XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) N-CSRSCertified semi-annual shareholder report (management investment company)

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 Term 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, 2023

Item 1. Reports to Stockholders.

(a)

Dear Shareholder:

We thank you for your investment in the XAI Octagon Floating Rate & Alternative Income Term Trust (the “Trust”). This report covers the six months ended March 31, 2023 (the “Period”). During the Period, we observed elevated, but tapering inflation levels, continued rate hikes by the U.S. Federal Reserve, and regional bank failures, including Silicon Valley Bank and Signature Bank. The Consumer Price Index (year over year) started the Period at 8.2% and ended the period at 5.0%.¹ The U.S. Federal Reserve raised interest rates three times during the Period for a total increase of 1.50%, with one additional rate hike of 0.25% in May 2023. These dynamics are important to consider as the Trust is primarily invested in floating-rate securities including loans, CLO debt and CLO equity.

Despite overall market volatility and the inflationary environment, the loan market continued to perform relatively well. Loans experienced a default free Q4 2022 followed by eight loan issuers defaulting in Q1 2023. Despite these defaults and a -0.03% return during the month of March, Q1 2023 represented the second strongest first quarter of performance for the asset class in the last 10 years.² As economic pressures maintained through the course of the Period, leveraged loan prices remained resilient.

The macroeconomic dynamics affecting the loan market have similarly impacted the CLO market, but despite this, the pace of new CLO formation has been stable and resulted in a persistent bids for loans and broad tightening in CLO liability spreads. With meaningful performance dispersion across both the CLO and underlying loan markets, we believe it is important to focus on fundamentally strong CLOs that offer compelling yields and the potential for price appreciation.

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 14.61%, 7.88%, and 6.79%,³ respectively.

The Trust’s net asset value (“NAV”) decreased during the Period by 1.10% from $6.39 per common share to $6.32 per common share as of March 31, 2023, largely reflecting price declines for the Trust’s investments in CLO equity and loans.

During the Period, the Trust declared monthly distributions totaling an aggregated $0.438 per common share. The monthly distribution of $0.073 per common share declared on March 1, 2023 represented an annualized distribution rate of 13.62% based on the Trust’s closing market price of $6.43 per common share on March 31, 2023. Subsequent to Period-end, the Trust declared a monthly distribution of $0.085 per share on May 1, 2023, representing a 16.44% increase over the previous distribution.

The market price per common share of $6.43 on March 31, 2023 represented a 1.74% premium to NAV of $6.32 per common share. During the Period, the Trust’s common shares traded on average at a 1.24% premium to NAV. From the Trust’s IPO on September 27, 2017 through March 31, 2023, the Trust’s common shares have traded on average at a 3.32% premium to NAV.

We continue to seek operational scale by increasing the Trust’s common assets. During the Period, the Trust issued an additional 571,206 common shares pursuant to an “at-the-market” offering program, resulting in $3,843,658 of net proceeds to the Trust which may result in incremental expense efficiencies for shareholders. In addition to the at-the-market program, $6,500,000 of the Trust’s 6.00% Series 2029 Convertible Preferred Shares were converted to common shares in two separate conversions at a conversion price above the current NAV, resulting in the issuance of an additional 1,035,531 common shares.

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 Managing Director XA Investments LLC May 15, 2023

XA Investments LLC (“XAI”) serves as the investment adviser to 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.

Gretchen M. Lam, Senior Portfolio Manager at Octagon and a member of Octagon’s Investment Committee serves as lead portfolio manager of XAI Octagon Floating Rate & Alternative Income Term Trust (the “Trust”). Ms. Lam 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 Chief Executive Officer), Michael B. Nechamkin (Chief Investment Officer and Senior Portfolio Manager), Lauren B. Law (Portfolio Manager), and Sean M. Gleason (Portfolio Manager). In addition, Maegan Gallagher (Head of Trading and Capital Markets) is a member of the Octagon Investment Committee.

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. 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 have historically used the one-month LIBOR as an interest rate benchmark, which is currently being phased out. “LIBOR” stands for London Interbank Offered Rate and was the benchmark rate that most of the world’s leading banks charge each other for short-term loans. On July 29, 2021, the Alternative Reference Rates Committee, a group of private market participants formed by the Federal Reserve Board and New York Fed, formally recommended CME Group’s forward-looking Term Standard Overnight Financing Rate (“SOFR”) as the replacement rate for LIBOR. New instruments are now being issued with an alternative rate – typically SOFR - and all existing instruments tied to LIBOR are required to transition to a new reference rate by June 30, 2023. Replacement of LIBOR could adversely affect the market value or liquidity of CLO securities and/or loans, and pose tangential risk for markets and assets that do not rely directly on LIBOR. There is uncertainty with respect to replacement of LIBOR with proposed alternative reference rates, and it is possible that different markets might adopt different rates, resulting in multiple rates at the same time and a potential mismatch between CLO securities and underlying collateral, the effects of which are uncertain at this time, and could include increased volatility or illiquidity. In addition, operational and technology challenges during the transition from LIBOR as well as inconsistent communication from issuers could result in delayed investment analyses and reduced investment opportunities.

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 pursues its investment objective by investing 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.

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 the 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 current market conditions for the leveraged loan market and Octagon’s outlook.

Leveraged loans returned 5.94% for the six months ended March 31, 2023 (the “Period”), as measured by the Morningstar LSTA US Leveraged Loan Index (the “Morningstar LSTA LLI”),¹ reflecting a rebound in loan prices in the fourth quarter of 2022 that continued into January and February 2023. Loan prices peaked in mid-November at 93.06 before retreating to 92.44 by year-end; driven by improving price levels, the Morningstar LSTA LLI returned 2.62% in the final quarter of 2022.¹ For the full year 2022, loans returned -0.77%, significantly outperforming most other asset classes, including high yield bonds (-11.22%), investment grade bonds (-15.44%), 10-year US Treasury bonds (-16.28%), and the S&P 500 Index (-19.44%).² In a challenging year marked by a dramatic increase in interest rates, we observed loans benefiting from their floating-rate coupon and senior secured position in the capital structure.

In concert with other risk assets, loans entered 2023 on a positive note. Amid supportive technical dynamics, the average bid price for the Morningstar LSTA LLI climbed almost two points in January, and reached a high watermark of 94.71 on February 9, 2023—a level not seen since August 2022.¹ The Morningstar LSTA LLI’s February return of 0.58% marked the fifth consecutive month of positive performance for loans, despite some price softness in the final two weeks of the month.¹ Loan prices remained stable in early March before succumbing to market volatility sparked by the failure of Silicon Valley Bank and broader concerns about U.S. banks, only to partly rebound by month-end. Inclusive of March’s modest loss of -0.03%, loans returned 3.23% in the first quarter of 2023, compared to first quarter returns of 3.72% for high yield bonds, 3.45% for investment grade bonds, 3.70% for 10-year US Treasury bonds, and 7.03% for the S&P 500 Index.³ In the wake of a flight-to-quality that drove significant performance dispersion in the loan market throughout 2022, lower-rated loans outpaced their higher-quality cohorts in the first quarter of 2023.³ Despite comparatively steeper losses among riskier credits in March 2023, CCC rated loans generated a total first quarter return of 3.92%, outperforming B (+3.81%), BB (+2.08%), and BBB rated loans (+2.27%).³ Nevertheless, CCC loans continued to meaningfully underperform higher quality loans on a trailing 12-month basis, underscoring investors’ heightened sensitivity to risk.

After a default-free fourth quarter 2022, eight loan issuers defaulted in the first quarter of 2023.⁴ As a result, the trailing 12-month default rate of the Morningstar LSTA LLI rose from 0.72% as of December 31, 2022 to 1.32% as of March 31, 2023.⁴ Ratings agencies continue to swiftly downgrade borrowers that report disappointing earnings results or are deemed at risk of credit deterioration, thereby contributing to increased performance dispersion among loan borrowers. Year-to-date as of March 31, 2023, S&P has downgraded 86 facilities in the Morningstar LSTA LLI, compared to 35 upgrades, resulting in a 3-month downgrade-to-upgrade ratio of 2.46x, modestly below the prior quarter’s level of 2.77x.⁴ The share of performing loans priced below 80 also demonstrated modest improvement in the first quarter, declining to 6.3% as of March 31, 2023 from 7.4% as of year-end 2022.¹ Fundamentals for corporate borrowers generally remain stable, although interest coverage ratios have declined amid rising rates, with some borrowers affected more than others. We anticipate softer corporate earnings, tighter monetary policy, and challenging credit conditions will lead to further deterioration in credit metrics and additional defaults in the coming months. Moreover, the loan market may experience drawn-out ripple effects of the recent banking sector crisis as smaller, regional banks reduce corporate lending and tightening credit conditions create a more costly environment for borrowers. We therefore remain acutely focused on managing risk and positioning the Trust’s portfolio defensively.

Institutional new issue loan volume totaled $49.5 billion in the first quarter of 2023, up from $35.7 billion in the fourth quarter of 2022, but markedly lower than $112.3 billion of new issuance in the first quarter of 2022.³ Refinancing activity accounted for the lion’s share of first quarter 2023 loan supply (70%), as borrowers took advantage of a more supportive technical backdrop to address near-term debt maturities. Companies remain highly focused on maturity profiles and their ability to refinance given uncertain economic conditions. Of the $34.5 billion of loan refinancings executed in the first quarter, $23.5 billion (68%) were from B rated borrowers, whereas refinancing activity in the prior quarter was concentrated among BB rated borrowers (60% of total fourth quarter 2022 refinancings).³ Inclusive of $46.5 billion of amend-and-extend transactions in the first quarter of 2023, the amount of loans coming due between 2023-2025 decreased to roughly $228 billion as of March 31, 2023, versus $280 billion at year-end 2022.³

The steady pace of CLO origination in the first quarter of 2023 precipitated a persistent bid for loans and broad tightening in CLO liability spreads compared to fourth quarter 2022 levels. CLO managers priced $32.3 billion of new deals in the U.S. market in the first quarter, a considerable uptick from $22.6 billion in the fourth quarter of 2022, and slightly exceeding first quarter 2022 volume of $31.2 billion.³ Conversely, loan-focused mutual funds and ETFs reported outflows in each month of the first quarter, totaling $9.3 billion year-to-date as of March 31, 2023.⁵ Through March 2023, retail loan funds have experienced 11 consecutive months of net withdrawals.⁵ As of first quarter-end, retail funds comprise just 6.2% of the institutional loan investor base.⁶

Despite crosswinds, we believe loans have continued to offer interesting risk/return opportunities for fundamental credit pickers. All-in yields for loans have been benefiting from higher LIBOR and SOFR base rates; given high levels of current income with meaningful price convexity, we believe that loans currently present a compelling total return opportunity with the potential for mitigated downside volatility. Though we expect credit stress to remain elevated, we would expect relatively balanced market technicals to provide support for loan prices, notwithstanding issuer-specific price movement driven by earnings results and company outlook. We anticipate periods of market volatility as 2023 progresses, and believe that adherence to Octagon’s rigorous credit research process and proactive risk management will support our ability to navigate an uncertain economic outlook in an effort to uphold the Trust’s capital preservation and income generation objectives.

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

In tandem with strong performance for loans, CLO debt tranches generated healthy fourth quarter 2022 returns that ranged from 2.54% for AAA tranches to 6.43% for BB tranches (as measured by the J.P. Morgan CLO Index or “CLOIE”).⁷ For the full-year 2022, CLO debt produced an annual return of 0.21% (across tranches), buoyed by positive performance among AAA tranches (+1.05%), while all other tranches comprising the CLOIE were down on the year (AAs: -0.17%; A: -1.67%; BBB: -2.77%; BB: -3.82%; B: -6.39%).⁵ Still, CLOs generally performed well in 2022 versus comparably rated assets. CLO AAAs’ 1.05% 2022 annual return compares to -17.53% for AAA rated corporate bonds; CLO BB’s 2022 annual return of -3.82% compares to -9.48% for BB rated high yield bonds.⁸

New CLO issuance has been steady year-to-date, despite the challenges of macro headwinds, muted loan supply, and persistently wide AAA spreads amid the diminished presence of traditional CLO AAA buyers (large US and Japanese banks). With $33.6 billon priced across 77 new deals year-to-date as of March 31, 2023, primary CLO market activity is running slightly ahead of last year’s pace, and above the 10-year average for first quarter new deal volume ($26.1 billion).³ Meanwhile, secondary CLO trading activity has remained elevated, with approximately $13 billion of U.S. CLO BWIC volume in the first quarter of 2023, largely comprising investment grade debt tranches (rated AAA-A), which accounted for 72% of total quarterly volume.⁹

While primary CLO AAA spreads marginally widened in mid-March amid banking sector-driven market volatility, on the whole, primary CLO spreads tightened in the first quarter of 2023 from the fourth quarter 2022 but remain wide to historical levels.³ The average AAA coupon for broadly syndicated loan CLOs that priced in the first quarter was SOFR + 1.97%, down 0.34% from the fourth quarter 2022 average spread of SOFR + 2.31%.³ In the first quarter, the weighted average cost of liabilities across the capital stack tightened by 0.23% quarter-over-quarter.³ First quarter CLO origination was driven in part by CLO managers’ internal investments/captive equity funds; deals from established, top-tier managers accounted for 55% of total primary CLO activity in the first quarter,¹⁰ and we expect new CLO issuance will continue to be focused among higher tier managers. We have also observed consolidation among CLO managers; we think this trend will continue and drive increased performance dispersion between established, top-tier managers and smaller, newer managers, especially as credit stress increases. We anticipate domestic bank demand to remain muted in light of the recent volatility in the banking sector; in the context of limited CLO AAA investor demand, CLO spreads are likely to remain wide to historical levels, which may impact the pace of new deal formation. Absent an uptick in new issue loan supply, CLO liability spread compression, or a decline in secondary loan prices, CLO arbitrage is likely to remain challenged. It bears noting that approximately 40% of outstanding U.S. broadly syndicated loan CLOs will exit the reinvestment period by the end of 2023,¹¹ these CLOs are likely to remain outstanding barring a contraction in CLO AAA spreads or a sustained rally in loan prices.

CLO fundamentals experienced some marginal deterioration towards year-end 2022, with modest declines reported in market value metrics (weighted average price, CLO equity market value NAV, BB market value overcollateralization) as loan prices came down from mid-November highs.¹² The accelerating pace of negative ratings actions and loan defaults in the first quarter of 2023 has sharpened CLO market participants’ focus on increased downgrades and heightened default risk in underlying loan exposures. CLO exposure to CCC/Caa rated assets in excess of 7.5% negatively impacts overcollateralized cushions; though many CLO managers reduced median CCC exposures in 2022 through active trading—and US CLOs have therefore generally maintained healthy junior overcollateralization ratio test cushions—the currently high concentration of B3/B- rated loans in CLOs could inflate CCC buckets in an event of a loan downgrade wave. Roughly 17% of the loan market has been downgraded over the course of 2022 and the first quarter of 2023, with 5% to the CCC bucket (about $65 billion of downgrades to CCC).¹³ Approximately 3% of B- rated loans held in CLOs have been downgraded to CCC over the first three months of 2023, which is in line with the historical average.¹³ Credit stress is expected to increase as macroeconomic headwinds strengthen, underscoring the importance of proactive risk management.

The median annualized equity distribution for reinvesting US CLOs declined in 2022,¹⁴ as rising rates eliminated the benefit of floors on underlying loan collateral and as the basis between one-month and three-month LIBOR/SOFR increased (in 2022, many loan borrowers took advantage of lower one-month LIBOR/SOFR in 2022, whereas most CLO liabilities pay at the three-month rate). The base rate mismatch has compressed since year-end, though heightened rate volatility impacted first quarter 2023 CLO equity payments. At approximately 10% on an annualized basis, the median first quarter 2023 US CLO equity distribution rate was broadly unchanged quarter-over-quarter, but down from approximately 15.7% one year ago.¹⁴ Second quarter equity distributions are tracking meaningfully higher; a survey of reported April 2023 payments across approximately 900 outstanding deals reveals a median quarterly distribution of 4% of notional value, compared to 2.5% for the first quarter.¹⁵

Though challenges remain, we believe CLO tranches present compelling investment opportunities, and that the Trust’s portfolio has the potential for further upside. At current levels, we believe BB rated CLO tranches (which comprise the majority of the Trust’s CLO debt holdings) are very attractive given double-digit average current yields, expected price convexity, and additional upside potential. With meaningful performance dispersion across both the CLO and underlying loan markets, we will endeavor to invest in fundamentally strong CLOs that offer compelling yields and the potential for price appreciation. Importantly, the CLO structure has proven resilient over time and is especially valuable during market dislocations when collateral managers can acquire discounted assets with previously locked-in, non-mark-to-market financing. We expect elevated macro risks to drive periods of volatility over the remainder of the year that may create buying opportunities for the Trust.

How did the Trust perform for the six months ended March 31, 2023?

For the six-month period ended March 31, 2023, the Trust’s total return on market price was 15.81% and total return based on net asset value (“NAV”) was 5.81%. NAV return includes 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, 2023, the Trust’s market price of $6.43 represented a premium of 1.74% to its NAV of $6.32. The market value of the Trust’s 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.

What were the distributions over the period?

From October 1, 2022 through March 1, 2023, the Trust paid a monthly distribution of $0.073 per share. The Trust’s declared distribution payable on March 1, 2023 was consistent with the previous five distributions during the Period and represents annualized distribution rate of 13.62% based on the Trust’s closing market price of $6.43 per common share on March 31, 2023. The Trust’s distribution rate is not constant, and the amount of distributions, when 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 of 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.

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 for the six months ended March 31, 2023?

The Trust generated positive returns across its main portfolio segments during the Period. Performing loans represented the largest contributor to performance, with a net gain of $0.31 per share for the Period, followed by the Trust’s CLO equity investments, which produced a net gain of $0.19 per share. During the Period, the Trust’s CLO equity positions collected quarterly distribution payments totaling $13,265,803 or $0.37 per share, which were offset by unrealized market value losses of -$6,495,807 or -$0.18 per share. It bears noting that CLO equity pricing can be very volatile. The Trust’s CLO debt portfolio segment and performing high yield bond portfolio segment posted net gains of $0.14 per share and $0.02 per share, respectively, for the Period. The Trust’s opportunistic loan portfolio segment produced a nominal net gain for the Period, while its opportunistic bond and equity holdings generated nominal net losses for the Period.

Relevant indices for the markets in which the Trust invests include the Trust’s benchmark, the Morningstar LSTA Leveraged Loan 100 Index (formerly the S&P/LSTA Leveraged Loan 100 Index), which returned 6.78% for the Period, Bloomberg Barclays U.S. High Yield 1% Issuer Capped Index, which returned -7.88% for the Period, and the JP Morgan BB/B CLO Debt Index, which returned 10.04% for the Period. There is no representative benchmark index for CLO equity in the marketplace.

Discuss the Trust’s secondary market performance and issuance of additional common shares.

During the six months ended March 31, 2023, the Trust issued 571,206 common shares pursuant to an “at-the-market” (“ATM”) offering program resulting in $3,843,658 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 or above the Trust’s NAV. The placement agent sells the common shares in the open market and the Trust receives cash proceeds from the transaction to be invested pursuant to the Trust’s investment objectives.

The Trust issues common shares pursuant to the ATM program only if the shares are trading at a sufficient premium such that the issuance price, less the placement fee, exceeds the Trust’s NAV per share. For the Period, the Trust’s common shares traded at an average 1.24% premium to NAV and had an average daily trading volume of 161,740 common shares. ATM program daily issuance totals depend on the common shares’ average daily trading volume and market price’s relative premium or discount to NAV.

In addition to the at-the-market program, $6,500,000 of the Trust’s 6.00% Series 2029 Convertible Preferred Shares were converted to common shares in two separate conversions at a conversion price above NAV, resulting in the issuance of an additional 1,035,531 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. With the current cost of borrowing, the amount of leverage used 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, 2023, the amount of outstanding borrowings under the facility was $122,350,000, which represented approximately 30.50% of the Trust’s Managed Assets (including the proceeds from borrowing). As of March 31, 2023, the Trust also had 6.50% Series 2026 Preferred Shares and 6.00% Series 2029 Convertible Preferred Shares outstanding with a total liquidation preference of $39,900,000 and $3,500,000, respectively. Total leverage was $165,750,000 as of March 31, 2023, representing 41.32% of the Trust’s Managed Assets.

The purchasers of the 6.00% Series 2029 Convertible Preferred Shares also agreed to purchase up to 800,000 additional 6.00% Series 2029 Convertible Preferred Shares, representing an aggregate liquidation preference of $20,000,000, at one or more subsequent closings on or before December 31, 2023, as determined by the Trust in its discretion.

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 (the “1940 Act”). 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 such 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 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. It is not possible to invest directly in an index.

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.

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 100 Index (formerly the S&P/LSTA U.S. Leveraged Loan 100 Index) (“L100”) 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%. 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. Loan facilities included in the L100 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).

Risks and Other Considerations

Investing involves risk, including the possible loss of principal and fluctuation in value.

The views expressed in these Questions & Answers reflect those of the portfolio managers only through the report period as stated on the cover. These views are expressed for informational purposes only and are subject to change at any time, based on market and other conditions, and may not come to pass. These views should not be construed as research, investment advice or a recommendation of any kind regarding the Trust or any issuer or security, do not constitute a solicitation to buy or sell any security, and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific investor.

The views expressed in this report may also include forward-looking statements that involve risk and uncertainty, and there is no guarantee that any predictions will come to pass. Actual results or events may differ materially from those projected, estimated, assumed, or anticipated in any such forward-looking statements. Important factors that could result in such differences, in addition to the other factors noted with such forward-looking statements, include general economic conditions such as inflation, recession, and interest rates. Neither XAI nor Octagon has any obligation to update or otherwise revise any forward-looking statements, including any revision to reflect changes in any circumstances arising after the date hereof relating to any assumptions or otherwise.

There can be no assurance that the Trust will achieve its investment objective or that any investment strategies or techniques discussed herein will be effective. The value of the Trust will fluctuate with the value of the underlying securities. Historically, closed-end funds often trade at a discount to their net asset value.

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.

Risk Considerations

Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee the Trust’s investment objective will be achieved. Closed-end fund shares may frequently trade at a discount or premium to their net asset value. CLOs often involve risks that are different from or more acute than risks associated with other types of credit instruments, and may be difficult to value or be illiquid. The value of CLOs may decrease if ratings agencies revise their ratings criteria and, as a result, lower the rating of a CLO in which the Trust has invested. Senior loans may not be fully secured by collateral, generally do not trade on exchanges, and are typically issued by unrated or below-investment grade companies, and therefore are subject to greater liquidity and credit risk. Lower credit debt securities maybe more likely to fail to make timely interest or principal payments. Leverage increases return volatility and magnifies the Trust’s potential return and its risks; there is no guarantee a trust’s leverage strategy will be successful. The Trust’s 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.

Please see “Risks” 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.

Growth of a $10,000 Investment (as of March 31, 2023)

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, 2023)

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.

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

Asset Allocation (as a % of Total Investments)

Total may not add up to 100% due to rounding.

Holdings may vary and are subject to change.