XFLT 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: September 30, 2024

Item 1. Reports to Stockholders.

XAI Octagon Floating Rate & Alternative Income Trust

SHAREHOLDER LETTER

September 30, 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 fiscal year ended September 30, 2024 (the “Period”). During the Period, we observed decreasing inflation levels and the first interest rate cut by the U.S. Federal Reserve (the “Fed”) since March 2020, signaling that the Fed believes inflation is coming under control. The Consumer Price Index started the Period at 3.7% and ended the Period at 2.4%.¹  Despite continued economic uncertainty surrounding the future path of interest rates and inflation, the U.S. economy remained resilient during the Period but has started to show signs of moderation, as evidenced by slight increases in unemployment and moderating GDP growth.

During the Period, the U.S. added approximately 2.4 million jobs, as measured by nonfarm payroll figures,²  while the September 2024 unemployment rate remains healthy at 4.1%, up slightly from 3.8% at the beginning of the period.³  Q2 2024 real GDP increased 3.0% quarter-over-quarter, with the advance estimate of Q3 2024 real GDP expected to slow slightly to 2.8% as of October 30, 2024.⁴  The Fed lowered interest rates once during the Period at their September meeting for a decrease of 0.50%. The outcome of the Fed’s monetary easing, its impact on the U.S. economy, and the future path of inflation and employment data, 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 U.S. Leveraged Loan Index (the “Morningstar LLI”) returned 9.59% during the Period.⁵  Loan performance over the Period was buoyed by higher reference rates, an encouraging economic outlook providing support for credit fundamentals, broadly positive corporate earnings results, and favorable market technical indicators. The trailing 12-month default rate for the Morningstar LLI decreased to 0.80% as of September 30, 2024, compared to 1.34% as of September 30, 2023.⁶ 

For the Period, the S&P 500 Index, the Bloomberg U.S. Corporate High Yield Index, and the Trust’s benchmark, the Morningstar LSTA U.S. Leveraged Loan 100 Index, generated total returns of 36.35%, 15.74%, and 9.47%, respectively.⁵ 

The Trust’s net asset value (“NAV”) decreased during the Period by 0.60% from $6.67 per common share to $6.63 per common share as of September 30, 2024, resulting in a total return (including the reinvestment of dividends) of 15.27%.

During the Period, the Trust declared monthly distributions totaling an aggregated $1.02 per common share. The monthly distribution of $0.085 per common share declared on September 1, 2024, represented an annualized distribution rate of 14.96% based on the Trust’s closing market price of $6.82 per common share on September 30, 2024.

The market price per common share of $6.82 on September 30, 2024, represented a 2.87% premium to the Trust’s NAV of $6.63 per common share. During the Period, the Trust’s common shares traded on average at a 3.76% premium to NAV. From the Trust’s IPO on September 27, 2017, through September 30, 2024, the Trust’s common shares have traded on average at a 3.38% premium to NAV.

We continue to seek operational scale by increasing the Trust's common assets. During the Period, the Trust issued an additional 14,671,183 common shares pursuant to an at-the-market (“ATM”) offering program, resulting in $102,639,781 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, receiving proceeds of 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, $20,000,000 of the Trust’s 6.00% Series 2029 Convertible Preferred Shares were converted to common shares in three separate conversions resulting in the issuance of an additional 2,876,677 common shares. $15,000,000 of the Trust’s 6.95% Series 2029 Convertible Preferred Shares also converted to common shares in two separate conversions totaling 2,172,264 in common shares issued. The share issuances were completed upon conversion of the Convertible Preferred Shares at an average conversion price above the Trust’s NAV per common share.

On October 26, 2023, the Trust announced that the Trust’s Board of Trustees unanimously approved two proposals (together, the “Proposals”): (i) an amendment to the Trust’s declaration of Trust to eliminate the Trust’s termination; and (ii) a new sub-advisory agreement among Octagon Credit Investors LLC (“Octagon”), the Trust and XA investments LLC. At a special shareholder meeting on December 19, 2023, which was adjourned to January 24, 2024, the Proposals were approved by the Trust’s shareholders.

XAI Octagon Floating Rate & Alternative Income Trust

SHAREHOLDER LETTER

September 30, 2024 (Continued) (Unaudited)

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 new sub-advisory agreement allowed Octagon to remain the Trust’s sub-adviser upon closing of Generali Group’s acquisition of Octagon’s parent company, Conning Holdings, which was completed on April 3, 2024. There were no changes to the Trust’s investment policies, strategies, or portfolio management in conjunction with approval of the Proposals.

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

November 15, 2024

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
September 30, 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 and Head Strategic Initiatives 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 have historically used the one-month LIBOR as an interest rate benchmark, which was phased out on June 30, 2023, although one- three- and six-month U.S. dollar LIBOR continued 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. “LIBOR” stands for London Interbank Offered Rate and was the benchmark rate that most of the world’s leading banks charged 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 Federal Bank of New York, 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.

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 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 market conditions for leveraged loans during the fiscal year ended September 30, 2024, and Octagon’s outlook.

US leveraged loans returned 9.59% during the 12 months ended September 30, 2024 (the “Period”), as measured by the Morningstar LSTA US Leveraged Loan Index (the “Morningstar LLI”).¹  Loan performance over the Period was buoyed by higher reference rates, an encouraging economic outlook providing support for credit fundamentals, broadly positive corporate earnings results, and favorable market technicals. With an annual return of 13.32%, loans produced quarterly returns of 2.46%, 1.90%, and 2.04% in the first, second, and third quarters of 2024, respectively.1 Loans have gained 6.54% year-to-date as of September 30, 2024, trailing the first nine months of 2023 (+10.16%) but outperforming comparable periods in 2020, 2021 and 2022.² 

Lower-rated loans outperformed their higher quality cohorts during the Period as investors generally maintained a healthy appetite for risk assets.¹  The share of performing loans priced below 80 in the Morningstar LLI decreased to a multi-year low of 3.35% as of February 28, 2024 before modestly increasing to 4.47% as of May 31, 2024, then gradually declining to 3.43% as of September 30, 2024.¹  Loan ratings downgrades have continued to outpace upgrades over the course of 2024 (albeit at a slower pace than observed in 2023), thereby contributing to increased performance dispersion among loan borrowers.³  The trailing 12-month (“LTM”) default rate for the Morningstar LLI decreased to 0.80% as of September 30, 2024, compared to 1.34% as of September 30, 2023 (calculated on a par amount basis).⁴  While conventional defaults (i.e., due to missed payments and bankruptcy filings) declined over the Period, the count of distressed exchanges increased. 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 among troubled companies and their lenders as a means to reduce debt while avoiding most costly bankruptcy proceedings. Inclusive of conventional/payment defaults and distressed exchanges, the trailing 12-month dual-track default rate for the Morningstar LLI (calculated on an issuer count basis) was 4.21% as of September 2024,⁵  which compares to 3.17% as of September 30, 2023.⁵ 

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
September 30, 2024 (Continued) (Unaudited)

In the wake of relatively subdued primary loan market activity in 2023, gross new loan issuance has surged in 2024, as robust demand, continued price appreciation, and a lack of true new issue loan supply drove record-setting loan repricing and refinancing volumes, particularly in the first half of this year.⁶  Year-to-date gross loan supply totals $958.8 billion as of September 30, 2024, with repricings and refinancings accounting for 72% of total supply, compared to 53% over the same period in 2023.⁶  Loan borrowers have taken advantage of accommodating market conditions to reduce interest expense or extend maturities (or both); year-to-date as of September 30, 2024, 61% of all outstanding loans in the Morningstar LLI have either been paid down, repriced, or extended.6 Drilling down, over $500 billion of institutional term loans have been repriced between January and September 2024 (including re-syndicated repricings), in turn lowering the borrowing spread by 0.53% (on average) which translates to $2.7 billion of annual interest savings for those loan issuers.⁶  Further, the amount of loans coming due between 2024-2026 decreased by 65% in the year-to-date period ending September 30, 2024.⁷  We believe the improvement in the near-term maturity wall bodes well for loan defaults and credit stress.

Following record-level repricing and refinancing volumes in the first and second quarters of 2024, the pace of opportunistic primary market activity decelerated in the third quarter, as better visibility on interest rates helped to boost M&A-backed loan issuance in September 2024. Net loan supply (funding buyouts, add-on acquisitions, other corporate M&A transactions, and recapitalizations) totaled $80.6 billion in the third quarter of 2024 (or 36% of total quarterly new loan issuance), an encouraging increase from an approximate $55 billion quarterly average in the first half of 2024, and $24.3 billion in the fourth quarter of 2023).⁶  Year-to-date net loan supply totals $192.1 billion as of September 30, 2024, in line with the 10-year average, and considerably higher than the 12-year low of $73 billion issued over the same period in 2023.⁶ 

Heavy CLO supply provided strong technical support for the loan market over the Period. New CLO issuance set a record pace in the first half of 2024 amid record-level loan refinancing activity and continued tightening in CLO liability spreads.⁶  Of the $141.9 billion of new CLOs priced year-to-date as of September 30, 2024, broadly syndicated loan (“BSL”) CLOs accounted for $114.7 billion.⁸  Following consecutive monthly inflows in 2024, retail loan funds reported net outflows in August and September 2024, reflecting shifting rate expectations. Year-to-date as of September 30, 2024, retail loan funds have recorded $9.8 billion of net inflows, compared to -$17.8 billion of outflows over the same period in 2023.⁹ 

Despite declining base rates, we believe loans offer attractive relative value with average yields north of 9% as of September 30, 2024.¹⁰  Lower base rates should ease interest burdens and generally benefit credit fundamentals for loan borrowers, further supported by improved liquidity profiles and steady operating performance over the Period. Further, we believe lower interest rates should bode well for M&A-backed loan issuance, in turn supporting continued CLO formation.

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

In tandem with positive performance for loans, CLO debt tranches produced healthy returns over the Period that ranged from 7.69% for AAA rated tranches to 26.55% for B rated tranches, as measured by the J.P. Morgan Collateralized Loan Obligation Index (“CLOIE”).¹⁰  CLO mezzanine tranches (rated BB and B, which comprise the majority of the Trust’s CLO debt holdings) returned 23.40% for the Period.10 Primary CLO liability spreads tightened over the Period, amid heavy new CLO supply, a wave of loan repricings, and increased demand from both institutional and retail CLO AAA investors.⁶  The weighted average cost of liabilities across the capital stack for broadly syndicated loan (“BSL”) CLOs priced in the third quarter of 2024 was SOFR + 1.76%, approximately 0.69% tighter than the average in the third quarter of 2023, reflective of spread compression over the Period ranging from 0.49% for primary CLO AAAs to 1.86% for CLO BBBs.⁶ 

With $141.9 billion of new deals priced year-to-date as of September 30, 2024, primary CLO issuance is running 80% ahead of last year’s pace.⁶  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 2024.⁶  Year-to-date CLO reset volume totaled $142.8 billion as of September 30, 2024 (surpassing the calendar-year record set in 2021), in addition to $59.9 billion of refinancings over the same period.⁸  The momentum is expected to continue through year-end; several sell-side CLO strategists recently raised their projections for full-year 2024 CLO reset and refinancing volumes.¹¹  Refinancings and resets of CLOs held by the Trust may be accretive to the Trust; not only do CLO refinancings and resets help to offset the impact of loan repricings and spread compression, CLO resets can also provide an opportunity to improve collateral portfolio quality (in some instances, before pricing a reset, a CLO manager will sell higher priced CCC loans in an effort to reduce portfolio risk, as capital injections from CLO equity holders provide cash to rebuild par loss). Furthermore, CLO resets extend the weighted average reinvestment period of the underlying CLO equity positions in the Trust’s portfolio.

Record gross CLO issuance in 2024 has been offset by CLO amortizations and liquidations. Year-to-date as of September 30, 2024, amortizations and liquidations of post-reinvestment period (“RP”) CLO liabilities total roughly $97 billion, reflecting the impact of elevated loan repayments and the sizeable share of post-RP CLOs.¹²  Year-to-date net BSL CLO supply totaled an estimated $14 billion as of September 30, 2024, while year-to-date CLO AAA net supply is running at a deficit (-$12 billion as of September 30, 2024) given the heavy volume of AAA principal payments and called CLOs.¹² 

In addition to continued demand from traditional institutional CLO buyers (i.e., U.S. and Japanese banks, insurance companies, etc.), during the Period we observed rapidly increasing demand from CLO exchange-traded funds (ETFs), particularly for CLO AAA tranches. CLO ETFs represent the largest source of net CLO AAA demand this year and hold an outsized share of CLOs newly issued or reset in 2024.¹³  Despite shifting rate expectations, the size of the CLO ETF complex has grown to over $16 billion in AUM as of September 30, 2024.¹⁴  We expect demand for CLO AAAs to remain strong in the near-term, which may lead to further CLO spread compression.

Overall credit metrics for BSL CLO collateral portfolios were broadly stable during the Period; in our view, lower interest rates should ease loan borrowers’ interest expenses, in turn further mitigating tail risk in CLO portfolios. The median S&P CCC concentration in reinvesting BSL CLO portfolios gradually declined over the Period from 6.3% as of September 2023 to 5.4% as of September 2024, reflecting sales of CCC loans from CLO resets, regular trading activities in non-reset deals, higher deal call volume, and ratings migrations in and out of the CCC bucket (upgrades or downgrades to D or SD).¹⁵  Junior overcollateralization ratio test cushions for reinvesting BSL CLOs generally remain healthy at a median level of 4.7% as of September 30, 2024, in line with the September 2023 median.¹⁵ 

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
September 30, 2024 (Continued) (Unaudited)

After reaching a multi-year peak in April 2024, the median equity distribution for reinvesting CLOs decreased moderately quarter-over-quarter in July 2024 to 4.0% of notional value, and to 3.7% in October 2024, reflecting the impact of weighted average spread compression.¹⁵  In the near-term, quarterly CLO equity payments are projected to decline due to the impact of loan repricings and lower base rates, though a delayed rate cut could marginally boost January 2025 equity distributions.¹⁶  While continued loan repricing activity and declining rates may weigh on quarterly equity payments, improved credit fundamentals and tighter CLO liability costs should support optionality value for CLO equity.¹⁶  We hold a generally favorable view of CLO equity and CLO debt tranches, which currently offer incremental yield relative to similarly rated credit assets.¹⁶ 

How did the Trust perform for the period?

During the Period, the Trust’s total return based on market price was 13.80% and total return based on net asset value (“NAV”) was 15.27%. 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 September 30, 2024, the Trust’s market price of $6.82 represented a premium of 2.87% to its NAV of $6.63. 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.

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 share declared on September 1, 2024 represented an annualized distribution rate of 14.96% based on the Trust’s closing market price of $6.82 per common share on September 30, 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 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 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 $0.68 per share for the Period, followed by the Trust’s performing loan investments, which produced a net gain of $0.50 per share. During the Period, the Trust’s CLO equity positions collected quarterly distribution payments totaling $57,219,745 or $1.03 per share, which were offset by unrealized market value losses of $11,558,494 or -$0.21 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 $0.29 per share and $0.05 per share, respectively, for the Period.

Relevant indices for the markets in which the Trust invests include the Trust’s benchmark, the Morningstar LSTA US Leveraged Loan 100 Index, which returned 9.49% for the Period, the Bloomberg US Corporate High Yield Index, which returned 15.74% for the Period, and the JP Morgan BB/B CLO Debt Index, which returned 23.40% for the Period. There is no representative benchmark index for CLO equity in the marketplace.

Discuss the Trust’s issuance of additional common shares.

During the Period, the Trust issued 14,671,183 common shares pursuant to an at-the-market (“ATM”) offering program resulting in $102,639,781 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 per common share. 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 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 at an average 3.76% premium to NAV and had an average daily trading volume of 391,149 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 ATM program, $20,000,000 of the Trust’s 6.00% Series 2029 Convertible Preferred Shares were converted to common shares in three separate conversions resulting in the issuance of an additional 2,876,677 common shares. $15,000,000 of the Trust’s 6.95% Series 2029 Convertible Preferred Shares also converted to common shares in two separate conversions totaling 2,172,264 in common shares issued. The share issuances were completed upon the conversion of the Convertible Preferred Shares at an average conversion price above NAV per common share.

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 6.95%, 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 September 30, 2024, the amount of outstanding borrowings under the facility was $204,050,000, which represented approximately 27.29% of the Trust’s Managed Assets (including the proceeds from borrowing). As of September 30, 2024, the 6.95% Series 2029 Convertible Preferred Shares and 6.95% Series II 2029 Convertible Preferred Shares represented an aggregate liquidation preference of $45,000,000.

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
September 30, 2024 (Continued) (Unaudited)

The Trust also had 6.50% Series 2026 Preferred Shares outstanding with a total liquidation preference of $39,900,000. Total leverage was $288,950,000 as of September 30, 2024, representing 38.65% of the Trust’s Managed Assets.

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 US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

The J.P. Morgan CLO Debt Index represents the 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 LLI is a market-value weighted index designed to measure the performance of the U.S. leveraged loan market. The index universe comprises syndicated, senior secured, U.S.-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 U.S. 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.

XAI Octagon Floating Rate & Alternative Income Trust

QUESTIONS & ANSWERS
September 30, 2024 (Continued) (Unaudited)

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.

XAI Octagon Floating Rate & Alternative Income Trust

TRUST PORTFOLIO INFORMATION
September 30, 2024 (Unaudited)

Growth of a $10,000 Investment (as of September 30, 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 September 30, 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
September 30, 2024 (Continued) (Unaudited)

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

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

September 30, 2024

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

September 30, 2024 (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

September 30, 2024 (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

September 30, 2024 (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

September 30, 2024 (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

September 30, 2024 (Continued)

See Notes to Financial Statements.

XAI Octagon Floating Rate & Alternative Income Trust

SCHEDULE OF INVESTMENTS

September 30, 2024 (Continued)

See Notes to Financial Statements.