iv) other credit-related instruments.

Leveraged loans are debt obligations (also commonly referred to as “senior loans” or “floating-rate loans”) issued by a bank to a corporation that generally holds legal claim to the borrower’s assets above all other debt obligations. Leveraged loans and CLO debt securities now typically use Term Standard Overnight Financing Rate (SOFR) as an interest rate benchmark instead of their previous rate benchmark—one-month London Interbank Offered Rate (LIBOR). While the industry has shifted to SOFR, one- three- and six-month U.S. dollar LIBOR will continue to be published under a representative “synthetic” methodology until September 30, 2024, to assist in transitioning existing instruments tied to LIBOR to an alternative rate. These “synthetic” rates are not permitted for use in new products.

CLOs are a type of structured credit vehicle that typically invest in a diverse portfolio of broadly syndicated leveraged loans. CLOs finance this pool of loans with a capital structure that consists of debt and equity. CLO debt includes senior and mezzanine debt (collectively, “liabilities”) of a CLO structure with tranches rated from AAA down to BB or B. Interest earned from the underlying loan collateral pool of a CLO is used to pay the coupon interest on the CLO liabilities. CLO debt investors earn returns based on spreads above 3-month LIBOR or SOFR, as applicable. CLO equity represents a residual stake in the CLO structure and is the first loss position in the event of defaults and credit losses. CLO equity investors receive the excess spread between the CLO assets and liabilities and expenses. CLO equity is junior in priority of payment and is subject to certain payment restrictions generally set forth in an indenture governing the notes.

The Trust uses leverage to seek to enhance total return and income. Although leverage may create an opportunity for increased return and income for shareholders, it also results in additional risks and can magnify the effect of any losses. There is no assurance that the leverage strategy will be successful. If income and gains on securities purchased with leverage proceeds are greater than the cost of leverage, common shareholders’ return will be greater than if leverage had not been used. Conversely, if the income or gains from the securities purchased with the proceeds of leverage are less than the cost of leverage, common shareholders’ return will be less than if leverage had not been used.

Describe the market conditions for leveraged loans during the six months ended March 31, 2024, and Octagon’s outlook.

US leveraged loans returned 5.40% during the six months ended March 31, 2024 (the “Period”), as measured by the Morningstar LSTA US Leveraged Loan Index (the “Morningstar LLI”).¹ During the Period, strong performance in the loan market was driven by elevated reference rates, a positive economic outlook providing support for credit fundamentals, strong corporate earnings results, and favorable market technicals. Against this supportive backdrop, loan prices climbed in Q4 2023 and through Q1 2024. As of March 31, 2024, the average bid price for the Morningstar LLI was 96.73, 3.35% higher than at September 30, 2023 (the Trust’s fiscal year-end).¹ As measured by the Morningstar LLI, loans returned 13.32% in 2023—the strongest annual return for the asset class since 2009—followed by a 2.46% quarterly return in Q1 2024.¹ Notably, leveraged loans outperformed other credit assets in 2023 and in 1Q 2024,² which we believe underscores the benefit of floating rate coupons provided by leveraged loans. Higher base rates have propelled outsized gains for the floating rate asset class, with interest income accounting for approximately 88% of the Morningstar LLI’s 5.40% return during the Period.¹

Lower rated loans outperformed their higher quality cohorts over the course of 2023 and in Q1 2024, as prices advanced and investors maintained a healthy appetite for riskier assets.¹ Amid firmer market conditions, the share of performing loans priced below 80 in the Morningstar LLI gradually declined over the Period.¹ Loan ratings downgrades continued to outpace upgrades throughout 2023 and through Q1 2024 (albeit at a slower pace than observed in 2023), thereby contributing to increased performance dispersion among loan borrowers.³ The trailing 12 month default rate for the Morningstar LLI decreased to 1.14% as of March 31, 2024, from 1.34% as of September 30, 2023.³ While conventional defaults (i.e., due to missed payments and bankruptcy filings) declined over the Period, the count of distressed exchanges increased.³ Distressed exchanges occur when a debtor exchanges assets generally worth less than their original loan in an effort to restructure the debt. Distressed exchanges and other liability management transactions or “LMTs” (in which a company’s debts are restructured outside of a typical bankruptcy process), have become more prevalent between troubled companies and their lenders as a means to reduce debt and avoid costly bankruptcy proceedings.³ We expect LMT activity to remain elevated in the near-term.

Full-year 2023 institutional loan new issuance of $234.1 billion increased only 4% year-over-year from the 2022 total of $225.3 billion.⁴ In the wake of relatively subdued primary loan market activity in 2023, gross monthly new loan issuance surged to a seven-year high in January 2024, as robust demand, continued price appreciation, and a lack of true new issue loan supply (resulting from mergers and acquisitions and leveraged buyout transactions) spurred a wave of loan repricings and refinancings.⁴ After a slower February, refinancings and repricings picked up in March 2024,⁴ allowing many borrowers to extend loan maturities and reduce interest expenses, thereby alleviating some of the pressure from higher rates. Year-to-date as of March 31, 2024, the amount of loans coming due between 2024 2026 decreased by 30% from December 31, 2023.⁵

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
March 31, 2024 (Continued) (Unaudited)

Heavy new CLO issuance has provided strong technical support for the loan market as net loan supply continues to fall short of demand. The steady pace of CLO origination over the course of 2023, which totaled $115.8 billion in new US CLO issuance,⁶ precipitated persistent bids for loans and broad tightening in CLO liability spreads that continued into the new year.⁷ During the Period, new US CLO issuance totaled $80.7 billion, reflecting record deal issuance in Q1 2024.6 In addition to robust institutional demand, retail loan funds reported over $2 billion of net inflows in Q1 2024, following sustained outflows over the course of 2023.⁸

Despite inflationary pressures, we expect credit fundamentals to generally remain stable for most loan borrowers, though idiosyncratic risk remains elevated among lower-rated borrowers. We anticipate pockets of credit stress and episodic periods of market volatility as economic and monetary conditions shift, and we will therefore retain a disciplined approach as we seek to manage risk in the Trust’s portfolio. Broadly, we expect resilient growth and the higher rate environment to bode well for floating rate loans, which provide valuable protection from interest rate volatility. Given high levels of current income with price convexity (i.e., when the price increase resulting from a decline in interest rates is greater than the price decrease that would result from an equivalent rise in rates), we believe loans should continue to offer compelling risk/return opportunities for fundamental credit pickers.

Describe the current market conditions for the CLO market and Octagon’s outlook.

In tandem with strong performance for loans, CLO debt tranches produced positive returns over the Period that ranged from 4.07% for AAA-rated tranches to 14.22% for BB-rated tranches, as measured by the J.P. Morgan Collateralized Loan Obligation Index (“CLOIE”).⁹ Notably, with a full-year 2023 return of 24.66%, CLO mezzanine tranches (rated BB and B, which comprise the majority of the Trust’s CLO debt holdings) posted the strongest annual performance of credit assets.^9,10

Primary CLO liability spreads tightened during the Period, particularly in Q1 2024 amid heavy new CLO supply, a wave of loan repricings, and increased activity among traditional CLO AAA buyers (in particular, renewed demand from US banks reentering the market).⁷ With nearly $50 billion of new deals priced year-to-date as of March 31, 2024, primary CLO market activity is running 45% ahead of last year’s pace.⁷ As primary CLO spreads compressed, managers sought to reprice liabilities on existing CLO AAA tranches, leading to a record volume of deal resets and refinancings in Q1 2024.⁷ The momentum is expected to continue in the near-term in the wake of record-setting CLO formation in Q1 2024.¹¹ We believe that refinancings and resets of CLOs held by the Trust should be accretive to the Trust in 2024; not only do CLO refinancings and resets typically help to offset the impact of loan repricings and spread compression, but CLO resets also extend the weighted average reinvestment period of the underlying CLO equity positions in the Trust’s portfolio.

CLO spread compression and higher CLO equity net asset values (NAVs) precipitated an uptick in CLO call volume in Q1 2024.¹² A CLO can be called by the majority of equity holders at any point after the non-call period expires—equity holders are incentivized to exercise the call option when the liquidation value of the equity tranche (i.e., NAV) is positive. CLO equity NAVs have improved in tandem with higher loan prices, and we expect to see increased call volume from seasoned CLOs with minimal equity payments and positive NAVs. If call volume increases, CLO investors' cash available for investment will increase in tandem, which we believe is likely to bolster demand for CLO tranches.

CLO managers remain focused on managing portfolio risk in underlying collateral pools amid continued loan ratings downgrades. The median CCC concentration in US broadly syndicated loan (BSL) CLO portfolios was lower in March 2024 compared to December 2023 levels, reflecting sales of CCC loans at higher prices, as well as ratings migrations in and out of the CCC bucket (upgrades or downgrades to D or DD) during the first quarter.¹³ Junior overcollateralization ratio test cushions for reinvesting BSL CLOs generally remain healthy at a median level of 4.7% as of March 31, 2024,¹⁴ though overcollateralization cushions may face pressure from increased ratings downgrades among underlying loans.

Despite spread tightening over the Period, we believe BB-rated CLO debt tranches remain attractive given double digit average current yields. A higher-for-longer rate environment should support above-average returns for CLO tranches over the intermediate term, in our view. We continue to hold a favorable view of CLO equity, in particular, primary CLO equity tranches, as the new issue equity arbitrage has improved compared to prior periods. For reinvesting CLOs, the median January 2024 equity distribution was 3.6% of notional value, or roughly 15% on an annualized basis.¹⁵ Absent a spike in loan defaults, quarterly CLO equity distributions are expected to increase in April and July of 2024, driven by higher base rates and reflecting a tightening in the basis between three-month and one-month SOFR.¹⁶ At the same time, risks remain throughout the corporate credit space, and CLO collateral portfolios are likely to be challenged by loan ratings downgrades, defaults, and borrower-specific idiosyncratic issues. We remain focused on investing in fundamentally strong CLOs that offer compelling yields and the potential for price appreciation.

How did the Trust perform for the period?

During the Period, the Trust’s total return based on market price was 9.83% and total return based on NAV was 12.02%, which is net of the deduction of management fees, operating expenses, and all other Trust expenses. All Trust total returns cited whether based on NAV or market price assume the reinvestment of all distributions. As of March 31, 2024, the Trust’s market price of $7.09 represented a 2.16% premium to NAV of $6.94 per common share. The market value of the Trust’s common shares fluctuates from time to time and may be higher or lower than the Trust’s NAV. Performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted.

Relevant indices for the markets in which the Trust invests include the Trust’s benchmark, the Morningstar LSTA US Leveraged Loan 100 Index (the “Morningstar 100”), which returned 5.28% for the Period, Bloomberg Barclays U.S. High Yield 1% Issuer Capped Index, which returned 8.77% for the Period, and the JP Morgan BB/B CLO Debt Index, which returned 14.22% for the Period. There is no representative benchmark index for CLO equity in the marketplace.

What were the distributions over the period?

During the Period, the Trust maintained its monthly distribution of $0.085 per share. The Trust’s distribution of $0.085 per common share declared on March 1, 2024, represented an annualized distribution rate of 14.39% based on the Trust’s closing market price of $7.09 per common share on March 31, 2024. The Trust’s distribution rate is not constant, and the amount of distributions, when and if declared by the Trust’s Board of Trustees, is subject to change based on the performance of the Trust.

The Trust intends to pay substantially all its net investment income, if any, to common shareholders through monthly distributions and to distribute any net realized long-term capital gains to common shareholders at least annually. The Trust’s net investment income and capital gain can vary significantly over time; however, the Trust seeks to maintain stable common share monthly distributions over time. There is no assurance the Trust will pay regular monthly distributions or that it will do so at a particular rate. Distributions may be paid by the Trust from any permitted source and, from time to time, all or a portion of a distribution may be a return of capital.

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
March 31, 2024 (Continued) (Unaudited)

Please see Note 4 of the Notes to the Financial Statements for more information on distributions for the Period.

What influenced the Trust’s performance over the Period?

The Trust generated positive returns across its main portfolio segments during the Period. CLO equity represented the largest contributor to performance, with a net gain of $0.46 per share for the Period, followed by the Trust’s performing loan investments, which produced a net gain of $0.32 per share. During the Period, the Trust’s CLO equity positions collected quarterly distribution payments totaling $24,916,107 or $0.51 per share, which were offset by unrealized market value losses of $2,276,766 or -$0.05 per share. It bears noting that CLO equity pricing can be volatile. The Trust’s CLO debt portfolio segment and performing high yield bond portfolio segment posted net gains of $0.20 per share and $0.04 per share, respectively, for the Period.

Discuss the Trust’s issuance of additional common shares.

During the Period, the Trust issued 4,980,443 common shares pursuant to an at-the-market (“ATM”) offering program, resulting in $34,887,185 of net proceeds to the Trust. The ATM program is a form of continuous offering of the Trust’s common shares. The goal of the Trust’s ATM program is to enhance secondary market liquidity for shareholders by increasing the size of the Trust over time and reducing operating expenses per share. In an ATM offering, newly issued shares are sold incrementally into the secondary trading market through a placement agent at prevailing market prices, but always at a price higher than the Trust’s NAV per common share, which is accretive to the Trust’s shareholders. The placement agent sells the common shares on the open market and the Trust receives cash proceeds from the transaction to be invested pursuant to the Trust’s investment objective.

The Trust issues common shares pursuant to the ATM program only if the common shares are trading at a sufficient premium such that the issuance price, less the placement fee, exceeds the Trust’s NAV per common share. For the Period, the Trust’s common shares traded on average at a 4.75% premium to NAV and had an average daily trading volume of 324,897 common shares. ATM program daily issuance totals depend on the common shares’ average daily trading volume and the relative premium or discount of the Trust’s common share price to NAV.

In addition to the ATM program, the Trust sold 3,546,854 common shares in a registered direct placement, raising approximately $25,000,000. The offering, which was accretive to shareholders, was executed at a price above the Trust’s NAV per common share. Additionally, $10,000,000 of the Trust’s 6.00% Series 2029 Convertible Preferred Shares were converted to common shares in two separate conversions at respective conversion prices above NAV, resulting in the issuance of an additional 1,446,179 common shares.

Discuss the Trust’s use of leverage.

The Trust uses leverage as part of its investment strategy to finance the purchase of additional securities that may provide increased income and greater appreciation potential to common shareholders than could be achieved from a portfolio that is unlevered. Given the average cost of leverage during the Period of 6.76%, the leverage employed by the Trust is expected to be accretive to income generation. The Trust currently employs leverage through the combination of a bank borrowing facility and preferred shares outstanding. As of March 31, 2024, the amount of outstanding borrowings under the bank borrowing facility was $169,050,000, which represented approximately 27.25% of the Trust’s Managed Assets (which includes the proceeds from borrowing and preferred shares outstanding). In addition, the Trust had 6.50% Series 2026 Preferred Shares, 6.00% Series 2029 Convertible Preferred Shares, and 6.95% Series 2029 Convertible Preferred Shares outstanding as of March 31, 2024, with liquidation preferences of $39,900,000, $10,000,000, and $20,000,000, respectively. The Trust’s total preferred shares outstanding were $69,900,000 as of March 31, 2024, which represented approximately 11.27% of the Trust’s Managed Assets. Total leverage, which includes both the bank borrowing facility and preferred shares outstanding, was $238,950,000 as of March 31, 2024, representing 38.52% of the Trust’s Managed Assets.

On November 6, 2023, the Trust entered into an agreement to issue and sell up to 1,200,000 shares of its 6.95% Series 2029 Convertible Preferred Shares, amounting to a total liquidation preference of $30,000,000. As of April 4, 2024, the Trust has issued each of the 1,200,000 shares of the 6.95% Series 2029 Convertible Preferred Shares.

The Trust may use leverage through (i) the issuance of senior securities representing indebtedness, including through borrowing from financial institutions or issuance of debt securities, including notes or commercial paper, (ii) the issuance of preferred shares and/or (iii) reverse repurchase agreements, securities lending, short sales or derivatives, such as swaps, futures or forward contracts, that have the effect of leverage. The Trust may utilize leverage, to the maximum extent permitted under the Investment Company Act of 1940, as amended. Because a portion of the Trust’s assets may consist of illiquid investments, to the extent that the Trust must dispose of portfolio holdings to meet its regulatory asset coverage ratio, the Trust may be required to dispose of more liquid holdings at times or on terms that the Trust would otherwise consider undesirable, which may pose particular risks during adverse or volatile market conditions. While leverage may increase the income of the Trust in yield terms, it also amplifies the effects of changing market prices in the portfolio and can cause the Trust’s NAV to change to a greater degree than the market as a whole. This change in NAV can create volatility in Trust pricing.

Index Definitions

The Trust is actively managed and does not seek to track any index. Index returns are stated for illustrative purposes only, do not reflect the deduction of fees and expenses, and do not represent the performance of the Trust. Past performance is not a predictor of future market performance. It is not possible to invest directly in an index.

The Bloomberg Barclays U.S. High Yield 1% Issuer Capped Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond markets. Securities are classified as high yield if the middle rating of the Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Issuers are capped at 1% of the index.

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
March 31, 2024 (Continued) (Unaudited)

The J.P. Morgan CLO Debt Index represents the post-crisis J.P. Morgan Collateralized Loan Obligation Index (“CLOIE”). The CLOIE is an index that tracks the market for U.S. dollar-denominated broadly syndicated, arbitrage CLOs. The CLOIE is divided by origination (pre- versus post-crisis) and is broken out further into six original rating classes (AAA, AA, A, BBB, BB, B). The sub-index referenced herein tracks BB-rated CLO debt.

The Morningstar LSTA US Leveraged Loan Index (the “Morningstar LLI”) is a market-value weighted index designed to measure the performance of the US leveraged loan market. The index universe comprises syndicated, senior secured, US-dollar denominated leveraged loans covered by PitchBook Leveraged Commentary & Data (“PitchBook LCD”), a Morningstar Company. Loan facilities included in the Morningstar LLI must have a one year (at inception) minimum term, an initial minimum spread of LIBOR/SOFR +1.25%, and a minimum size of $50mm (initially funded). LSTA/Refinitiv Mark-to-Market Pricing is used to price each loan in the index. LSTA/Refinitiv Mark-to-Market Pricing is based on bid/ask quotes gathered from dealers and is not based upon derived pricing models. The index uses the average bid for its market value calculation. Please note, the performance information presented herein for the Morningstar LLI reflects restated returns for the period June 25, 2022 – February 27, 2023, pursuant to a recent notification issued by PitchBook LCD that a technical error had occurred in the calculation of accrued interest for certain securities dating back to June 25, 2022. Consequently, previous communications reflected overstated returns.

The Morningstar LSTA US Leveraged Loan 100 Index (the “Morningstar 100”) is designed to measure the performance of the 100 largest facilities in the US leveraged loan market. Index constituents are market-value weighted, subject to a single loan facility weight cap of 2%. Loan facilities included in the Morningstar 100 must have a one year (at inception) minimum term, an initial minimum spread of LIBOR/SOFR + 1.25%, and a minimum size of $50mm (initially funded). LSTA/Refinitiv Mark-to-Market Pricing is used to price each loan in the index. LSTA/Refinitiv Mark-to-Market Pricing is based on bid/ask quotes gathered from dealers and is not based upon derived pricing models. The index uses the average bid for its market value calculation. Please note, the performance information presented herein for the Morningstar 100 reflects restated returns for the period June 25, 2022 – February 27, 2023, pursuant to a recent notification issued by PitchBook LCD that a technical error had occurred in the calculation of accrued interest for certain securities dating back to June 25, 2022. Consequently, previous communications reflected overstated returns.

Please see “Risks” in the Trust’s Annual Report for the fiscal year ended September 30, 2023, which was filed on Form N-CSR on November 29, 2023 for more information regarding the Trust’s risks and considerations.

Visit the Trust’s website (www.xainvestments.com/XFLT) for additional information regarding the Trust. The Trust regularly updates performance and certain other data and publishes material information as necessary from time to time on its website. Investors and others are advised to check the website for updated information and the release of other material information about the Trust. References herein to the Trust’s website are intended to allow investors public access to information regarding the Trust and do not, and are not intended to, incorporate the Trust’s website in this report.

This material is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be, and should not be construed as, legal or tax advice and/or legal opinion. Always consult a financial, tax, and/or legal professional regarding your specific situation.

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
March 31, 2024 (Continued) (Unaudited)

XAI Octagon Floating Rate & Alternative Income Trust

TRUST PORTFOLIO INFORMATION
March 31, 2024 (Unaudited)

Growth of a $10,000 Investment (as of March 31, 2024)

The chart above represents historical performance of a hypothetical investment of $10,000 in the Trust since inception. Past performance does not guarantee future results. Performance reflects the partial waiver of the Trust’s advisory fees and/or reimbursement of expenses for certain periods since the inception date. Without these waivers and/or reimbursements, performance would have been lower. This chart does not reflect the deduction of taxes that a shareholder would pay on Trust distributions or the redemption of Trust shares. The chart assumes that distributions from the Trust are reinvested.

Summary Performance (as of March 31, 2024)

Performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than performance data quoted.

XAI Octagon Floating Rate & Alternative Income Trust

TRUST PORTFOLIO INFORMATION

March 31, 2024 (Continued) (Unaudited)

Top Ten Portfolio Holdings (as a % of Total Investments)*  

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

March 31, 2024 (Unaudited)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

March 31, 2024 (Unaudited) (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

March 31, 2024 (Unaudited) (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

March 31, 2024 (Unaudited) (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

March 31, 2024 (Unaudited) (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

March 31, 2024 (Unaudited) (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

March 31, 2024 (Unaudited) (Continued)