N-Q 1 fp0039782_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: October 1, 2018 - December 31, 2018

 

 

 

Item 1. Schedule of Investments.

 

XAI Octagon Floating Rate & Alternative Income Term Trust      
       
Schedule of Investments      
December 31, 2018 (Unaudited)      

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
CORPORATE BONDS - 3.44%* (2.28% of Total Investments)                   
Diversified Financial Services - 0.39% (0.26% of Total Investments)                   
Refinitiv US Holdings, Inc., Senior Unsecured(b)   8.25%   N/A   11/15/2026   $308,000   $278,188 
                        
Health Care Providers & Services - 0.73% (0.49% of Total Investments)                   
Envision Healthcare Corp., Senior Unsecured(b)   8.75%   N/A   10/15/2026    333,000    288,476 
Verscend Escrow Corp., Senior Unsecured(b)   9.75%   N/A   08/15/2026    250,000    235,000 
Total Health Care Providers & Services                583,000    523,476 
                        
Hotels, Restaurants & Leisure - 0.68% (0.45% of Total Investments)                   
Golden Nugget, Inc., Subordinated(b)   8.75%   N/A   10/01/2025    500,000    481,250 
                        
Internet Software & Services - 0.45% (0.30% of Total Investments)                   
Veritas US, Inc. / Veritas Bermuda, Ltd., Senior Unsecured(b)   10.50%   N/A   02/01/2024    500,000    322,500 
                        
Pharmaceuticals - 0.71% (0.47% of Total Investments)                       
Bausch Health Cos., Inc., Senior Unsecured(b)   9.25%   N/A   04/01/2026    500,000    503,542 
                        
Wireless Telecommunication Services - 0.48% (0.31% of Total Investments)                   
Digicel Group, Ltd., Senior Unsecured(b)   8.25%   N/A   09/30/2020    500,000    339,750 
                        
Total Corporate Bonds (Cost $2,893,857)               $2,891,000   $2,448,706 
                        
SECURED SECOND LIEN LOANS(c) - 11.37% (7.53% of Total Investments)               
Commercial Services & Supplies - 1.09% (0.72% of Total Investments)                   
AVSC Holding Corp., Initial   9.78%   3M US L + 7.25%   09/01/2025    805,556    773,333 
                        
Communications Equipment - 0.17% (0.11% of Total Investments)                   
Global Tel*Link Corp.   10.96%   3M US L + 8.25%   11/29/2026    125,000    121,250 
                        
Health Care Providers & Services - 1.19% (0.79% of Total Investments)                   
CVS Holdings I LP, Initial   9.28%   1M US L + 6.75%   02/06/2026    102,612    95,430 
Gentiva Health Services, Inc., Initial   9.56%   3M US L + 7.00%   07/02/2026    752,980    749,215 
Total Health Care Providers & Services                855,592    844,645 
                        
Hotels, Restaurants & Leisure - 0.53% (0.35% of Total Investments)                   
Affinity Gaming, Initial   10.77%   1M US L + 8.25%   01/31/2025    392,857    377,143 
                        
Insurance - 2.36% (1.56% of Total Investments)                       
Asurion LLC, Replacement B-2   9.02%   1M US L + 6.50%   08/04/2025    1,700,000    1,677,696 
                        
Internet Software & Services - 0.37% (0.25% of Total Investments)                   
Imperva, Inc.(d)   N/A   L + 7.75%   11/20/2026    267,045    265,710 
                        
Real Estate Investment Trusts (REITs) - 1.12% (0.74% of Total Investments)                  
Capital Automotive LP, Initial Tranche B   8.52%   1M US L + 6.00%   03/24/2025    807,643    795,028 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
SECURED SECOND LIEN LOANS(c) (continued)                       
Software - 4.38% (2.90% of Total Investments)                       
EagleView Technology Corp.   9.96%   3M US L + 7.50%   08/14/2026   $442,623   $429,344 
McAfee LLC, Initial   11.01%   1M US L + 8.50%   09/29/2025    916,667    907,500 
MH Sub I LLC, Amendment No. 2 Initial   10.00%   1M US L + 7.50%   09/15/2025    750,000    682,500 
Misys, Ltd., Dollar   10.05%   1M US L + 7.25%   06/13/2025    1,200,000    1,101,432 
Total Software                3,309,290    3,120,776 
                        
Transportation Infrastructure - 0.16% (0.11% of Total Investments)                   
Deck Chassis Acquisition, Inc., Initial   8.53%   1M US L + 6.00%   06/15/2023    123,711    118,144 
                        
Total Secured Second Lien Loans (Cost $8,475,705)               $8,386,694   $8,093,725 
                        
SENIOR SECURED FIRST LIEN LOANS(c) - 59.43% (39.38% of Total Investments)               
Aerospace & Defense - 1.94% (1.28% of Total Investments)                   
Constellis Holdings LLC, B   7.52%   3M US L + 5.00%   04/21/2024    762,513    724,387 
Maxar Technologies, Ltd., Initial B   5.15%   3M US L + 2.75%   10/04/2024    399,658    366,686 
Space Exploration Technologies Corp., B   6.73%   1M US L + 4.25%   11/20/2025    290,000    287,100 
Total Aerospace & Defense                1,452,171    1,378,173 
                        
Automobiles - 1.79% (1.19% of Total Investments)                       
Thor Industries, Inc., B(d)   N/A   L + 3.75%   11/03/2025    849,673    798,693 
Truck Hero, Inc., Initial   6.26%   1M US L + 3.75%   04/22/2024    493,734    476,661 
Total Automobiles                1,343,407    1,275,354 
                        
Building Products - 1.80% (1.20% of Total Investments)                   
Ply Gem Midco, Inc., Initial   6.18%   3M US L + 3.75%   04/12/2025    493,898    449,447 
SRS Distribution, Inc., Initial   5.77%   2M US L + 3.25%   05/23/2025    896,629    834,430 
Total Building Products                1,390,527    1,283,877 
                        
Chemicals - 2.18% (1.44% of Total Investments)                       
Graftech Finance, Inc., Initial Term Loan   6.02%   1M US L + 3.50%   02/12/2025    493,671    466,519 
Schenectady International Group, Inc., Initial   7.19%   3M US L + 4.75%   10/15/2025    484,566    465,183 
Solenis Holdings LLC, Initial Dollar   6.71%   3M US L + 4.00%   12/26/2023    646,104    617,030 
Total Chemicals                1,624,341    1,548,732 
                        
Commercial Services & Supplies - 0.78% (0.52% of Total Investments)                   
Harland Clarke Holdings Corp., Initial   7.55%   3M US L + 4.75%   11/03/2023    619,178    557,415 
                        
Communications Equipment - 1.31% (0.87% of Total Investments)                   
Global Tel*Link Corp.   6.96%   3M US L + 4.25%   11/29/2025    714,080    693,851 
MLN US HoldCo LLC, B   7.02%   1M US L + 4.50%   11/30/2025    247,561    239,361 
Total Communications Equipment                961,641    933,212 
                        
Construction & Engineering - 1.72% (1.14% of Total Investments)                   
Brand Energy & Infrastructure Services, Inc., Initial   6.73%   3M US L + 4.25%   06/21/2024    740,602    701,616 
Brookfield WEC Holdings, Inc., Initial   6.27%   1M US L + 3.75%   08/01/2025    542,986    524,856 
Total Construction & Engineering                1,283,588    1,226,472 
                        
Distributors - 1.14% (0.76% of Total Investments)                       
United Natural Foods, Inc., Initial   6.77%   1M US L + 4.25%   10/22/2025    1,000,000    812,500 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
SENIOR SECURED FIRST LIEN LOANS(c) (continued)                  
Diversified Financial Services - 0.85% (0.56% of Total Investments)                       
Financial & Risk US Holdings, Inc., Initial Dollar   6.27%   1M US L + 3.75%   10/01/2025   $636,152   $604,344 
                        
Diversified Telecommunication Services - 2.98% (1.98% of Total Investments)               
Altice France S.A., USD TLB-13 Incremental   6.46%   3M US L + 4.00%   08/14/2026    818,182    771,137 
Syniverse Holdings, Inc., Tranche C   7.46%   1M US L + 5.00%   03/09/2023    776,258    692,166 
WideOpenWest Finance LLC, Eighth Amendment B   5.72%   1M US L + 3.25%   08/18/2023    715,938    661,347 
Total Diversified Telecommunication Services                2,310,378    2,124,650 
                        
Electrical Equipment - 0.95% (0.63% of Total Investments)                   
AI Ladder Subco S.a r.l., Facility B   7.02%   3M US L + 4.50%   07/09/2025    432,497    426,550 
Energy Acquisition LP, Initial   7.05%   3M US L + 4.25%   06/26/2025    258,519    249,471 
Total Electrical Equipment                691,016    676,021 
                        
Electronic Equipment, Instruments & Components - 2.02% (1.34% of Total Investments)               
Mavenir Systems, Inc., Initial   8.39%   1M US L + 6.00%   05/08/2025    745,627    739,572 
Triton Solar US Acquisition Co., B   8.51%   3M US L + 6.00%   10/31/2024    295,250    273,106 
Ultra Clean Holdings, Inc., B   6.84%   3M US L + 4.50%   08/27/2025    451,327    426,504 
Total Electronic Equipment, Instruments & Components                1,492,204    1,439,182 
                        
Energy Equipment & Services - 2.30% (1.53% of Total Investments)                   
KCA Deutag US Finance LLC, 2018 Extended   9.55%   3M US L + 6.75%   02/28/2023    991,307    795,028 
McDermott International, Inc.   7.52%   1M US L + 5.00%   05/12/2025    906,611    843,901 
Total Energy Equipment & Services                1,897,918    1,638,929 
                        
Food Products - 0.67% (0.44% of Total Investments)                       
Chobani LLC, New   6.02%   1M US L + 3.50%   10/10/2023    510,063    474,043 
                        
Health Care Equipment & Supplies - 0.60% (0.40% of Total Investments)                  
Lanai Holdings II, Inc., Initial(d)   N/A   L + 4.75%   08/29/2022    464,820    425,310 
                        
Health Care Providers & Services - 7.16% (4.74% of Total Investments)                   
Air Medical Group Holdings, Inc.                       
2018   5.68%   1M US L + 3.25%   04/28/2022    466,571    434,638 
2018 New(d)   N/A   L + 4.25%   03/14/2025    250,000    231,785 
BW NHHC Holdco, Inc., Initial   7.47%   1M US L + 5.00%   05/15/2025    872,971    851,147 
Envision Healthcare Corp., Initial   6.27%   1M US L + 3.75%   10/10/2025    787,822    732,391 
Gentiva Health Services, Inc., Closing Date Initial   6.31%   3M US L + 3.75%   07/02/2025    788,780    763,144 
Quorum Health Corp.   9.27%   1M US L + 6.75%   04/29/2022    173,256    171,177 
Regionalcare Hospital Partners Holdings, Inc., B   7.13%   3M US L + 4.50%   11/16/2025    654,040    618,885 
US Renal Care, Inc., Initial Term Loan   7.05%   3M US L + 4.25%   12/30/2022    249,357    236,765 
Verscend Holding Corp., B   7.02%   1M US L + 4.50%   08/27/2025    1,093,452    1,055,181 
Total Health Care Providers & Services                5,336,249    5,095,113 
                        
Hotels, Restaurants & Leisure - 3.21% (2.12% of Total Investments)                   
Bulldog Purchaser, Inc., Initial(e)   6.27%   1M US L + 3.75%   09/05/2025    175,032    170,656 
Callaway Golf Company, B(d)   N/A   L + 4.50%   12/17/2025    69,071    68,208 
Casablanca US Holdings, Inc., Amendment No. 2 Initial   6.53%   3M US L + 4.00%   03/29/2024    839,875    789,482 
CEC Entertainment, Inc., B   5.77%   1M US L + 3.25%   02/12/2021    707,928    653,063 
NPC International, Inc., Initial   6.02%   1M US L + 3.50%   04/19/2024    130,738    121,979 
Red Lobster Management LLC, Initial   7.77%   1M US L + 5.25%   07/28/2021    497,406    478,753 
Total Hotels, Restaurants & Leisure                2,420,050    2,282,141 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
SENIOR SECURED FIRST LIEN LOANS(c) (continued)                   
Household Products - 1.29% (0.86% of Total Investments)                   
American Greetings Corp., Initial   7.01%   1M US L + 4.50%   04/06/2024   $455,542   $447,000 
TKC Holdings, Inc., Initial Term Loan   6.28%   1M US L + 3.75%   02/01/2023    498,731    472,862 
Total Household Products                954,273    919,862 
                        
Independent Power/Renewable Electricity Producers - 0.18% (0.12% of Total Investments)               
Edgewater Generation LLC   6.27%   1M US L + 3.75%   12/13/2025    131,255    128,138 
                        
Industrial Conglomerates - 0.76% (0.50% of Total Investments)                   
WireCo WorldGroup, Inc., Initial   7.52%   1M US L + 5.00%   09/29/2023    545,200    540,200 
                        
Internet Software & Services - 2.71% (1.79% of Total Investments)                   
EIG Investors Corp., 2018 Refinancing   6.44%   3M US L + 3.75%   02/09/2023    450,525    435,130 
Imperva, Inc.(d)   N/A   L + 4.00%   11/20/2025    390,511    383,677 
Veritas US, Inc., New Dollar B   7.09%   1M US L + 4.50%   01/27/2023    987,437    838,620 
WeddingWire, Inc.(d)   N/A   L + 4.50%   12/19/2025    275,410    269,902 
Total Internet Software & Services                2,103,883    1,927,329 
                        
IT Services - 4.40% (2.91% of Total Investments)                       
Avaya, Inc., Tranche B   6.70%   1M US L + 4.25%   12/15/2024    962,877    927,973 
ION Trading Technologies S.a.r.l., 2018 Initial Dollar   6.52%   1M US L + 4.00%   11/21/2024    930,590    877,081 
Rackspace Hosting, Inc., B   5.58%   3M US L + 3.00%   11/03/2023    301,646    265,448 
SCS Holdings I, Inc., New Tranche B   6.77%   1M US L + 4.25%   10/30/2022    631,010    620,756 
West Corp., Initial B   6.53%   1M US L + 4.00%   10/10/2024    479,830    439,347 
Total IT Services                3,305,953    3,130,605 
                        
Machinery - 0.44% (0.29% of Total Investments)                       
Titan Acquisition, Ltd., Initial   5.52%   1M US L + 3.00%   03/28/2025    343,100    312,934 
                        
Media - 2.21% (1.47% of Total Investments)                       
MediArena Acquisition B.V., Dollar B   8.15%   3M US L + 5.75%   08/13/2021    745,490    713,061 
Quad/Graphics, Inc., B(d)   N/A   L + 5.00%   12/18/2025    310,304    301,771 
Univision Communications, Inc., 2017 Replacement Repriced First-Lien   5.27%   1M US L + 2.75%   03/15/2024    620,491    560,254 
Total Media                1,676,285    1,575,086 
                        
Oil, Gas & Consumable Fuels - 0.94% (0.62% of Total Investments)                   
Brazos Delaware II LLC, Initial   6.47%   1M US L + 4.00%   05/21/2025    259,786    237,705 
Permian Production Partners LLC, Initial Advances   8.51%   1M US L + 6.00%   05/20/2024    444,485    431,150 
Total Oil, Gas & Consumable Fuels                704,271    668,855 
                        
Personal Products - 1.09% (0.72% of Total Investments)                    
Knowlton Development Corp., Inc., Initial(d)   N/A   L + 4.25%   12/22/2025    241,352    235,922 
Revlon Consumer Products Corp., Initial B   6.21%   3M US L + 3.50%   09/07/2023    767,172    541,677 
Total Personal Products                1,008,524    777,599 
                        
Pharmaceuticals - 1.29% (0.85% of Total Investments)                      
Endo Pharmaceuticals Holdings, Inc., Initial Term Loan   6.81%   1M US L + 4.25%   04/29/2024    725,000    685,125 
Mallinckrodt International Finance S.A., 2018 Incremental(d)   N/A   L + 3.00%   02/24/2025    250,000    230,090 
Total Pharmaceuticals                975,000    915,215 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
SENIOR SECURED FIRST LIEN LOANS(c) (continued)                   
Real Estate Management & Development - 0.63% (0.42% of Total Investments)               
Forest City Enterprises LP, Initial   6.38%   3M US L + 4.00%   12/08/2025   $459,535   $447,279 
                        
Road & Rail - 0.66% (0.44% of Total Investments)                       
YRC Worldwide, Inc., Term B-1 Loan   11.02%   1M US L + 8.50%   07/26/2022    500,000    467,710 
                        
Software - 4.00% (2.65% of Total Investments)                       
Blackboard, Inc., B-4   7.44%   3M US L + 5.00%   06/30/2021    233,434    215,842 
Cambium Learning Group, Inc., Initial(d)   N/A   L + 4.50%   12/18/2025    481,283    457,219 
LegalZoom.com, Inc., 2018   7.00%   1M US L + 4.50%   11/21/2024    561,980    550,741 
McAfee LLC, B USD   6.27%   1M US L + 3.75%   09/30/2024    840,928    816,053 
Mitchell International, Inc., Initial   5.77%   1M US L + 3.25%   11/29/2024    343,579    328,118 
Project Leopard Holdings, Inc., 2018 Repricing   6.52%   1M US L + 4.00%   07/07/2023    493,762    480,801 
Total Software                2,954,966    2,848,774 
                        
Specialty Retail - 2.93% (1.94% of Total Investments)                       
Bass Pro Group LLC, Initial   7.52%   1M US L + 5.00%   09/25/2024    764,229    729,457 
Champ Acquisition Corp.   7.98%   3M US L + 5.50%   12/17/2025    302,768    294,063 
CWGS Group LLC   5.13%   1M US L + 2.75%   11/08/2023    498,728    449,269 
General Nutrition Centers, Inc., Tranche B-2   11.28%   1M US L + 8.75%   03/04/2021    208,412    192,260 
Payless, Inc.                       
Tranche A-1   10.78%   3M US L + 8.00%   02/10/2022    359,832    179,916 
Tranche A-2   11.78%   3M US L + 9.00%   08/10/2022    643,500    238,095 
Total Specialty Retail                2,777,469    2,083,060 
                        
Technology Hardware, Storage & Peripherals - 0.60% (0.40% of Total Investments)               
ELO Touch Solutions, Inc., B(d)   N/A   L + 6.50%   12/14/2025    446,974    428,536 
                        
Textiles, Apparel & Luxury Goods - 1.14% (0.75% of Total Investments)                   
Elevate Textiles, Inc., Initial   7.35%   1M US L + 5.00%   05/01/2024    830,491    809,729 
                        
Wireless Telecommunication Services - 0.76% (0.51% of Total Investments)                 
Digicel International Finance, Ltd., Initial B   5.96%   3M US L + 3.25%   05/27/2024    600,776    543,702 
                        
Total Senior Secured First Lien Loans (Cost $45,147,855)               $45,751,658   $42,300,081 
                        
CLO DEBT(c)(f)- 20.74% (13.75% of Total Investments)                   
Anchorage Capital CLO 2018-10, Ltd., Series 2018-10A(b)   8.18%   3M US L + 5.75%   10/15/2031    500,000    443,057 
Apidos CLO XXVIII, Series 2017-28A(b)   7.97%   3M US L + 5.50%   01/20/2031    1,000,000    879,519 
Atrium XIV LLC, Series 2018-14A(b)   8.01%   3M US L + 5.65%   08/23/2030    500,000    463,914 
CIFC Funding 2015-I, Ltd., Series 2015-1A(b)   8.47%   3M US L + 6.00%   01/22/2031    500,000    457,168 
CIFC Funding 2017-II, Ltd., Series 2017-2A(b)   8.42%   3M US L + 5.95%   04/20/2030    500,000    449,502 
CIFC Funding 2017-V, Ltd., Series 2017-5A(b)   8.55%   3M US L + 6.10%   11/16/2030    1,000,000    914,348 
Dryden 64 CLO, Ltd., Series 2018-64A(b)   8.04%   3M US L + 5.60%   04/18/2031    500,000    435,110 
GoldenTree Loan Management US CLO 1, Ltd., Series 2017-1A(b)   8.07%   3M US L + 5.60%   04/20/2029    1,000,000    850,943 
GoldenTree Loan Opportunities XI, Ltd., Series 2015-11A(b)   7.84%   3M US L + 5.40%   01/18/2031    750,000    632,484 
Halcyon Loan Advisors Funding 2018-2, Ltd., Series 2018-2A(b)   9.75%   3M US L + 6.90%   01/22/2031    500,000    480,000 
HPS Loan Management 11-2017, Ltd., Series 2017-11A(b)   10.44%   3M US L + 7.85%   05/06/2030    1,000,000    905,921 
Madison Park Funding XVII, Ltd., Series 2015-17A(b)   9.95%   3M US L + 7.48%   07/21/2030    1,000,000    890,369 
Marble Point CLO XI, Ltd., Series 2017-2A E(b)   8.04%   3M US L + 5.60%   12/18/2030    1,000,000    853,112 

 

 

 

       Reference Rate  Maturity   Principal     
   Coupon(a)   & Spread  Date   Amount   Value 
CLO DEBT(c)(f) (continued)                       
Neuberger Berman CLO XIV, Ltd., Series 2013-14A(b)   8.96%   3M US L + 6.45%   01/28/2030   $1,000,000   $916,714 
OZLM Funding, Ltd., Series 2012-1A(b)   9.14%   3M US L + 6.67%   07/23/2029    1,000,000    946,038 
OZLM XXII, Ltd., Series 2018-22A(b)   7.75%   3M US L + 5.30%   01/17/2031    500,000    429,431 
Sound Point CLO II, Ltd., Series 2013-1A(b)   8.01%   3M US L + 5.50%   01/26/2031    250,000    220,350 
Sound Point CLO XVIII, Ltd., Series 2017-4A(b)   7.97%   3M US L + 5.50%   01/20/2031    500,000    438,763 
Symphony CLO XVIII, Ltd., Series 2016-18A(b)   8.83%   3M US L + 6.35%   01/23/2028    1,000,000    919,366 
THL Credit Wind River 2017-4 Clo, Ltd., Series 2017-4A(b)   8.44%   3M US L + 5.80%   11/20/2030    500,000    448,948 
Voya CLO 2013-1, Ltd., Series 2013-1A(b)   8.92%   3M US L + 6.48%   10/15/2030    1,000,000    912,711 
Voya CLO 2013-2, Ltd., Series 2013-2A(b)   8.09%   3M US L + 5.60%   04/25/2031    1,000,000    876,287 
Total CLO Debt (Cost $16,387,828)               $16,500,000   $14,764,055 
                        
CLO EQUITY(f)(g)- 49.47% (32.79% of Total Investments)                   
ALM V, Ltd., Series 2012-5A(b)   N/A   Estimated yield of 14.56%   10/18/2027    2,000,000    854,684 
Anchorage Capital CLO 1-R, Ltd., Series 2018-1RA(b)   N/A   Estimated yield of 14.94%   04/13/2031    2,000,000    1,685,010 
Anchorage Capital CLO 3-R, Ltd., Series 2014-3RA(b)   N/A   Estimated yield of 13.33%   01/28/2031    1,400,000    1,203,614 
Apidos CLO XXVIII, Series 2017-28A(b)   N/A   Estimated yield of 12.00%   01/20/2031    3,500,000    2,876,230 
Ares XLIX CLO, Ltd., Series 2018-49A(b)   N/A   Estimated yield of 11.58%   07/22/2030    2,000,000    1,524,346 
Ares XLVI CLO, Ltd., Series 2017-46A(b)   N/A   Estimated yield of 13.84%   01/15/2030    4,050,000    3,696,646 
Ares XLVII CLO, Ltd., Series 2018-47A(b)   N/A   Estimated yield of 10.66%   04/16/2030    2,000,000    1,645,194 
Carlyle Global Market Strategies CLO 2013-1, Ltd., Series 2013-1A(b)   N/A   Estimated yield of 17.13%   08/14/2030    3,500,000    2,490,652 
Carlyle Global Market Strategies CLO 2016-1, Ltd., Series 2016-1A(b)   N/A   Estimated yield of 15.06%   04/20/2027    598,000    581,203 
Carlyle US CLO 2018-2, Ltd., Series 2018-2A(b)   N/A   Estimated yield of 12.47%   10/15/2031    933,000    767,267 
CIFC Funding 2017-V, Ltd., Series 2017-5A(b)   N/A   Estimated yield of 13.82%   11/16/2030    3,000,000    2,496,219 
Dryden 34 Senior Loan Fund, Series 2014-34A(b)   N/A   Estimated yield of 0.00%   10/15/2026    5,000,000    65,500 
Madison Park Funding XVIII, Ltd., Series 2015-18A(b)   N/A   Estimated yield of 7.93%   10/21/2027    4,000,000    3,411,416 
Marble Point CLO XI, Ltd., Series 2017-2A INC(b)   N/A   Estimated yield of 13.20%   12/18/2030    3,000,000    2,281,578 
OZLM XIX, Ltd., Series 2017-19A(b)   N/A   Estimated yield of 13.57%   11/22/2030    3,500,000    2,686,225 
OZLM XVI, Ltd., Series 2017-16A(b)   N/A   Estimated yield of 10.71%   05/16/2030    1,250,000    868,671 
RR 1 LLC, Series 2017-1A(b)   N/A   Estimated yield of 12.29%   07/15/2029    4,500,000    3,466,557 
Thacher Park CLO, Ltd., Series 2014-1A(b)   N/A   Estimated yield of 17.99%   10/20/2026    6,000,000    1,381,284 
Voya CLO 2017-4, Ltd., Series 2017-4A(b)   N/A   Estimated yield of 12.41%   10/15/2030    1,500,000    1,233,811 
Total CLO Equity (Cost $40,639,933)               $53,731,000   $35,216,107 

 

   Shares     
MONEY MARKET MUTUAL FUNDS - 6.44% (4.27% of Total Investments)          
Invesco Short Term Investments Trust Treasury Portfolio, Institutional Class          
(2.254% 7-Day Yield)   4,582,752    4,582,752 
Total Money Market Mutual Funds (Cost $4,582,752)  $4,582,752   $4,582,752 
           
Total Investments - 150.89% (Cost $118,127,930)       $107,405,426 
Liabilities in Excess of Other Assets - (3.86)%        (2,746,017)
Leverage Facility (Net of 87,105 Deferred Costs) - (47.03)%        (33,477,895)
Net Assets - 100.00%       $71,181,514 

 

* Amounts above are shown as a percentage of net assets as of December 31, 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 $52,428,868, which represents approximately 73.66% of net assets as of December 31, 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 December 31, 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 $4,169,349 as of December 31, 2018.
(e) This investment has an unfunded commitment as of December 31, 2018. For further details, see Note 4 to Quarterly Schedule of Investments.
(f) 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 Note 2 to Quarterly Schedule of Investments for additional information.
(g) CLO subordinated 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 an add-on purchase, refinancing or reset. The estimated yield and investment cost may ultimately not be realized.

All securities held as of December 31, 2018 are pledged as collateral for the Trust’s leverage facility.

 

 

 

XAI Octagon Floating Rate & Alternative Income Term Trust

Notes to Quarterly Schedule of Investments

December 31, 2018 (Unaudited)

 

1. ORGANIZATION

 

 

 

XAI Octagon Floating Rate & Alternative Income Term Trust (the “Trust”) is a 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 results may differ from those estimates, and the security valuations reflected in the schedule of investments may differ from the value the Trust ultimately realizes upon sale of the securities. 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 (“ASC”) Topic 946. The schedule of investments has been prepared as of the close of the New York Stock Exchange (“NYSE”) on December 31, 2018.

 

Expense Recognition: Expenses are recorded on the accrual basis of accounting.

 

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.

 

Cash & Cash Equivalents: The Trust considers its investment in a FDIC insured interest bearing account to be cash. Cash and cash equivalents are valued at cost plus any accrued interest. The Trust maintains cash balances, which, at times may exceed federally insured limits. The Trust maintains these balances with a high quality financial institution.

 

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.

 

 

 

Interest income from investments is recorded using the accrual basis of accounting to the extent such amounts are expected to be collected. Amortization of premium or accretion of discount is recognized using the effective interest method. CLO equity investments recognize investment income on the accrual basis utilizing an effective interest methodology based upon an effective yield to maturity utilizing projected cash flows. ASC Topic 325-40, Beneficial Interests in Securitized Financial Assets, requires investment income from CLO equity investments and fee rebates to be recognized under the effective interest method, with any difference between the cash distribution and the amount calculated pursuant to the effective interest method being recorded as an adjustment to the cost basis of the investment. There were no fee rebates for CLO equity investments held by the Trust as of December 31, 2018.

 

Effective yields for the Trust’s CLO equity positions are monitored and evaluated on a quarterly basis. The Trust also updates a CLO equity investment’s effective yield on a transaction such as an add-on purchase, refinancing or reset involving the CLO equity investment held. 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) there is significant 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.

 

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 December 31, 2018:

 

Investments in Securities at Value*  Level 1 - Quoted Prices   Level 2 - Significant
Observable Inputs		   Level 3 - Significant
Unobservable Inputs		   Total 
Corporate Bonds  $–   $2,448,706   $–   $2,448,706 
Secured Second Lien Loans   –    8,093,725    –    8,093,725 
Senior Secured First Lien Loans   –    42,300,081    –    42,300,081 
CLO Debt   –    –    14,764,055    14,764,055 
CLO Equity   –    –    35,216,107    35,216,107 
Money Market Mutual Funds   4,582,752    –    –    4,582,752 
Total  $4,582,752   $52,842,512   $49,980,162   $107,405,426 

 

*For detailed descriptions, see the accompanying Schedule of Investments.

           

The Trust recognizes transfers between the levels as of the end of the period. For the period ended December 31, 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 
Balance as of September 30, 2018  $17,845,594   $40,780,021   $58,625,615 
Accrued Discount/Premium   903    -   903 
Reductions to CLO Equity Cost Basis(a)   -    (469,311)  (469,311)
Realized Gain/(Loss)   (182,490)   321,902    139,412 
Change in Unrealized Appreciation/(Depreciation)   (1,549,951)   (3,472,756)  (5,022,707)
Purchases   480,000    -    480,000 
Sales Proceeds   (1,830,001)   (1,943,749)   (3,773,750)
Transfer into Level 3   -    -    - 
Transfer out of Level 3   -    -    - 
Balance as of December 31, 2018  $14,764,055   $35,216,107   $49,980,162 
Net change in unrealized appreciation/(depreciation) included in the Statements of Operations attributable to Level 3 investments held at December 31, 2018  $(1,560,234)  $(3,403,762)  $(4,963,996)

 

(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 three-month period ended December 31, 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 Trust 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
December 31, 2018		   Valuation
Methodologies		  Unobservable
Input		  Range/Weighted
Average(2)		 
CLO Debt  $14,764,055   Market Quotes  NBIB(1)   84.33 - 96.00 / 89.48 
CLO Equity   35,216,107   Market Quotes  NBIB(1)   1.31 – 97.19 / 65.54 
Total Level 3 assets  $49,980,162            

 

(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 an actual transaction price. 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 December 31, 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 the Trust has 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. Effective October 1, 2018, interest on the amount borrowed is based on one-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 three months ended December 31, 2018, the average amount borrowed under the Credit Agreement and the average interest rate for the amount borrowed was $37,110,652 and 3.51%, respectively. As of December 31, 2018, the amount of such outstanding borrowings was $33,565,000. The interest rate applicable to the borrowings on December 31, 2018 was 3.51%. All securities held as of December 31, 2018 are pledged as collateral for the leverage facility.

 

The use of leverage is a speculative technique that involves special risks. There can be no assurance 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. 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.

 

4. UNFUNDED COMMITMENTS

 

 

 

The Trust may enter into certain credit agreements, all or a portion of which may be unfunded. The Trust is obliged to fund these loan commitments at the borrower’s discretion. Unfunded loan commitments and funded portions of the credit agreements are marked-to-market daily. At December 31, 2018 the Trust had an unfunded commitment with Bulldog Purchaser, Inc. in the amount of $95,238.

 

 

 

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: February 20, 2019   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: February 20, 2019   President and Chief Executive Officer  
      (principal executive officer)  
         
By: (Signature and Title)   /s/ John “Yogi” Spence  
      John “Yogi” Spence  
Date: February 20, 2019   Treasurer and Chief Financial Officer  
      (principal financial officer)