XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) 22 Aug 232023 Q2 Earnings call transcript

You have joined the meeting as an attendee and will be muted throughout the meeting. XAI Octagon Floating Rate & Alternative Income Term Trust. We're going to discuss today results for the quarter. We're pleased to have you with us. We've got some new material to share with you all today. the some start disclosures. to going presentation general with We're not and for meant investments The the may intended purposes today. discussed suitable is audience or security presentation is individual educational not for an to may be recommend an to XAI audience to decisions. making consult own any members Neither prime or should the investment members investment adviser adviser acting audience to Octagon is their or as and make prior

research and The the include information reflect presented here forward-looking proprietary does statements. materials

those questions should forward-looking with can investors And audience, go. not put questions we to welcome reliance upon We'll and as We're place be live statements. so to you. your undue pleased questions. from we really and We Gretchen them Stephen. also We'll answer take the to

the screen, number box there, of we're in with Q&A look And just always bottom the at forward typing XXX to is us something contact question. xainvestments.com, use occurs you your case at our available. located So to later, we you. your please and speaking Please

I'm I'm is Steven and XFLT. manager joined Kimberly funds. of served product for have by Flynn accounts co-mingled portfolio we with serves who for [ph] portfolio joined. Investment the the Octagon on at and and Gretchen management she also manager separate colleague, who runs Lam, Perry, is Rexon my My Committee as CLOs, Today, XFLT. for And name also number a

Octagon, credit. below are familiar may to I'm since billion of you They investment-grade some the with have in assets new known evaluation more as it's going to terms very credit to the experts They and a process have So webinar, Octagon front the record cover if those June does new use going disciplined And first investment XX to expertise on back questions you. of the not management publicly is in investment a We're to team, their to Stock with their firm be available. from of Octagon's obviously under of you're familiar back be loans they're in $XX.X CLOs. for cohesive end introductory XFLT, that XXXX. cycle-tested credit focusing years. as made than they going The and of the Credit. again which to a fund, pleasure traded and moment. in they once have put Exchange on strategy in New materials At track marketplace this Stephen York are year. a in a Gretchen be

little a that's So bit background Octagon. on of

questions. into you're planned answer doesn't a interested box. topics just your what I in the to We'll these please group. And this for We've if address cover a prepared got few moment. updates to in, question some the want Q&A get

let's So X. Slide to go

Financial a highlights. Perry in Steven moment. this cover colleague, will My

slide. the to and just number make governance go of wanted a is we'll and So shareholder to actions aware you new We board the This slide. of meetings. frequency the

on loop Your future the include Board met corporate And so in overview transactions. last in XFLT to and months. the going we're actions potential just can future you for times this webinars X XX has governance stand

over the largely know, XFLT last grown program. As years, you at-the-market our has through X

which another the have way base. of common from share funds into also convert preferred you convertible We preferred shares, growing

duties have these as act Phil inception to continue since are fund of is Chair Jones, the exercising Our Danny their - Scott members. trustees, and by trustees Greg behalf served of Franklin X the Board shareholders board independent independent the board he and And is joined in Dingens, on Cups. and

to out Group. their a the July, press there's acquisition close pending XXXX. recently in the Generali [ph] is announced first just of came a Canning Just couple with that company in that corporate scheduled announcing of half by group, Octagon actions was terms a to in parent cover release of That -put transaction

Also, - reelected and Jones Meeting was May shareholder meeting. Annual the increase filed a the at was shareholder Shareholder proxy the by in shareholders recent distribution in Craven make X. the was Scott annual most April, later did fund on June

to that. just the that's managed share if now, But could, $XXX last few investments. bit a terms in What the state of talk price were appreciation is at appreciation. XXX. NAV fund do a overview at So of of larger I'd today. the weeks, the some to sits on little an the of to like like we little Actually, fund Slide million as is growth X/XX, its we've always in We today assets. fund continued about total we X, bit due and the as give And seen where of

our to go and managed the assets price NAV for website information. and latest at So ex-investments.com

weight continue As does of holdings be prior well just of from equity. equity seen us mix. asset We're prior webinars the also moment XX is in Octagon disclosures, comprised in CLO you've quarterly the how of The top and market portfolio. top the to overall loan to the the that talk the fund in and a of in the diversified terms for going fund XX represents XX% the sees market, the debt CLO CLO in about funds. opportunities and its about The market

XFLT the positioning also of CLO over The senior its peer XX% and that loans. compared closed-end mix, within the or funds. to equity-focused fund closed-end often typically the composition it which group. differentiates This add is the have or fund of from to category Portfolio fund this senior compared in funds, the more of really in terms change subgroup loan vary fund of is loan The is value asset time. only source marketplace. is that XFLT a listed has in may

the asset of portfolio half a middle in also sits sort lien the half a CLO XFLT second And loans first CLO in of these half to lien, being mix allocation equity. the two this of loans diversified with and of significant with groups mix, including and exposure and other

Qrestion, at XFLT's table. to to is time. of the go these let's now to if setting could question, And wanted to And the why terms look we love which go I'd what invest If types? we first [ph] from that's Qrestion maybe, So Slide with cover is the us over composition of in strategic XX, ability various share about asset important? like portfolio to the Octagon what in mix is this you could

unique that in on assets Sure, the that high-yield time. and corporate morning. really And silo on and CLO across Kim, most is fund good bonds, XFLT in invest and attractive relative you happy to. as loans, mentioned, debt based across us peers many can point close these equity of at the allocations shift value among

teens of assets as invested both XXXX, pull-to-par and a second basis. out call in of we BB to basis additional in lien a a XX% XXXX can and of on throughout also particular are really course Page over CLO we in over for XX% and and parts in were bonds. the about par, debt loans And and in debt the on debt many our the first last half about loans, year, high-yield both XX% which for CLO very on the XX, meaningful was, low back see discount current purchased you returns X% over our of versus the be both total upside relative purchases Today, XXXX, and in in about modeling CLO and return earlier and XX% XFLT's high debt equity at attractive in very view, year what high equity, could to CLO because offered allowed increased we've yields exposure of this time, really our in extremely

of have case has equity. due In BB really in those thesis debt, XXXX less to teens has in versus percentage is versus returns the marginally CLO subordination period. year-to-date markets, of over of CLO high outperformed the risk broad as return. out about the structural have of index, and the silos the by about equity-like outperformed course generally the CLO equity That points X But outperformed BBs the equity tranche played loan loans both even

BBs our we relative the really view prices asset rallied at toward shift various to CLO and is over that BBs today, as the equity. value classes the from look the and of CLO Now in summer, away as course of starting have

back And total that return of think XXXX, equity over in way we holders tweak maximize of allocations those so a the to in both continue and see the us benefits as we to kind really move half you'll us XLT forward income. allows and

you you, time and to methods And to talk growth Gretchen. the for come could about talk you addition, base for common if different Thank back We'll in growing minute. share you the fund. the for EXLP's a over of about love then I'd in highlights Stephen, quarter. the

hear a technical microphone check want Tim. I all ask absolutely. me Can right? Yes, to you here,

great... Yes,

confirm. I so me, on die headphones just my to wanted Yes,

quarter, issuance approximately of million. strong seen So issued new X.X at-the-market or common second quarter, has shelf for shares, XFLT $XX.X with seen a program statement volume very net nearly for the registration proceeds strong of quarters, very million the we stock We've the as good for fund the secondary as to than that in market they a this sign and need. view out the stronger of of like the prior and support of to investors health wellness and and get fund

$X.XXX the Also by quarter XX.XX% share. per the from distribution the increase notable rate per of was $X.XXX to prior for the share

two to As rate, have $X.XXX. at of quarter distributions declarations being with at Subsequent $X.XXX quarter, two were back of we're the there them $X.XXX looking that at one the been rate. prior those at end,

yield and XX current it's various of XX% the CLO average debt, on of market weighted portfolio, the to the of to the equity X.XX%. price highlight bonds as to asset the the that important XX% want also in note of this X/XX. is close I yielding loans classes positions

to I bit talk to So returns. another the turn I'll a and the performance. net going XFLT continue about to little quarter slide through wanted here

returned the being to NAV at And bit our return turn the the at little benchmark then close XX.XX% inception, since close is and X-year on attention and outperformed to with versus and and X.XX%. quarter, relatively X-year total benchmark benchmark price For returned the basis. X-year price we to price if the very X.X%. X.XX%, NAV the a of X.X% being

and Kim, other recently. the of inception fund Current bit a of date, the premium funds We'd couple little as X.X%. rallying on a of the going, here. of average But history We've keep asset for close to value to seen is slides. Friday's was present I'll like premium premium net the X.XX%. discount of

the of to backdrop. a use view the you price like the general give markets and also we on, a as equity and Moving performance NAV fund, compare

that NAV come can that downturn the the bit last month, there. seen green equity line, two, week you in the and rally also we've see or months, despite a rally the X.X over of last we've As with markets seen up little a little in

out grow. base volume to grow. seen as growth, the we've seen and with and moving the grow. XXX,XXX distribution, shares some day. day, keep I seen as activity. shareholders growth the it XX this in lot the shares volume compare to increase the in but common lot ability we've activity on seeing share We're that need inception of we traded said last XFLT's for can the you before, XX-day of fund of and the along as in was view they since get like We've since seeing a that investors per to I'll of XXX,XXX a volume the that seen interest And volume again, of And investors we've of August to per We're and fund. from

health we show show the to just this So wellness. like to and

slides. are floating all instruments. of the assets in the A fund Obviously, rate couple substantially more

in the just raised assets no base earned as has it's rates Fed that So benchmark rates, the fund increasing. more the surprise that from the the have

we cessation present LIBOR that rate to against and Fed happened of in A X-month LIBOR, this may people funds June slide like lot And XXXX. recall so SOFR.

but the rate the drop chart, see this new lot line accepted instruments base LIBOR in portfolio. So a the may of SOFR the off widely we is for

mentioned Finally, Kim, you this.

activity saw you for fund of has costs for scale Kim, the at fund. program, costs investors. We over we it fixed have efficiencies down costs the turn of driving it amongst And quarter, where continuing as out the growth fixed for back asset questions. the grows, seen in the and to shares spreads The I'll those drive the the the the - asset market continue a to base lot

Sure.

benefited think hear is to I moving a has higher, but about base XFLT is with XFLT what leverage rates love fund. bit little a more you I'd that mentioned

the state and on about leverage? of the impact can rising of the current the of rates talk you So of leverage fund's cost kind

gone has Good rates cost absolutely. point. question, up leverage fund has Yes, up. gone The two of of good XFLT types the leverage. have base as for also

facility We the have preferred we the credit and shares. have

rate, preferreds. and the SOFR I'll a facility is So to The talk credit I'll a the move about a base spread. facility base credit first, plus then rate

increase. as of the we've facility base the And increased, cost average credit the so rates have seen

the the priced of convertible surpassed the quarter, preferred which cost X%. Over facility we actually credit did see are the at past costs,

the debt give With willing the use credit CLO loans of equity the lot loan are credit funds to and CLO and to lenders don't of facility, because The fund fund borrowings mix funds have or they a the loans, choose which bank allow in asset leverage. CLO if the to. to equity, do access the borrow

seen And preferreds so of that as fixed over also a quarter, rate to use the since are X%. we've borrowing the increase bank rate funds leverage. convertible the Those gone

use at conjunction the And continued so X.X%. We've the able preferred, to was that in to draw fund X% are those leverage. with retail

stock overview. the I've There's close par. in They $XX.X about, trade utilize to those don't the attention If the we continually preferreds, which And then the to secondary the XXXX the outstanding what cost look left have talked And leverages your to of draw is leverage, retail of trade preferred. the convertible the retail have shareholders screen, bottom market. structure the way best so of I at that's XXXX the conversations. we for of preferred preferred. million the there

On right, is information. public this the bottom

a the currently the are those have in We that see those positions preferred retail they see You share ownership. have. of lot institutions and interest

Stephen. Thanks, Great.

Let's now questions little focused the turn a bit more market on environment. for

the to off today? CLO resilient. fears CLO bit loan are debt this the peak, Gretchen. So is to tranche a And eased and GDP second turn its and to trading I'm going markets where remained question as Recession inflation low How and reacted? equity quarter came loans of in

their was loan become borrowers We've loan market syndicated as quite the rallied of macro others and where very the the the really X,XXX-or-so second or different in spoken what for has really dispersion risk have in time first quarter. high quarter dispersion across more that the elevated past That about but say continued, quarters borrowers view the broadly the about is performance. have positive, negative level some even market struggled might in some time, in the of some in in less well performance financial has done second

you have late if a at In fair the look loans index months, And broader happened since fact, XXXX. the recent by hasn't rated outperformed - very a loan margin. CCC that

BB price have have only full through loans price X year moved by today, up If out you the zoom to X XXXX point. in CCC rallied in while points, rated

but about loans that being we've CCC difference compress. trading So talked in and the to between wide, basis still price very rated loans seeing are is, and BB starting it we rated

Today, average XX CCC-rated there's was a At loan year-end number difference that on between an points. almost and BB-rated XX-point XXXX, a price loan.

as starting levels. normalized So to into more come describe more

months. XX.X% Loans that tranches of Nonetheless, as at even economy. are are still equity as but the CLO at to as many these in par. have prepayment par the reinvested rallied at trading can levels a And benefit loan prices. picked is big really The as new months, they certainly new as loan reminder, recent trading even discounted at prepayments and loans reflect the recent of a is bit in index at to up challenges persists prepayments those And - are be discounts CLO in loan currently a this into X/XX. proceeds

on $X.XX of we the the the equity, higher. in end CLO at range in cases, at June. JPMorgan trading XX% the And of to sit some XX% dollar to Index BBs, about to and according at yields Chloe least as even see

well terms both so yields. really debt levels trading across as CLO of upside, of compelling price complexity equity, current in in future terms very as and future still loans, price So

bit little like that borrowers underlying what Understood. Question, you looked loan the given the about the CLO and of performance translate And a then that into quarter? does in second that could what performance? talk performance,

Sure.

not numbers it in about that numbers over quarters for X been have spoken while though revenue of profit actually X And decelerating we've or So all or the quarter growth be are believe case yet, and still do sequentially. not, those to have the to reported once last we both quarter. second the companies positive, believe second all so

So We're that's seeing seeing growth. growth. EBITDA revenue still good. still We're

across We X,XXX performance dispersion borrowers. seeing, again, the are of those across market

XXXX. XXXX that managers mean first better of for part or half outperformed of course the we by avoiding So the years back, for managers? does really of That's have and last X.X what strategy the CLO As tail left distribution. look so, risk the the of really been the over the winning

the that so As actively riskiest expect to avoiding loans will them still want manage continues, will but losses also by outperform risk. managers by we see in continue taking who year selectively We certainly those to CLOs. early them to can reduce thoughtful, be nimble take in so to them to in want disciplined risk see loans. exposure that those way. But performance We want corporate also still identifying their a deteriorating we they do

note XFLT, that increasing that percentage do beyond we to goes managers see CLO to have CLO that important be want do to ends reinvestment reason, the active own we we period, reduced even that, will for to the of difficult and here, we in the are them Once exposure reinvestment beyond as in a CLO one do the to to happens, period market in exposure And the its seek CLO what once for deals their equity continued nimble And the the to this want do market reinvestment period. reduce them continue we it an really is to we the CLO. do in environment. very just current prohibits trading, that to

aware be more about just any specific? that of industries or there underperforming industry or should are we Another things borrowers. any question industry that loan problem outperforming Are are

financial or we've factors. past correlated seen defaults really one from and far borrower. Yes. of XX% year retail of hasn't underperformance to loan and last to in this idiosyncratic years In been example. specific interesting the gas, cycles, that Weak because that case where strongly It's be oil or year. is so, been kind performance That the to were sector, sector-specific for to less more appears - specific

would exposed labor certainly cases, have costs Having with that state to Real pass framework. higher I in estate-related said specifically last office is a especially federal so and the seeing had weakness, are sectors. weakness on prevalent those struggling year some reimbursement or the many been sector. those say, that, higher real seen we ability care hit or over due estate and more limited commercial Health costs to in borrowers to

And would I lastly, just seeing that's a from debt have full have rates with And the weakness challenged CapEx particularly that's the really Telecom, risen. coupled of, say, some which say, prevalent as caused much across function underperforming line, sector. high loads, top burden of as modestly really been already needs, but

of really in products in recurring or used manufacturers to Everything course from remained last customers. their light performance many seen we've for the service cabinetry, which, outperformers, cases, revenues or new those from software that companies. really prices products are resilient a have and subscription believe pushback from benefited years are And not, in of as darn pretty building For the strength without seen steady business example, to X.X we've and that our from in many so. providers, ability raise used over homebuilding it has

calculating X-month by this year-end, that consistent point of it, an and year. call defaults to XX generally X.X% those over pace months percentage or indicator the rate the had default we into XXXX of the look and in this creeps rate higher, by point, and the part at the the defaults distressed the seeing CCCs loan excludes up the we of - out of of same which X% At into LSTA the back in ZIP basis, a that to is X% versus forward XXXX. level trading in or this our X.X% we that an for run loans consistent On to, that LTM with We anticipate this unchanged expectations as market in of looking level range, the And relatively but also do number. in that exchanges future maybe XXXX, with As loan is are defaults. X.X% a in below last way, of would that expectations general we're X this expect half XXXX XX earlier of the code the XXXX, to similar default. tinge

talk compares XFLT more back about little it groups? to the is different Stephen, Can you a and XFLT you. positioned. uniquely Great. to peer bit how

to So some understand of positioned? I think the and is of the the it's helpful for how benefits fund audience differences this

absolutely. Yes,

As five four in roughly compared get in XX% you loans, spoke are XX% it's differences. where about other the the about that few is main There's up. CLOs. closed-end bucket to maybe And unique XFLT earlier, CLO ones marketplace, Oftentimes, focused roughly funds. we there a coming

because one highlight leverage is XFLTs at this leverage first credit on The I'll is the point facility. those mainly the of loans, cost

of easy run leverage to CLO The leverage like of team pulling is the of and X.XX%. As facility shares And steady A cost management was focused X/XX, level. it's portfolio shares. the that mainly and leveraged maintaining those that X.XX%. that leverage down preferred average are funds ratios fund preferred the see incremental toggle between by and would X% quote end leverage credit to maintain benefit and

use preferreds. chunkier leverage CLO of little they have bit of mainly competitors issuance as Some a the

Another is or versus XF estimates quarterly valuation the marked like from competitors. thing we'd by is daily a asset to third And value highlight party. LT on some XFLT for net the done monthly is

XFLT fee. incentive just any fees, performance a have with not does it, Additionally, to moving fees or down fees management associated income flat

loan the the of funds higher funds. price, lower distribution be CLO the than market on it's It's of as going rates competitive. than equity-focused also slightly focused some Lastly, some expected, to but slightly

oftentimes to class group a at Lastly, net this value. premium asset in this trades asset

for X.XX%. the premium of was premium - had X.XX%. average was an value X/XX, last XX-month X And CLO of As funds, focused other net the they for to it XFLT then asset

focused the the group. main the of and is -- main with some are CLO those those differences are differences So that

Thanks, Stephen.

Gretchen. quick We've a one Just for the question prepared got audience. more for reminder

bottom your the have question, the we'll go Q&A audience. please of and your submit at question you to tool ask and If screen there, the a

Okay.

to coming forward? we - For CLO and see do what the for outlook couple correction, love have more a terrific. markets in, is going We'd your one question loan

to this sit notably interest rates. most the high form we for challenges At inflation rate doubt the point, camp. macro persist, No in still still of higher in high longer and

And challenges is we so And many in the that test our companies look loan expectation forward. have the will the market. syndicated certainly as broadly that of borrowed

and have distributions. Over losses the time, exhibited resilience CLO equity equity still increased seen At downgrades. them. continued same loans CLOs credit this these are CCC environments before, through positioned for supports and withstand cushions and robust well CLO to they've collateralization And loan

at levels the very both high front, sit historically. and CLO yields are tranches CLO/BB XX% sit XX-plus current loans to loan Technicals On markets XX%. current yields percent are at supportive. debt on in These the

we positioning have take are into look is we prepayments And issuance, issuance of which losses as CLO of We half XXXX, both the back modest are XXXX is historically forward fund really on loans time. at time, credit to same while most risk the supporting the net what disciplined steady. focused over and avoiding loan low

investment Steven free is, income But gross proportion the the Gretchen. costs? leverage the And to to audience. feel one question is have I in Great. do from question you, rising to of directed the Thank best is fund one you, We Gretchen, think comment. the rising

comments general twofold. free. please couple it's then the add a - of wants it Yes, is answer and And question. feel I'll good on give to that's anything, a

loans and On base spread. the seen base the interest have loan spread. And base and gone the rates the rates up, cost rates have rates plus as leverage you interest leverage side, gone or plus up. also we've The the rate on go have

it that to be from rates. with so seems perspective, lockstep increasing in the And

was earnings equity of was there LIBOR. headwind month a CLO a difference CLO in the equity On there the X to bit as of X-month and side, of the a little lag

that between spread initially equity. a of of so CLO caused bit earnings those a little to lag And X

has seen to little down, between that we've a as compressed income. more spread CLO incremental come them start and equity so And bit earn

and has And been so rates opportunity the leverage overall, arbitrage the using seen. increasing

declaration. saw in with we distribution with And the that the increase May

income rates And increase to the the investment fund. in so in increase for overall, has an corresponded

of Yes. timing of in phenomenon. that that I [indiscernible] of the would of the of run many was months, the for the the part, in referenced was LIBOR. shape XXXX its course. persistent So CLO X terms just and saw headwinds and a persistent temporary of distributions. is XXXX ermanent. of X that margin sort base referencing call or month But on liabilities structures, there various That back I the basis months. be the CLO of difference, may half That equity within is right? differences assets of rates the the a are we That always X CLO kind really has, underscore the function That most would a is a

basis -- a but of the difference. that the of difference the shift, is the Now permanent sort will -- amount

X leverage which but And the is assets, to the in SOFR, opposed in the earn which SOFR daily credit fund, the as months. of to references the case facility X

fund across the of of which, So all up debt, much slug moved there, result curve, think of play cost. very leverage but is the on sound points and have preferred base its I fund really in hasn't as has the of line course, the a that fixed the in of benefit moved punch benefited a the in is as little the the rates and different bit

that fund there benefit so and is fund to the the stream the distribution generates. a And net

Stephen, today check please Thank have webinar. available the website so our today, the joining Day happy and Stephen. for point, my Gretchen. I feel to Bye-bye. you, another hope summer. appreciate Thank final and you information on contact replay the and back. has Thanks of or any weeks weekend you, there everyone at additional quarterly Labor great will a Thank you. If us, questions, free be anybody thoughts to colleague, me additional contact

Thank you.

bye Good