N-Q 1 fp0035483_nq.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

 

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)

 

John P. McGarrity, 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: April 1, 2018 – June 30, 2018

 

 

 

Item 1. Schedule of Investments.

 

XAI Octagon Floating Rate & Alternative Income Term Trust

 

Schedule of Investments

June 30, 2018 (Unaudited)      

 

      

Reference Rate

  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
CORPORATE BONDS - 4.48%* (2.96% of Total Investments)        
Wireless Telecommunication Services - 0.47% (0.31% of Total Investments)        
Digicel Group, Ltd., Senior Unsecured(b)   8.25%  N/A   09/30/2020   $500,000   $373,750 
                        
Hotels, Restaurants & Leisure - 1.77% (1.17% of Total Investments)                  
Golden Nugget, Inc., Subordinated(b)   8.75%  N/A   10/01/2025    1,000,000    1,029,710 
IRB Holding Corp., Senior Unsecured(b)   6.75%  N/A   02/15/2026    400,000    382,612 
Total Hotels, Restaurants & Leisure                1,400,000    1,412,322 
                        
Pharmaceuticals - 1.72% (1.14% of Total Investments)                       
Mallinckrodt International Finance SA, Senior Unsecured   4.75%  N/A   04/15/2023    250,000    209,375 
Mallinckrodt International Finance SA / Mallinckrodt CB, LLC, Senior Unsecured(b)   5.75%  N/A   08/01/2022    250,000    225,000 
Valeant Pharmaceuticals International, Inc., Senior Unsecured(b)   9.25%  N/A   04/01/2026    500,000    520,625 
Valeant Pharmaceuticals International, Inc., Senior Unsecured(b)   9.00%  N/A   12/15/2025    400,000    415,500 
Total Pharmaceuticals                1,400,000    1,370,500 
                        
Internet Software & Services - 0.52% (0.34% of Total Investments)                   
Veritas US, Inc. / Veritas Bermuda, Ltd., Senior Unsecured(b)   10.50%  N/A   02/01/2024    500,000    410,000 
                        
Total Corporate Bonds (Cost $3,736,283)                3,800,000    3,566,572 
                        
SECURED SECOND LIEN LOANS(c) - 12.07% (7.97% of Total Investments)               
Chemicals - 0.31% (0.20% of Total Investments)                       
Utex Industries, Inc., Initial Term Loan   9.34%  1M US L + 7.25%   05/22/2022    250,000    244,582 
                        
Commercial Services & Supplies - 1.00% (0.66% of Total Investments)                   
AVSC Holding Corp., Initial Term Loan   9.34%  1M US L + 7.25%   09/01/2025    805,556    798,169 
                        
Diversified Financial Services - 0.13% (0.09% of Total Investments)                   
Blackhawk Network Holdings, Inc., Term Loan   9.13%  3M US L + 7.00%   05/25/2026    103,452    103,883 
                        
Electronic Equipment, Instruments & Components - 0.32% (0.21% of Total Investments)               
LTI Holdings, Inc., Initial Term Loan   10.84%  1M US L + 8.75%   05/16/2025    250,000    252,500 
                        
Health Care Providers & Services - 0.34% (0.23% of Total Investments)                   
Gentiva Health Services, Inc. (Kindred at Home), Second Lien Initial Term Loan(d)   N/A   L + 7.00%   06/22/2026    190,480    192,385 
Sound Inpatient Physicians Inc., Second Lien Initial Term Loans(d)   N/A   L + 6.75%   06/26/2026    78,125    78,125 
Total Health Care Providers & Services                268,605    270,510 
                        
Hotels, Restaurants & Leisure - 1.50% (0.99% of Total Investments)                   
Affinity Gaming, LLC, Initial Term Loan   10.34%  1M US L + 8.25%   01/31/2025    392,857    387,290 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
SECURED SECOND LIEN LOANS(c) (continued)        
Hotels, Restaurants & Leisure (continued)        
Golden Entertainment, Inc., Term B Facility Loan   9.10%  1M US L + 7.00%   10/20/2025   $800,000   $809,000 
Total Hotels, Restaurants & Leisure                1,192,857    1,196,290 
                        
Insurance - 2.17% (1.43% of Total Investments)                       
Asurion, LLC, Replacement B-2 Term Loan   8.09%  1M US L + 6.00%   08/04/2025    1,700,000    1,723,375 
                        
Media - 0.84% (0.56% of Total Investments)                       
Red Ventures, LLC & New Imagitas, Inc., Term Loan   10.09%  1M US L + 8.00%   11/08/2025    662,500    671,609 
                        
Real Estate Investment Trusts (REITs) - 1.02% (0.67% of Total Investments)                   
Capital Automotive LP, New Term Loan   8.09%  1M US L + 6.00%   03/24/2025    807,643    811,011 
                        
Software - 4.28% (2.83% of Total Investments)                       
Finastra Group Holdings Limited, Dollar Term Loan   9.56%  3M US L + 7.25%   06/13/2025    1,700,000    1,634,652 
McAfee, LLC, Initial Term Loan   10.59%  1M US L + 8.50%   09/29/2025    1,000,000    1,014,000 
Micro Holding Corp. & MH Sub I, LLC, Term Loan   9.59%  1M US L + 7.50%   09/15/2025    750,000    754,688 
Total Software                3,450,000    3,403,340 
                        
Transportation Infrastructure - 0.16% (0.10% of Total Investments)                   
Direct Chassislink, Inc., Term Loan   8.09%  1M US L + 6.00%   06/15/2023    123,711    124,639 
                        
Total Secured Second Lien Loans (Cost $9,695,908)                9,614,324    9,599,908 
                        
SENIOR SECURED FIRST LIEN LOANS(c) - 61.21% (40.44% of Total Investments)               
Aerospace & Defense - 1.19% (0.79% of Total Investments)                       
Constellis Holdings, LLC, Term B Loan   7.33%  3M US L + 5.00%   04/21/2024    766,383    768,299 
Vertex Aerospace Services Corporation, Initial Term Loan(d)   N/A   L + 4.75%   06/16/2025    178,571    179,464 
Total Aerospace & Defense                944,954    947,763 
                        
Auto Components - 0.87% (0.57% of Total Investments)                       
Bright Bidco B.V. (Lumileds), Refinancing Term B Loan   5.76%  1M US L + 3.50%   06/30/2024    694,750    688,845 
                        
Automobiles - 0.62% (0.41% of Total Investments)                       
Truck Hero, Inc., Initial Term Loan   5.84%  1M US L + 3.75%   04/22/2024    496,241    495,412 
                        
Building Products - 1.11% (0.73% of Total Investments)                       
SRS Distributions, Inc. (fka Shingle Aquisition Intermediate, Inc.), Initial Term Loan   5.58%  3M US L + 3.25%   05/23/2025    898,876    884,647 
                        
Chemicals - 1.64% (1.08% of Total Investments)                       
Graftech Finance, Inc., Initial Term Loan   5.59%  1M US L + 3.50%   02/12/2025    663,265    658,708 
Solenis International, L.P., Initial Dollar Term Loan(d)   N/A   L + 4.00%   12/26/2023    649,351    647,306 
Total Chemicals                1,312,616    1,306,014 
                        
Commercial Services & Supplies - 1.57% (1.04% of Total Investments)                   
Genuine Financial Holdings, LLC (HireRight), Initial Term Loan (Early July EST)(d)   N/A   L + 3.75%   06/27/2025    773,913    772,946 
Harland Clarke Holdings Corp., Fronting Initial Term Loan (B-7)   7.08%  3M US L + 4.75%   11/03/2023    492,812    478,850 
Total Commercial Services & Supplies                1,266,725    1,251,796 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
SENIOR SECURED FIRST LIEN LOANS(c) (continued)        
Communications Equipment - 0.91% (0.60% of Total Investments)        
Global Tel Link Corp., Term Loan   6.33%  3M US L + 4.00%   05/23/2020   $459,854   $460,810 
Intelsat Jackson Holdings S.A., Term B-4 Loan   6.60%  1M US L + 4.50%   01/02/2024    253,165    262,420 
Total Communications Equipment                713,018    723,230 
                        
Construction & Engineering - 1.86% (1.23% of Total Investments)                   
Brand Energy & Infrastructure Services, Initial Term Loan   6.61%  3M US L + 4.25%   06/21/2024    744,361    744,919 
KBR, Inc., Term B Loan   5.84%  1M US L + 3.75%   04/25/2025    737,762    737,762 
Total Construction & Engineering                1,482,123    1,482,681 
                        
Containers & Packaging - 0.13% (0.08% of Total Investments)                    
Flex Acquisition Company, Inc. (fka Hilex Poly Company // Novolex), Incremental B-2018 Term Loan (6/29/18)(d)   5.75%  3M US L + 3.25%   06/29/2025    99,502    99,212 
                        
Diversified Consumer Services - 0.22% (0.15% of Total Investments)                   
University Support Services LLC (St. George's University Scholastic Services, LLC)                       
Delayed Draw Term Loan (7/17/18)(d)   N/A   L + 3.50%   06/20/2025    42,021    41,916 
Term Loan (7/17/18)(d)   N/A   L + 3.50%   06/20/2025    135,067    134,729 
Total Diversified Consumer Services                177,088    176,645 
                        
Diversified Financial Services - 0.54% (0.35% of Total Investments)                   
Pi US Mergerco, Facility B1 Loan   5.59%  1M US L + 3.50%   01/03/2025    432,414    425,928 
                        
Diversified Telecommunication Services - 2.60% (1.72% of Total Investments)                 
Syniverse Holdings, Inc., Tranche C Term Loan   7.05%  1M US L + 5.00%   03/09/2023    780,169    778,546 
TDC A/S (US Newco Co-Borrower), Facility B2 (USD) Loan(d)   N/A   L + 3.50%   06/11/2025    609,442    607,730 
Wide Open West Finance, LLC, Refinancing Term B Loan   5.34%  1M US L + 3.25%   08/18/2023    719,563    685,383 
Total Diversified Telecommunication Services                2,109,173    2,071,659 
                        
Electrical Equipment - 1.09% (0.72% of Total Investments)                       
Al Ladder (Luxembourg) Subco S.ar.l. (Laird Technologies), Facility B(d)   N/A   L + 4.50%   05/02/2025    535,088    532,188 
Energy Acquisition (Electrical Components International, Inc.), Initial Term Loan(d)   N/A   L + 4.25%   06/26/2025    338,710    335,746 
Total Electrical Equipment                873,798    867,934 
                        
Electronic Equipment, Instruments & Components - 3.11% (2.05% of Total Investments)               
C1 Holdings Corp. (ConvergeOne), Term Loans   5.84%  1M US L + 3.75%   04/10/2025    746,241    742,980 
LTI Holdings, Inc.                       
Initial Term Loan   6.84%  1M US L + 4.75%   05/16/2024    490,038    488,812 
Second Amendment Incremental Term Loan   5.59%  1M US L + 3.50%   05/16/2024    245,000    244,694 
Mavenir Systems, Inc., Initial Term Loan   8.03%  1M US L + 6.00%   05/08/2025    1,000,000    997,500 
Total Electronic Equipment, Instruments & Components                2,481,278    2,473,986 
                        
Energy Equipment & Services - 3.23% (2.13% of Total Investments)                   
KCA Deutag US Finance, 2018 Extended Term Loan   9.08%  3M US L + 6.75%   05/17/2021    996,288    991,058 
McDermott Technology, Inc. and McDermott Technology, B.V. (fka McDerott Finance LLC), Term Loan   7.09%  1M US L + 5.00%   05/12/2025    911,178    914,595 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
SENIOR SECURED FIRST LIEN LOANS(c) (continued)        
Energy Equipment & Services (continued)        
Seadrill Partners Finco, LLC, Initial Term Loan   8.33%  3M US L + 6.00%   02/21/2021   $740,923   $662,407 
Total Energy Equipment & Services                2,648,389    2,568,060 
                        
Food Products - 0.30% (0.20% of Total Investments)                       
H-Food Holdings, LLC. (fka Hearthside Food Solutions), Initial Term Loan   5.09%  1M US L + 3.00%   05/23/2025    238,267    235,789 
                        
Health Care Equipment & Supplies - 0.13% (0.09% of Total Investments)                   
Medplast Holdings, Inc., Initial Term Loan (Late lune/Early July)(d)   N/A   L + 3.75%   07/02/2025    102,190    101,999 
                        
Health Care Providers & Services - 3.46% (2.28% of Total Investments)                   
Air Medical Group Holdings, Inc. (AMGH Holding Corp.), Term Loan   5.28%  1M US L + 3.25%   04/28/2022    468,927    454,958 
BW NHHC Holdco, Inc. (Jordan Health Services), Initial Term Loan   7.07%  1M US L + 5.00%   05/15/2025    877,358    865,847 
Diplomat Pharmacy, Inc., Initial Term B Loan   6.60%  1M US L + 4.50%   12/20/2024    226,397    226,397 
Gentiva Health Services, Inc. (Kindred at Home)                       
Delayed Draw Initial Term Loan(d)   N/A   L + 3.75%   07/02/2025    311,177    308,843 
First Lien Initial Term Loan(d)   N/A   L + 3.75%   07/02/2025    497,884    494,150 
Medical Solutions Holdings, Inc., Closing Date Term Loan   5.84%  1M US L + 3.75%   06/14/2024    223,583    223,118 
Quorum Health, Term Loan   8.84%  1M US L + 6.75%   04/29/2022    173,913    176,652 
Total Health Care Providers & Services                2,779,239    2,749,965 
                        
Health Care Technology - 1.10% (0.73% of Total Investments)                   
Inovalon Holdings, Inc., Closing Date Term Loan   5.56%  1M US L + 3.50%   04/02/2025    900,929    875,027 
                        
Hotels, Restaurants & Leisure - 2.78% (1.84% of Total Investments)                  
Casablanca US Holdings, Inc. (Apple Leisure Group), Amendment No. 2 Initial Term Loan   6.10%  2M US L + 4.00%   03/29/2024    844,106    839,885 
CEC Entertainment, Term B Loan   5.34%  1M US L + 3.25%   02/12/2021    586,317    544,788 
Kingpin Intermediate Holdings, LLC, Initial Term Loan   6.35%  1M US L + 4.25%   07/03/2024    248,120    247,500 
Red Lobster Management, LLC (fka Red Lobster/Darden Resturant), Initial Term Loan   7.34%  1M US L + 5.25%   07/28/2021    249,352    248,106 
Stars Group Holdings, LLC (fka Amaya Holdings), Term Loan(d)   N/A   L + 3.50%   06/27/2025    332,282    332,282 
Total Hotels, Restaurants & Leisure                2,260,177    2,212,561 
                        
Household Products - 1.20% (0.79% of Total Investments)                       
American Greetings Corp., Initial Term Loan   6.59%  1M US L + 4.50%   04/06/2024    457,831    460,120 
TKC Holdings, Inc., Initial Term Loan   5.85%  1M US L + 3.75%   02/01/2023    496,231    494,524 
Total Household Products                954,062    954,644 
                        
Industrial Conglomerates - 1.64% (1.08% of Total Investments)                   
Blount International, Inc., Initial Term Loan   6.23%  1M US L + 4.25%   04/12/2023    748,125    751,402 
WireCo WorldGroup, Inc., Initial Term Loan   7.09%  1M US L + 5.00%   09/29/2023    547,989    550,043 
Total Industrial Conglomerates                1,296,114    1,301,445 
                        
Insurance - 1.07% (0.71% of Total Investments)                       
Asurion, LLC, New B-7 Term Loan(d)   N/A   L + 3.00%   11/03/2024    855,422    853,283 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
SENIOR SECURED FIRST LIEN LOANS(c) (continued)        
Internet Software & Services - 2.37% (1.57% of Total Investments)        
EIG Investors Corp. (Endurance Internatioanl Group), Term Loan (2018)   6.07%  2M US L + 3.75%   02/09/2023   $465,612   $464,644 
Quest Software US Holdings, Inc., One Identity US Holdings LLC, Quest Intenational, LLC, Term Loan (First Lien)   6.58%  3M US L + 4.25%   05/16/2025    515,625    513,263 
Veritas US, Inc., Initial Dollar Term B-1 Loan   6.65%  3M US L + 4.50%   01/27/2023    992,462    907,111 
Total Internet Software & Services                1,973,700    1,885,018 
                        
IT Services - 4.64% (3.07% of Total Investments)                       
Avaya, Inc., Tranche B Term Loan   6.32%  1M US L + 4.25%   12/15/2024    967,740    968,350 
Ion Trading Technologies, S.A.R.L., Dollar Term Loan (EST July 1)(d)   N/A   L + 4.00%   11/21/2024    941,935    932,516 
SCS Holdings I, Inc., Term B Loan   6.34%  1M US L + 4.25%   10/30/2022    708,811    709,109 
West Corp., Term B Loan   6.09%  1M US L + 4.00%   10/10/2024    743,176    739,832 
Zotec Partners, LLC, Term Loan   7.09%  1M US L + 5.00%   02/14/2024    343,021    343,020 
Total IT Services                3,704,683    3,692,827 
                        
Media - 2.64% (1.75% of Total Investments)                       
Houghton Mifflin Harcourt Publishers, Inc., Term Loan (May 2018 Secondary)   5.09%  1M US L + 3.00%   05/28/2021    406,171    377,942 
MediArena Acquisition B.V., Dollar Term B Loan   8.06%  3M US L + 5.75%   08/13/2021    247,426    246,860 
Red Ventures, LLC & New Imagitas, Inc., Term Loan   6.09%  1M US L + 4.00%   11/08/2024    992,500    996,430 
Univision (Umbrella Acquisition), 2017 Replacement Repriced First-Lien Term Loan (C-5)   4.84%  1M US L + 2.75%   03/15/2024    498,641    481,398 
Total Media                2,144,738    2,102,630 
                        
Metals & Mining - 0.63% (0.42% of Total Investments)                       
Big River Steel, Closing Date Term Loan   7.33%  3M US L + 5.00%   08/23/2023    496,250    502,146 
                        
Oil, Gas & Consumable Fuels - 2.37% (1.57% of Total Investments)                   
BCP Raptor, LLC (EagleClaw Midstream), Initial Term Loans   6.42%  2M US L + 4.25%   06/24/2024    249,370    243,448 
Brazos Delaware II, LLC, Initial Term Loans   6.09%  1M US L + 4.00%   05/21/2025    405,405    405,405 
EG America, LLC, Incremental Term Loan   6.33%  3M US L + 4.00%   02/06/2025    798,000    790,219 
Permian Production Partners, Initial Advances   8.09%  1M US L + 6.00%   05/20/2024    455,882    449,044 
Total Oil, Gas & Consumable Fuels                1,908,657    1,888,116 
                        
Personal Products - 1.35% (0.89% of Total Investments)                       
CNT Holdings III Corp., Term Loan   5.35%  1M US L + 3.25%   01/22/2023    496,222    483,816 
Revlon Consumer Products Corp., Initial Term B Loan   5.59%  1M US L + 3.50%   09/07/2023    769,129    592,229 
Total Personal Products                1,265,350    1,076,045 
                        
Pharmaceuticals - 1.13% (0.75% of Total Investments)                       
HLF Financing US, LLC, Term Loan   7.59%  1M US L + 5.50%   02/15/2023    894,481    900,635 
                        
Professional Services - 1.78% (1.17% of Total Investments)                       
IG Investments Holdings, LLC (fka Igloo Merger Sub, LLC), Refinancing Term Loan   5.69%  3M US L + 3.50%   05/23/2025    850,189    847,358 
National Intergovernmental Purchasing Alliance Company AKA Omnia Partners, Initial Term Loans   6.08%  3M US L + 3.75%   05/23/2025    421,053    420,000 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
SENIOR SECURED FIRST LIEN LOANS(c) (continued)        
Professional Services (continued)        
Oasis Outsourcing Holdings, Inc., Tranche B-1 Term Loan(d)   N/A   L + 5.34%   06/30/2023   $146,269   $146,939 
Total Professional Services                1,417,511    1,414,297 
                        
Software - 6.09% (4.02% of Total Investments)                       
Blackboard, Inc., Term B-4 Loan   7.36%  3M US L + 5.00%   06/30/2021    496,212    468,508 
Cvent, Inc., Term B Loan   5.84%  1M US L + 3.75%   11/29/2024    220,789    220,237 
Digicert Holdings, Inc., Term Loan   6.84%  1M US L + 4.75%   10/31/2024    997,500    996,044 
Finastra Group Holdings Limited, Dollar Term Loan   5.81%  3M US L + 3.50%   06/13/2024    245,631    241,060 
Idera, Inc., Initial Term Loan   6.60%  1M US L + 4.50%   06/28/2024    496,241    500,791 
Legalzoom.com, Inc., Initial Term Loan   6.59%  1M US L + 4.50%   11/21/2024    563,426    564,835 
McAfee, LLC, Term Loan   6.59%  1M US L + 4.50%   09/30/2024    854,738    858,251 
Micro Holding Corp. & MH Sub I, LLC, Term Loan   5.84%  1M US L + 3.75%   09/13/2024    496,250    495,769 
Project Leopard Holdings, Inc. (Kofax), Repricing Term Loan   6.09%  1M US L + 4.00%   07/07/2023    496,256    495,636 
Total Software                4,867,044    4,841,131 
                        
Specialty Retail - 2.06% (1.36% of Total Investments)                       
General Nutrition Centers, Inc., Tranche B-2 Term Loans (eff. 2/28/18)(d)   10.85%  1M US L + 8.75%   03/04/2021    336,369    322,615 
Office Depot, Inc., Initial Term Loan   9.06%  3M US L + 7.00%   11/08/2022    408,975    418,177 
Payless, Inc.                       
Tranche A-1 Term Loan   10.33%  3M US L + 8.00%   02/10/2022    361,649    348,387 
Tranche A-2 Term Loan   11.33%  3M US L + 9.00%   08/10/2022    646,750    547,584 
Total Specialty Retail                1,753,743    1,636,763 
                        
Technology Hardware, Storage & Peripherals - 0.32% (0.21% of Total Investments)               
Internap Corporation f/k/a Internap Network Service, Initial Term Loan (2017)   7.80%  1M US L + 5.75%   04/06/2022    251,151    252,407 
                        
Textiles, Apparel & Luxury Goods - 0.74% (0.49% of Total Investments)                   
International Textile Group, Inc., Initial Term Loan   6.98%  1M US L + 5.00%   05/01/2024    589,431    592,013 
                        
Transportation Infrastructure - 2.00% (1.32% of Total Investments)                   
Uber Technologies, Inc., Term Loan   6.00%  1M US L + 4.00%   04/04/2025    729,839    731,357 
World Wide Express Global Logistics (aka Rep WWEX) Acquisition Parent, LLC, Term Loan(d)   N/A   L + 4.00%   02/03/2024    869,565    860,869 
Total Transportation Infrastructure                1,599,404    1,592,226 
                        
Wireless Telecommunication Services - 0.72% (0.48% of Total Investments)                   
Digicel International Finance, Ltd., Initial Term B Loan   5.61%  3M US L + 3.25%   05/27/2024    603,817    575,890 
                        
Total Senior Secured First Lien Loans (Cost $48,985,655)                49,487,306    48,700,669 
                        
CLO DEBT(c)(e)- 24.37% (16.10% of Total Investments)                       
Apidos, Series 2017-28A(b)   7.48%  3M US L + 5.50%   01/20/2031    1,000,000    1,002,698 
Carlyle Global Market Strategies, Ltd., Series 2013-3A(b)   7.85%  3M US L + 5.50%   10/15/2030    2,500,000    2,454,183 
CIFC Funding, Ltd.                       
Series 2015-1A(b)   8.36%  3M US L + 6.00%   01/22/2031    500,000    503,486 
Series 2017-2A(b)   8.31%  3M US L + 5.95%   04/20/2030    500,000    506,413 
Series 2017-5A(b)   8.45%  3M US L + 6.10%   11/16/2030    1,000,000    1,013,538 
Dryden, Ltd., Series 2018-64A(b)   7.82%  3M US L + 5.60%   04/18/2031    500,000    499,018 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
CLO DEBT(c)(e) (continued)        
Goldentree Loan Management, Ltd., Series 2017-1A(b)  7.96%   3M US L + 5.60%  04/20/2029   $1,000,000   $922,057 
Goldentree Loan Opportunities, Ltd., Series 2015-11A(b)   7.76%  3M US L + 5.40%   01/18/2031    750,000    735,196 
Highbridge Loan Management, Ltd.                       
Series 2014-3A(b)   8.86%  3M US L + 6.50%   07/18/2029    1,000,000    1,013,062 
Series 2017-11A(b)   10.21%  3M US L + 7.85%   05/06/2030    1,000,000    979,617 
Madison Park Funding, Ltd., Series 2015-17A(b)   9.84%  3M US L + 7.48%   07/21/2030    1,000,000    983,315 
Marble Point, Ltd., Series 2017-2A E(b)   7.96%  3M US L + 5.60%   12/18/2030    1,000,000    980,005 
Neuberger Berman, Ltd., Series 2013-14A(b)   8.81%  3M US L + 6.45%   01/28/2030    1,000,000    1,015,597 
OZLM Funding, Ltd.                       
Series 2012-1A(b)   9.03%  3M US L + 6.67%   07/23/2029    1,000,000    1,023,275 
Series 2018-22A(b)   7.01%  3M US L + 5.30%   01/17/2031    500,000    493,482 
Sound Point, Ltd.                       
Series 2013-1A(b)   7.86%  3M US L + 5.50%   01/26/2031    250,000    245,811 
Series 2017-4A(b)   7.24%  3M US L + 5.50%   01/20/2031    500,000    498,500 
Series 2018-2A(b)   8.34%  3M US L + 6.00%   07/26/2031    1,000,000    990,000 
Symphony, Ltd., Series 2016-18A(b)   8.71%  3M US L + 6.35%   01/23/2028    1,000,000    1,018,890 
THL Credit Wind River, Series 2017-4A(b)   8.13%  3M US L + 5.80%   11/20/2030    500,000    499,160 
Voya, Ltd.                       
Series 2013-1A(b)   8.83%  3M US L + 6.48%   10/15/2030    1,000,000    1,014,436 
Series 2013-2A(b)   7.94%  3M US L + 5.60%   04/25/2031    1,000,000    998,435 
Total CLO Debt (Cost $19,418,582)                19,500,000    19,390,174 
                        
CLO EQUITY(c)(e)(f)- 46.52% (30.73% of Total Investments)                   
ALM V, Ltd., Series 2012-5A(b)   N/A   Estimated yield of 10.17%   10/18/2027    2,000,000    1,163,454 
Anchorage Capital, Ltd., Series 2014-3RA(b)   N/A   Estimated yield of 8.63%   01/28/2031    1,400,000    1,260,239 
Apidos, Series 2017-28A(b)   N/A   Estimated yield of 8.81%   01/20/2031    3,500,000    3,316,169 
Ares, Ltd.                       
Series 2017-46A(b)   N/A   Estimated yield of 10.40%   01/15/2030    4,050,000    3,810,345 
Series 2018-47A(b)   N/A   Estimated yield of 12.65%   04/16/2030    2,000,000    1,804,030 
Carlyle Global Market Strategies, Ltd., Series 2013-1A(b)   N/A   Estimated yield of 11.83%   08/14/2030    3,500,000    2,962,124 
CIFC Funding, Ltd., Series 2017-5A(b)   N/A   Estimated yield of 9.93%   11/16/2030    3,000,000    2,747,427 
Dryden, Ltd., Series 2014-34A(b)   N/A   Estimated yield of 0.00%   10/15/2026    5,000,000    190,200 
Goldentree Loan Opportunities, Ltd., Series 2015-11A SUB(b)   N/A   Estimated yield of 13.29%   04/18/2027    2,500,000    1,846,668 
Madison Park Funding, Ltd., Series 2015-18A(b)   N/A   Estimated yield of 6.14%   10/21/2027    4,000,000    3,550,000 
Marble Point, Ltd., Series 2017-2A INC(b)   N/A   Estimated yield of 11.01%   12/18/2030    3,000,000    2,663,199 
OZLM, Ltd.                       
Series 2017-16A(b)   N/A   Estimated yield of 8.27%   05/16/2030    1,250,000    988,666 
Series 2017-19A(b)   N/A   Estimated yield of 9.61%   11/22/2030    3,500,000    2,957,773 
RR 1, LLC, Series 2017-1A(b)   N/A   Estimated yield of 7.23%   07/15/2029    4,500,000    3,507,134 
Thacher Park, Ltd., Series 2014-1A(b)   N/A   Estimated yield of 9.19%   10/20/2026    6,000,000    2,897,004 
Voya, Ltd., Series 2017-4A(b)   N/A   Estimated yield of 7.06%   10/15/2030    1,500,000    1,351,035 
Total CLO Equity (Cost $38,201,958)                50,700,000    37,015,467 

 

                 Shares      
MONEY MARKET MUTUAL FUNDS - 2.72% (1.80% of Total Investments)                   
Invesco Short Term Investments Trust Treasury Portfolio, Institutional Class                       
(1.750% 7-Day Yield)                2,163,019    2,163,019 
Total Money Market Mutual Funds (Cost $2,163,019)                2,163,019    2,163,019 

 

 

 

Total Investments - 151.37% (Cost $122,201,405)                    $120,435,809 
Liabilities in Excess of Other Assets - (2.70)%                     (2,006,089)
Leverage Facility - (48.85)%                     (38,865,000)
Net Assets - 100.00%                    $79,564,720 

 

*Amounts above are shown as a percentage of net assets as of June 30, 2018.
(a)The rate shown is the coupon as of the end of the reporting period.
(b)Security exempt from registration under Rule 144A of the Securities Act of 1933. Total market value of Rule 144A securities amounts to $59,762,838, which represents approximately 75.11% of net assets as of June 30, 2018. Such securities may normally be sold to qualified institutional buyers in transactions exempt from registration.
(c)Variable rate investment. Interest rates reset periodically. Interest rate shown reflects the rate in effect at June 30, 2018. For securities based on a published reference rate and spread, the reference rate and spread are indicated in the description above. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above.
(d)All or a portion of this position has not settled as of the period end. The interest rate shown represents the stated spread over the London Interbank Offered Rate ("LIBOR" or "L") or the applicable LIBOR floor; the Trust will not accrue interest until the settlement date, at which point LIBOR will be established. The total cost of securities purchased on a when issued or delivery delayed basis was $7,949,488 as of June 30, 2018.
(e)As a result of the use of significant unobservable inputs to determine fair value, these investments have been classified as Level 3 assets. See also footnote 2 for additional information.
(f)CLO subordinated notes and income notes are considered CLO equity positions. CLO equity positions are entitled to recurring distributions which are generally equal to the remaining cash flow of payments made by underlying securities less contractual payments to debt holders and fund expenses. The effective yield is estimated based upon the current projection of the amount and timing of these recurring distributions in addition to the estimated amount of terminal principal payment. Effective yields for the CLO equity positions are updated generally once a quarter or on a transaction such as a partial sale, add-on purchase, refinancing or reset. The estimated yield and investment cost may ultimately not be realized.

 

All securities held as of June 30, 2018 are pledged as collateral for the leverage facility.

 

 

 

XAI Octagon Floating Rate & Alternative Income Term Trust

Notes to Quarterly Schedule of Investments

June 30, 2018 (Unaudited)

 

1. ORGANIZATION

 

XAI Octagon Floating Rate & Alternative Income Term Trust (the “Trust”) is a recently-organized, diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust commenced operations on September 27, 2017.

 

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).

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates: The preparation of the schedule of investments in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the schedule of investments during the period reported. Actual amounts may differ from those estimates, and the valuations reflected in the schedule of investments may differ from the value the Trust ultimately realizes upon sale of the holdings. The Trust is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies in the Financial Accounting Standards Board Accounting Standards Codification Topic 946. The schedule of investments has been prepared as of the close of the New York Stock Exchange (“NYSE”) on June 29, 2018.

 

Portfolio Valuation: The net asset value per common share of the Trust is determined daily, on each day that the NYSE is open for trading, as of the close of regular trading on the NYSE (normally 4:00 p.m. ET). The Trust’s net asset value per common share is calculated by dividing the value of the Trust’s total assets, less its liabilities by the number of shares outstanding.

 

Securities Transactions and Investment Income: Investment security transactions are accounted for on a trade date basis. Dividend income is recorded on the ex-dividend date. Realized gains and losses from securities transactions and unrealized appreciation and depreciation of securities are determined using the identified cost basis method for financial reporting purposes.

 

Effective yields for the Trust’s CLO equity positions are monitored and evaluated at least on a quarterly basis, at the beginning of the period. The Trust also updates a CLO equity investment’s effective yield in each instance where there is a respective partial sale, add-on purchase, refinancing or reset involving the CLO equity investment held. At the initial assessment, or quarterly evaluation, the effective yield will be set to 0.00% if: (1) the aggregate projected amount of future recurring distributions is less than the amortized investment cost, and/or (2) notification has been received that the CLO will be redeemed, creating uncertainty with respect to the timing of future residual distributions. The future distributions

 

 

 

for CLO equity positions with a 0.00% effective yield, will be recognized solely as return of capital until the aggregate projected amount of future recurring distributions exceeds the amortized investment cost. To the extent there are additional distributions once the amortized cost equals zero, these amounts will be treated as interest income.

 

Fair Value Measurements: The Trust discloses the classification of its fair value measurements following a three-tier hierarchy based on the inputs used to measure fair value. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability that are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability that are developed based on the best information available.

 

Various inputs are used in determining the value of the Trust’s investments as of the end of the reporting period. When inputs used fall into different levels of the fair value hierarchy, the level in the hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The designated input levels are not necessarily an indication of the risk or liquidity associated with these investments.

 

These inputs are categorized in the following hierarchy under applicable financial accounting standards:

 

Level 1 – Unadjusted quoted prices in active markets for identical investments, unrestricted assets or liabilities that the Trust has the ability to access at the measurement date;
Level 2 – Quoted prices which are not active, quoted prices for similar assets or liabilities in active markets or inputs other than quoted prices that are observable (either directly or indirectly) for substantially the full term of the asset or liability; and
Level 3 – Significant unobservable prices or inputs (including the Trust’s own assumptions in determining the fair value of investments) where there is little or no market activity for the asset or liability at the measurement date.

 

The following is a summary of the inputs used to value the Trust’s investments as of June 30, 2018:

Investments in Securities at Value 

Level 1 -

Quoted Prices

  

Level 2 -

Significant

Observable Inputs

  

Level 3 -

Significant

Unobservable

Inputs

   Total 
Corporate Bonds  $–   $3,566,572    –   $3,566,572 
Secured Second Lien Term Loans   –    9,599,908    –    9,599,908 
Senior Secured First Lien Term Loans   –    48,700,669    –    48,700,669 
CLO Debt   –    –    19,390,174    19,390,174 
CLO Equity   –    –    37,015,467    37,015,467 
Money Market Mutual Funds   2,163,019    –    –    2,163,019 
Total  $2,163,019   $61,867,149   $56,405,641   $120,435,809 

 

The Trust recognizes transfers between the levels as of the end of the period. For the period ended June 30, 2018, the Trust did not have any transfers between Level 1 and Level 2 securities.

 

 

 

The changes of the fair value of investments for which the Trust has used Level 3 inputs to determine the fair value are as follows:

 

   CLO Debt   CLO Equity   Total 
Beginning balance at September 30, 2017  $-   $-   $- 
Amortization   1,957    -    1,957 
Reductions to CLO Equity Cost Basis(a)   -    (3,260 ,478)    (3,260,478)
Change in Unrealized Appreciation/(Depreciation)   (28,408)   (1,186,491)   (1,214,899)
Purchases   19,416,625    41,462,436    60,879,061 
Balance as of June 30, 2018  $19,390,174   $37,015,467   $56,405,641 
                
Net change in unrealized appreciation (depreciation) on investments still held as of June 30, 2018  $(28,408)  $(1,186,491)  $(1,214,899)

 

(a)Reduction to cost value on CLO equity investments represents the difference between distributions received, or entitled to be received, and income earned for the nine-month period ended June 30, 2018

 

The following table summarizes the quantitative inputs and assumptions used for investments categorized in Level 3 of the fair value hierarchy as of the end of the reporting period. In addition to the techniques and inputs noted in the table below, according to the Trust's valuation policy, the Adviser may use other valuation techniques and methodologies when determining the Trust's fair value measurements as provided for in the valuation policy and approved by the Board. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the fair value measurements as of the end of the reporting period.

 

  Quantitative Information about Level 3 Value Measurements
Assets

Value as of

June 30, 2018

Valuation

Methodologies

Unobservable

Input

Range/Weighted

Average(2)

CLO Debt 19,390,174 Market Quotes NBIB(1) 92.21 - 102.33 / 99.44
CLO Equity 37,015,467 Market Quotes NBIB(1) 3.80 - 94.75 / 73.01
Total Level 3 assets 56,405,641      

 

(1)The Trust generally uses non-binding indicative bid ("NBIB") prices provided by an independent pricing service or broker on or near the valuation date as the primary basis for the fair value determination for CLO debt and equity investments, which may be adjusted for pending equity distributions as of the valuation date. These bid prices are non-binding, and may not be determinative of fair value. In valuing the Trust’s investments in CLO debt and CLO equity, in addition to non-binding indicative bid prices provided by an independent pricing service or broker, the Trust also may consider a variety of relevant factors as set forth in the Trust’s valuation policy, including recent trading prices for specific investments, recent purchases and sales known to the Trust in similar securities, other information known to the Trust relating to the securities, and discounted cash flows based on output from a third-party financial model, using projected future cash flows.

 

(2)Weighted averages are calculated based on the value of investments on June 30, 2018.

 

Significant increases or decreases in any of the unobservable inputs in isolation my result in a significantly lower or higher fair value measurement.

 

Loan Participations and Assignments: The Trust may invest in loans arranged through private negotiation between one or more financial institutions. The Trust’s investment in any such loan may be

 

 

 

in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Trust generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and the Trust may not benefit directly from any collateral supporting the loan in which they have purchased the participation.

 

While some loans are collateralized and senior to an issuer’s other debt securities, other loans may be unsecured and/or subordinated to other securities. Some loans may be considered illiquid, and are generally less liquid than exchange-traded debt instruments.

 

3. LEVERAGE

The Trust uses leverage to seek to enhance total return and income. 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 (collectively, “Indebtedness”), (ii) the issuance of preferred shares (“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 (“portfolio leverage”). The Trust currently intends to use leverage through Indebtedness and may use Indebtedness to the maximum extent permitted under the 1940 Act. Under the 1940 Act, the Trust may utilize Indebtedness up to 33 1/3% of its Managed Assets (specifically, the Trust may not incur Indebtedness if, immediately after incurring such Indebtedness, the Trust would have asset coverage (as defined in the 1940 Act) of less than 300%). The Trust will not utilize leverage, either through Indebtedness, Preferred Shares or portfolio leverage, in an aggregate amount in excess of 40% of the Trust’s Managed Assets (including the proceeds of leverage).

 

On October 6, 2017, the Trust entered into a Credit Agreement (the “Credit Agreement”) with Societe Generale (the “Lender”) that established a revolving credit facility (the “Facility”) of up to $40,000,000. Interest on the amount borrowed is based on three-month LIBOR plus 1.20%. The Trust’s borrowings are secured by eligible securities held in its portfolio of investments. The Credit Agreement includes usual and customary covenants. Among other things, these covenants place limitations or restrictions on the Trust’s ability to (i) incur other indebtedness, (ii) change certain investment policies, (iii) pledge or create liens upon the assets of the Trust. In addition, the Trust is required to deliver financial information to the Lender, maintain an asset coverage ratio of not less than 300% and maintain its registration as a closed-end management investment company.

 

For the nine months ended June 30, 2018, the average amount borrowed under the Credit Agreement and the average interest rate for the amount borrowed was $37,358,718 and 3.06%, respectively. As of June 30, 2018, the amount of such outstanding borrowings was $38,865,000. The interest rate applicable to the borrowings on June 30, 2018 was 3.56%. All securities held as of June 30, 2018 are pledged as collateral for the leverage facility.

 

The use of leverage is a speculative technique that involves special risks. The Trust currently anticipates utilizing leverage to seek to enhance total return and income. There can be no assurance that the Adviser’s and the Sub-Adviser’s expectations will be realized or that a leveraging strategy will be successful in any particular time period. Use of leverage creates an opportunity for increased income and capital appreciation but, at the same time, creates special risks. Leverage exposes the Trust to greater risk and increased costs than if it were not implemented. The more leverage that is utilized by the Trust, the more exposed the Trust will be to the risks of leverage. The use of leverage by the Trust

 

 

 

causes the net asset value of the common shares to fluctuate significantly in response to changes in interest rates and other economic indicators. As a result, the net asset value, market price and dividend rate of the common shares is likely to be more volatile than those of a fund that is not exposed to leverage. Leverage increases operating costs, which may reduce total return. The Trust pays interest on its borrowings, which may reduce the Trust’s return. Increases in interest rates that the Trust must pay on its borrowings will increase the cost of leverage and may reduce the return to common shareholders. The risk of increases in interest rates may be greater in the current market environment because interest rates are near historically low levels. During the time in which the Trust is utilizing leverage, the amount of the investment advisory fee paid by the Trust will be higher than if the Trust did not utilize leverage because the fees paid will be calculated based on the Trust’s Managed Assets (including proceeds of leverage). Common shareholders bear the portion of the management fee attributable to assets purchased with the proceeds of leverage, which means that common shareholders effectively bear the entire management fee.

 

 

 

Item 2. Controls and Procedures.

 

(a)The registrant’s principal executive officer and principal financial officer have evaluated the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) as of a date within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures were effective, as of that date.

 

(b)There was no change in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the registrant's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

 

Item 3. Exhibits.

 

Separate certifications for the registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as Ex99.CERT.

 

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST

 

By: (Signature and Title) /s/ Theodore J. Brombach  
    Theodore J. Brombach  
Date: August 27, 2018 President and Chief Executive Officer  
    (principal executive officer)  

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By: (Signature and Title) /s/ Theodore J. Brombach  
    Theodore J. Brombach  
Date: August 27, 2018 President and Chief Executive Officer  
    (principal executive officer)  
       
By: (Signature and Title) /s/ John “Yogi” Spence  
    John “Yogi” Spence  
Date: August 27, 2018 Treasurer and Chief Financial Officer  
    (principal financial officer)