XFLT XAI Octagon Floating Rate & Alternative Income Trust

March 31, 2021 (Unaudited)

Dear Shareholder:

We thank you for your investment in XAI Octagon Floating Rate & Alternative Income Term Trust (the “Trust”). This report covers the six months ended March 31, 2021 (the “Period”). During this Period, we have observed the continuation of historic economic stimulus in the U.S. economy and the exciting rollout of the COVID-19 vaccines, which have begun a return to normalcy in many parts of the world. In December 2020, the U.S. government enacted another aid package totaling $900bn. In March 2021, another $1.9 trillion relief package was approved to further assist economic recovery. We have observed stronger technical and fundamental factors driving credit markets during this Period. With the pledge of the U.S. Federal Reserve to keep monetary conditions accommodative for as long as necessary, we expect a continuation of this trend in the coming months.

The last six months were characterized by a strong recovery in both equity and debt capital markets following the market declines in the prior period due to the impact of COVID-19. During the Period, we observed the continuation of price improvement for loan and CLO debt prices and the start of pricing increases for CLO equity which had relatively depressed prices at the end of the prior period. We have observed an increase in both institutional and retail demand for floating-rate assets given attractive relative yields compared to other fixed income asset classes without the attendant interest rate duration risk. Following elevated rating agency downgrades earlier in 2020, we have recently observed an uptick in loan and CLO debt upgrades as the economic recovery continues.

The Trust’s net asset value (“NAV”) increased during the Period by 20.43% from $6.56 per common share to $7.90 per common share on March 31, 2021, largely reflecting gains and valuation increases for the Trust’s investments in collateralized loan obligation (“CLO”) equity which had been depressed in the prior period.

For the six months ended March 31, 2021, the S&P 500 Index, the Bloomberg Barclays U.S. High Yield 1% Issuer Capped Index and the Trust’s benchmark, the S&P/LSTA Leveraged Loan 100 Index, generated total returns of 19.07%, 7.35%, and 4.45%,¹ respectively.

During the Period, the Trust declared aggregate monthly distributions totaling $0.438 per common share. The distribution of $0.073 per common share declared on March 1, 2021 represented an annualized distribution rate of 9.65% based on the Trust’s closing market price of $9.08 per common share on March 31, 2021.

The closing price per share of the Trust’s common shares was $9.08 on March 31, 2021, representing an 14.94% premium to NAV per common share. During the Period, the Trust’s common shares traded on average at a 6.74% premium to NAV. From the Trust’s IPO on September 27, 2017 through March 31, 2021, the Trust’s common shares have traded on average at a 1.20% premium to NAV.

During the Period, the Trust issued 2,019,102 common shares pursuant to an “at-the-market” program resulting in $15,539,724 of net proceeds to the Trust. The Trust also sold an additional 3,269,302 common shares through an underwritten offering, the second of this type of “overnight offering” for the Trust since inception. The underwritten offering resulted in gross proceeds of $28,181,383 (before deduction of the sales load and offering expenses) to the Trust. Additionally, the Trust issued 1,196,000 preferred shares resulting in gross proceeds of $29,900,000 (before the deduction in sales load and offering expenses) to the Trust. The preferred shares have a 5-year term and were issued at a rate of 6.50%. The XFLT 6.50% Series 2026 term preferred shares trade on the NYSE under the symbol XFLTPRA.

We appreciate your investment and look forward to serving your investment needs in the future. For the most up-to-date information on your investment, please visit the Trust’s website at www.xainvestments.com/XFLT.

Sincerely,

Kimberly Flynn

Managing Director

XA Investments LLC

March 31, 2021 (Unaudited)

XA Investments LLC (“XAI”) serves as the investment adviser to the Trust. Octagon Credit Investors, LLC (“Octagon”) serves as the Trust’s investment sub-adviser and is responsible for the management of the Trust’s portfolio of investments.

Gretchen M. Lam, Senior Portfolio Manager at Octagon Credit Investors, LLC (“Octagon”) and a member of Octagon’s Investment Committee serves as lead portfolio manager of XAI Octagon Floating Rate & Alternative Income Term Trust (the “Trust”). Ms. Lam is supported by a team of Octagon investment professionals in the day-to-day management of the Trust’s portfolio, including the following members of Octagon’s Investment Committee: Andrew D. Gordon (Octagon’s co-founder and Chief Executive Officer), Michael B. Nechamkin (Chief Investment Officer and Senior Portfolio Manager), Lauren B. Law (Portfolio Manager), and Sean M. Gleason (Portfolio Manager). In addition, Maegan Gallagher (Head of Trading and Capital Markets) is a member of the Octagon Investment Committee.

What is the Trust’s investment objective and how is it pursued? 

The Trust’s investment objective is to seek attractive total return with an emphasis on income generation across multiple stages of the credit cycle. The Trust seeks to achieve its investment objective by investing in a dynamically managed portfolio of opportunities primarily within the private credit markets. Under normal market conditions, the Trust will invest at least 80% of its Managed Assets in floating-rate credit instruments and other structured credit investments.

The Trust’s investments may include (i) structured credit investments, including collateralized loan obligation (“CLO”) debt and subordinated (i.e., residual or equity) securities; (ii) traditional corporate credit investments, including leveraged loans and high yield bonds; (iii) opportunistic credit investments, including stressed and distressed credit situations and long/short credit investments; and (iv) other credit-related instruments.

Leveraged loans are debt obligations (also commonly referred to as “senior loans” or “floating-rate loans”) issued by a bank to a corporation that generally holds legal claim to the borrower’s assets above all other debt obligations. Currently, leveraged loans have floating rates that typically fluctuate according to LIBOR. LIBOR stands for London Interbank Offered Rate and is the benchmark rate that most of the world’s leading banks charge each other for short-term loans. LIBOR is soon to be phased out, with new instruments being issued with an alternative rate beginning in 2021 and existing instruments required to transition by June 30, 2023.

CLOs are a type of structured credit vehicle that typically invest in a diverse portfolio of broadly syndicated leveraged loans. CLOs finance this pool of loans with a capital structure that consists of debt and equity. CLO debt includes senior and mezzanine debt (collectively, “liabilities”) of a CLO structure with tranches rated from AAA down to BB or B. Interest earned from the underlying loan collateral pool of a CLO is used to pay the coupon interest on the CLO liabilities. CLO debt investors earn returns based on spreads above 3-month LIBOR. CLO equity represents a residual stake in the CLO structure and is the first loss position in the event of defaults and credit losses. CLO equity investors receive the excess spread between the CLO assets and liabilities and expenses. CLO equity is junior in priority of payment and is subject to certain payment restrictions generally set forth in an indenture governing the notes.

The Trust pursues its investment objective by investing primarily in below investment grade credit instruments that are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and to repay principal. The Trust may invest without limitation in credit instruments that are illiquid.

The Trust uses leverage to seek to enhance total return and income. Although leverage may create an opportunity for increased return and income for shareholders, it also results in additional risks and can magnify the effect of any losses. There is no assurance that the leverage strategy will be successful. If income and gains on securities purchased with leverage proceeds are greater than the cost of the leverage, common shareholders’ return will be greater than if leverage had not been used. Conversely, if the income or gains from the securities purchased with the proceeds of leverage are less than the cost of leverage, common shareholders’ return will be less than if leverage had not been used.

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

For the six-month period ended March 31, 2021, leveraged loans returned 3.51% (as measured by the broad S&P/LSTA Leveraged Loan Index or “LLI”).¹ The loan market entered 2021 with substantial positive momentum following a strong risk rally in the final two months of 2020 supported by better-than-expected third quarter earnings, fewer defaults, and the introduction of vaccines. Following monthly returns of 1.19% and 0.59% in January and February (respectively), loans gave back some gains in March, generating a negative return of less than one basis point for the month.¹ March’s flat performance reflected a resetting of expectations among market participants following a substantial run-up in asset prices and a glut of new loan supply. By and large, loan prices retreated in March, with the weighted average bid price of the LLI declining a quarter point to 97.55 as of month-end. Price softness was most acute among higher-rated and more liquid loans, meanwhile, CCC rated loan prices continued to advance during the month—up +0.39 points to 91.39 as of March 31—underscoring investors’ ongoing search for yield amid an improving fundamental backdrop.¹ After returning 3.81% in the fourth quarter of 2020, loans returned 1.78% in the first quarter of 2021, further contributing to the historic rebound in the wake of the Covid-19 outbreak. Over the twelve months ended March 31, the LLI returned 20.71%—a one-year performance figure not seen in a decade.¹

March 31, 2021 (Unaudited)

Credit fundamentals continued to recover during the period amid an increasingly optimistic economic outlook driven by expanded vaccine availability, additional fiscal stimulus, accommodative monetary policy, encouraging trends in consumer spending and jobless claims, and more businesses reopening within the sectors most adversely affected by social distancing restrictions. As the negative impacts of the pandemic recede, many borrowers have emerged from a tumultuous 2020 with stronger liquidity profiles, and credit stress indicators continue to improve from last year’s peak levels. As of March 31, 2021, the percentage of first lien loans in the LLI trading below 80 was approximately 1%, compared to 56% one year ago.² In the wake of record-setting downgrade activity in the second quarter of 2020 (when the rating agencies were quick to act amid mounting Covid-related stress), rating agency actions have turned net positive. S&P upgraded 49 loan facilities and downgraded 35 during the first quarter of 2021, causing the trailing three-month upgrade-to-downgrade ratio to rise above 1.0x for the first time since early 2017.³ While we believe ratings agencies are likely to maintain a cautious stance towards issuers that were negatively impacted by the pandemic, we are nevertheless encouraged by the agencies’ affirmation of improving credit fundamentals. Notably, the loan market has been default-free in four of the previous five months.⁴ With only two defaults year-to-date as of March 31, 2021 (representing approximately 0.1% of the LLI), the trailing 12-month default rate for the LLI declined to 3.15% as of March 31, and is expected to trend lower as April-July 2020 defaults roll off.⁴ Given reduced default activity and the accelerated pace of economic stabilization, several sell-side strategists have lowered their 2021 loan default projections only a few months after issuing their initial forecasts. For example, on March 1, JPMorgan revised their 2021 loan default forecast down to 2.0% from a projected 3.5% full-year default rate published in early December 2020.⁵

Technical dynamics were strong throughout the period. New issue loan volume totaled $80.5 billion in the fourth quarter of 2020, propelled by a surge in corporate mergers and leverage buyout-backed issuance following two quarters of curtailed activity due to the pandemic.⁶ Loan supply volume has surged thus far in 2021, as continued price appreciation, contracting spreads and a supportive environment for floating rate assets spurred a wave of opportunistic issuance in the first quarter. Year-to-date loan repricing volume totaled $148.5 billion as of March 31, representing the highest quarterly reading since the first quarter of 2017.⁷ Meanwhile, “true” new loan issuance in the first three months of 2021 reached $180.8 billion--the largest quarterly new issue volume figure in the market’s history—driven by healthy M&A and LBO activity.⁷ Record-setting loan supply has been met by robust demand from CLOs, as well as retail and institutional investors alike. As of March 31, year-to-date new CLO formation totaled $39.3 billion across 81 deals—another record-setting quarterly tally—underpinned by tightening liability costs, renewed demand from investors that were sidelined in 2020, ample new loan supply, and CLOs’ comparatively attractive relative value versus other securitized products.⁷ The pace of new CLO creation has steadily increased since the second half of 2020 as attractive new issue loan yields and significant tightening in CLO liabilities (new issue AAA spreads in particular) helped to improve the arbitrage. As short-term rates have bottomed, retail money has flowed back into floating rate loan funds. Following $26.9 billion of outflows in 2020, retail loan funds have reported $13.1 billion of inflows year-to-date as of March 31, 2021.⁷

We perceive the potential for further upside over the remainder of 2021. We anticipate the potential for above-trend US GDP growth as vaccination rates increase, states fully reopen, and Americans embrace post-pandemic life, which we believe bodes well for corporate borrowers in the loan market. We will continue to rely on fundamental credit research, disciplined asset selection, and active portfolio management to seek to identify relative value opportunities with alpha potential. In the current market environment, we believe COVID-affected borrowers with fundamentally sound business models whose loans are trading at discounted levels could present interesting investment candidates for the Trust.

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

The CLO market continued to recover over the six-month period ending March 31, 2021, in tandem with the credit markets. CLO debt tranches rebounded from the late-March 2020 dislocation to generate positive performance across the capital stack, and have since posted positive returns in the first quarter of 2021. Meanwhile, CLO equity valuations have continued to improve alongside rising loan prices. Following $31.8 billion of new CLO issuance in the fourth quarter of 2020, the CLO market experienced its most active quarter on record in the first quarter of 2021, with $106.2 billion of new supply (an increase of 149% versus the first quarter of 2020), comprising $39.3 billion of new CLOs, $37.1 billion of deal refinancings, and $32.0 billion of resets.⁸ The resurgence in refinancing/reset activity year-to-date has been driven by 2016/2017 vintage deals exiting the reinvestment period, and also by 2019 vintage deals, as CLO managers have sought to take advantage of the very flat AAA term curve and extend the deal structure. Longer-dated deal structures (the pre-pandemic norm) have returned to dominance. Of the new issue and resets CLOs priced year-to-date as of March 31, 2021, 84% have a five-year reinvestment period.⁹ We expect that CLO origination, deal refinancings, and resets may remain strong through the first half of 2021. In the near-term, CLO refinancing/reset supply is likely to be dominated by deals issued post-COVID that will end the non-call period over the next two quarters.¹⁰ In our view, the surge in CLO reset activity could prove accretive to the Trust’s CLO equity positions; should any CLOs in the portfolio execute a refinancing or reset, the tighter CLO liability costs may significantly benefit equity investors over the long term.

Amid supportive market conditions, new issue CLO funding costs have compressed to the lowest level since January 2018, but primary loan spreads have remained relatively flat year-to-date, resulting in attractive new issue CLO arbitrage compared to prior years.⁹ The weighted average cost of capital for CLOs issued in the first quarter of 2021 was L+163 bps, on average, representing a decrease of 30 bps from the prior quarter.⁷ For further comparison, the weighted average cost of capital for a new issue CLO priced in early March 2020 ranged from L+140-150 bps, and widened out to the L+160bps context by month-end as market volatility increased.¹¹

March 31, 2021 (Unaudited)

CLO fundamentals continued to recover over the period, as an increasingly favorable economic outlook, better-than-expected corporate earnings, higher CCC loan prices, positive ratings actions, and fewer loan defaults drove further improvements in underlying loan portfolios and CLO coverage tests. In the fourth quarter of 2020, CLOs benefited from an uptick in ratings upgrades among CCC rated loans and a strong bid for risk assets. Loan prices continued to advance into year-end, thereby supporting CLO managers’ ability to sell lower quality loans at higher prices. After peaking at approximately 12% in May 2020, the median CCC basket for US CLOs decreased to 8% as of year-end,¹² and has since ticked down to 7% as of March 2021.¹³ Defaulted balances and stressed assets in CLO portfolios likewise continued to decline. As of early March 2021, only 1.7% of underlying loan collateral in CLO portfolios was trading below $80, implying lower downside risk.⁹ Less than 4% of reinvesting CLOs are currently failing one or more overcollateralization (O/C) test, compared to roughly 7 at year-end 2020 and 25% at the May 2020 peak.¹⁴ Following elevated rating agency downgrades and negative watch actions on CLO debt tranches earlier in 2020 (predominantly among mezzanine tranches), we have recently observed more tranche upgrades than downgrades as the economic recovery continues.⁹

Following the sharp rebound in CLO equity distributions in October (owing largely to the stabilization in LIBOR reference rates, the benefit of LIBOR floors, and fewer missed payments caused by CLO OC test failures), the median equity cash-on-cash distribution modestly decreased to 3.8% in January 2021.¹⁵ Equity payments are projected to decline due to the impact of loan repricings on CLO weighted average spreads. The wave of loan repricings year-to-date in 2021 has reduced the weighted average spread for CLOs by an estimated 7 bps (with another 1-2 bps if the reduced LIBOR floor benefit is included), which is expected to affect July CLO equity distributions.¹⁶ Given expectations of a benign loan default environment and short-term rate movements in the medium-term, we believe CLO equity may continue to offer upside potential as current CLO liability spreads are near historic tights.

We hold a constructive outlook for the CLO market, and expect continued CLO spread tightening against the backdrop of improving fundamentals and supportive technicals. In the near-term, we anticipate heavy CLO supply may be met with continued investor demand for floating rate CLO tranches, given inflationary pressures amid rising interest rates. Moreover, a healthy new issue loan pipeline may provide continued near-term support for the CLO market. Despite supportive market conditions, the CLO market is prone to episodic bouts of market volatility as technical dynamics shift, which we would generally view as a buying opportunity for the Trust. We maintain the view that potential bouts of market turbulence can benefit CLO equity. When credit spreads widen, loan prepayments and amortizations are typically recycled into discounted/higher yielding assets during periods of market volatility, while CLO liability spreads are fixed, resulting in higher CLO equity distributions. We therefore believe CLO equity continues to offer compelling risk-adjusted returns to long-term investors seeking income strategies.

How did the Trust perform for the six months ended March 31, 2021?

For the six-month period ended March 31, 2021, the Trust’s total return on market price was 60.49% and total return based on net asset value (“NAV”) was 27.50%. NAV return includes the deduction of management fees, operating expenses, and all other Trust expenses. All Trust returns cited – whether based on NAV or market price – assume the reinvestment of all distributions. As of March 31, 2021, the Trust’s market price of $9.08 represented a premium of 14.94% to its NAV of $7.90. The market value of the Trust’s shares fluctuates from time-to-time and may be higher or lower than the Trust’s NAV. Performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted.

What were the distributions over the period?

For the October 1, 2020 distribution payment which was declared on September 1, 2020, the Trust paid a monthly distribution of $0.060 per share. From November 1, 2020 through April 1, 2021, the Trust paid a monthly distribution of $0.073 per share. The Trust’s declared distribution on April 1, 2021, is consistent with the previous six distributions and represents annualized distribution rate of 9.65% based on the Trust’s closing market price of $9.08 per common share on March 31, 2021. The Trust’s distribution rate is not constant, and the amount of distributions, when declared by the Trust’s Board of Trustees, is subject to change based on the performance of the Trust. Please see Note 4 of the Notes to the Financial Statements for more information on distributions for the period.

What influenced the Trust’s performance for the six months ended March 31, 2021?

The Trust generated positive returns across its main portfolio segments during the period. CLO equity represented the largest contributor to performance for the six-month period, reflecting improved CLO equity valuations owing to higher underlying loan prices. The Trust’s CLO equity segment experienced a net gain of approximately $1.28 per share for the period, during which the Trust’s CLO equity positions collected quarterly distribution payments totaling $9,075,060 or $0.62 per share, which were augmented by market value gains of $9,705,129 or $0.66 per share. It bears noting that CLO equity pricing can be very volatile. CLO equity valuations often reflect the relative opaqueness of the secondary CLO equity market. The Trust’s performing loan portfolio segment produced a net gain of approximately $0.31 per share for the period, followed by net gains in the Trust’s CLO debt and high yield bond segments of $0.31 and $0.04, respectively.

Relevant indices for the markets in which the Trust invests include the Trust’s benchmark, the S&P/LSTA Leveraged Loan 100 Index, which returned 4.45% for the six-month period, Bloomberg Barclays U.S. High Yield 1% Issuer Capped Index, which returned 7.35% for the six-month period, and the JP Morgan BB/B CLO Debt Index, which returned 16.78% for the six-month period. There is no representative benchmark index for CLO equity in the marketplace.

March 31, 2021 (Unaudited)

How is the Trust positioned for the remainder of 2021?

Looking ahead, we believe that the Trust is well-positioned across its primary investment segments to meet its investment objective and capitalize on any potential bouts of market volatility through year-end. As of March 31, 2021, the Trust is invested predominantly in floating rate assets, comprising first and second lien loans (40.1% of the total portfolio on a market value basis as of March 31, 2021), CLO equity (32.4%) and CLO debt securities (9.6%). We note that the Trust’s allocation to money market securities (16.0%), as of March 31, 2021, is higher than is typical due to the invest-up of proceeds received from the Trust’s underwritten offering of common shares (discussed below) and underwritten offering of preferred shares just prior to the end of the reporting period—the common share offering closed on March 1, 2021 and the preferred share offering closed on March 23, 2021. We believe the Trust’s loan positions are appropriately diversified across industry sectors, with software, health care providers and services, and media representing the largest exposures as of March 31, 2021. The Trust’s CLO debt investments remain predominantly comprised of BB rated tranches; we believe moderating tail risk in underlying loan portfolios and expectations of further near-term CLO debt spread tightening should bode well for CLO mezzanine debt and CLO equity. We retain a constructive view of CLO equity over the longer term, though we expect the Trust’s CLO equity investments’ cash flows to decline over the near-term due to recent spread compression on the underlying loan collateral. Unless the market experiences pronounced volatility, we anticipate that CLO equity NAVs will remain generally stable given improvements in underlying collateral portfolios. Against the backdrop of an increasingly positive economic outlook and improving credit fundamentals, we anticipate near-term bouts of market volatility will be driven by shifting technicals, which we would view as an opportunity to increase the Trust’s CLO tranche exposure.

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

For the six months ended March 31, 2021, the Trust issued 2,019,102 common shares pursuant to an At-the-Market (“ATM”) program resulting in total net proceeds of $15,539,724 to the Trust. The ATM program is a form of continuous follow-on offering of the Trust’s common shares. The goal of the Trust’s ATM program is to enhance secondary market liquidity for shareholders by growing the size of the Trust over time and reducing operating expenses per share. In an ATM offering, newly issued shares are sold incrementally into the secondary trading market through a placement agent at prevailing market prices, but always at or above the Trust’s NAV. The placement agent sells the common shares in the open market and the Trust receives cash proceeds from the transaction to be invested pursuant to the Trust’s investment objectives. Octagon has been able to deploy the investment proceeds from the Trust’s ATM program in what it believes are attractive investment opportunities in CLO debt and CLO equity, which have been accretive to the Trust.

The Trust issues shares pursuant to the ATM only if the Trust’s shares are trading at a sufficient premium such that the issuance price, less the placement fee, exceeds the Trust’s NAV per share. For the six-month period ended March 31, 2021, the Trust traded at an average 6.74% premium to its NAV and has had average daily trading volumes of 131,738 common shares. ATM daily issuance totals depend on the Trust’s average daily trading volumes and its market price’s relative premium or discount to NAV.

The Trust also sold an additional 3,269,302 common shares through an underwritten offering, the second of this type of underwritten “overnight offering” for the Trust since inception. The underwritten offering resulted in gross proceeds of $28,181,383 (before deduction of the sales load and offering expenses) to the Trust. The shares were issued at an offering price of $8.62 while NAV was at $7.80, which resulted in an accretive offering to common shareholders. The ATM program was paused for 30 days following the close of the overnight offering.

How is the Trust positioned to perform in the current interest rate environment?

The Trust remains conservatively positioned in terms of duration; the vast majority of the Trust’s portfolio is invested in floating-rate or adjustable securities based on changes in LIBOR, as further explained below. Three-month LIBOR modestly declined during the period, from 0.23% as of October 1, 2020 to 0.19% as of March 31, 2021.¹⁷ Lower LIBOR has resulted in comparatively lower all-in yields for leveraged loans and CLO debt tranches. Despite lower short-term rates, we believe the loan market currently offers attractive total return and income potential for long-term investors. We expect accommodative global central bank policy to continue to be supportive of risk assets and overall economic growth.

Leveraged loans and CLO debt use LIBOR as an interest rate benchmart. LIBOR will be phased out, with new instruments being issued with an alternative rate beginning in 2021 and existing instruments required to transition by June 30, 2023. Replacement of LIBOR could adversely affect the market value or liquidity of CLO securities and/or loans, and pose tangential risk for markets and assets that do not rely directly on LIBOR. The six-month period was marked by several major announcements concerning the future of LIBOR. Within the US loan and CLO markets, these developments provided clarity regarding the timing of LIBOR’s end and the implementation of fallback rates in loans, CLO debt tranches, and other instruments that reference LIBOR. On March 5, 2021, the Financial Conduct Authority (FCA) and the ICE Benchmark Administration (IBA) confirmed that pound, sterling, Euro, Swiss franc and Japanese yen LIBOR settings, and 1-week and 2-month US dollar LIBOR settings will cease to be published after December 31, 2021 for legacy contracts. All other tenors of US dollar LIBOR, including 1-month and 3-month rates, will terminate on June 30, 2023, as initially announced by the FCA and IBA on November 30, 2020. The 18-month extension for most USD LIBOR settings allows additional time for outstanding USD LIBOR-linked contracts to mature and for lenders and borrowers to prepare for the transition. There is uncertainty with respect to replacement of LIBOR with proposed alternative reference rates, and it is highly likely that different markets will simultaneously have assets with different reference rates for a period of time, the effects of which are presently uncertain, and could include increased volatility or illiquidity, and could reduce overall returns. It is uncertain when the timing of the benchmark transition will take place for CLO liabilities as LIBOR transition language in US CLO documents varies across CLO transactions and vintages, though there are various fallback language options outlined in CLO documents. It is expected that new issue loans will begin referencing a Secured Overnight Financing Rate (SOFR) - based benchmark starting in January 2022, however this timeframe is uncertain and could also accelerate. Accordingly, it is expected that a mismatch of reference rates will exist for a period of time between CLO liabilities and at least a portion of underlying loans within CLO portfolios, which could have a negative impact on overall returns.

March 31, 2021 (Unaudited)

Discuss the Trust’s use of leverage.

The Trust uses leverage as part of its investment strategy to finance the purchase of additional securities that may provide increased income and greater appreciation potential to common shareholders than could be achieved from a portfolio that is unlevered. With the low cost of borrowing and relatively low default rates generally among U.S. companies, the amount of leverage used by the Trust is expected to be accretive to income generation. The Trust currently employs leverage through the combination of a bank borrowing facility and preferred shares outstanding. The Trust’s bank borrowing facility was amended during the Period to allow the Trust to borrow up to $75,000,000. As of March 31, 2020, the amount of outstanding borrowings under the facility was $50,150,000, which represented approximately 22.72% of the Trust’s Managed Assets (including proceeds of leverage). Additionally, as of March 31, 2021, the Trust issued preferred shares having a total liquidation preference of $29,900,000. Total leverage, as of March 31, 2021 was $76,150,000 representing 34.52% of the Trust’s Managed Assets.

The Trust may use leverage through (i) the issuance of senior securities representing indebtedness, including through borrowing from financial institutions or issuance of debt securities, including notes or commercial paper, (ii) the issuance of preferred shares and/or (iii) reverse repurchase agreements, securities lending, short sales or derivatives, such as swaps, futures or forward contracts, that have the effect of leverage. The terms of the credit facility require that if the Trust’s borrowings exceed 33 1/3% of the Trust’s managed assets, the Trust must reduce its borrowings below such ratio within a specified period of time. Because a portion of the Trust’s assets may consist of illiquid investments, to the extent that the Trust must dispose of portfolio holdings to meet such asset coverage ratio, the Trust may be required to dispose of more liquid holdings at times or on terms that the Trust would otherwise consider undesirable, which may pose particular risks during adverse or volatile market conditions. While leverage may increase the income of the Trust in yield terms, it also amplifies the effects of changing market prices in the portfolio and can cause the Trust’s NAV to change to a greater degree than the market as a whole. This change in NAV can create volatility in Trust pricing.

Index Definitions

The Trust does not seek to track any index. Index returns are stated for illustrative purposes only, do not reflect the deduction of fees and expenses, and do not represent the performance of the Trust. It is not possible to invest directly in an index.

Bloomberg Barclays U.S. High Yield 1% Issuer Capped Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond markets. Securities are classified as high yield if the middle rating of the Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Issuers are capped at 1% of the index.

J.P. Morgan CLO Debt Index represents the post-crisis J.P. Morgan Collateralized Loan Obligation Index (“CLOIE”). The CLOIE is an index that tracks the market for U.S. dollar-denominated broadly syndicated, arbitrage CLOs. The CLOIE is divided by origination (pre- versus post-crisis) and is broken out further into six original rating classes (AAA, AA, A, BBB, BB, B). The sub-index we reference here tracks BB-rated CLO debt.

S&P/LSTA U.S. Leveraged Loan 100 Index is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market. In conjunction with Standard & Poor’s/LCD, the Leveraged Syndications & Trading Association (“LSTA”) developed the S&P/LSTA U.S. Leveraged Loan 100 Index. The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to reflect the 100 largest loan facilities in the leveraged loan market. It mirrors the market-value-weighted performance of the 100 largest institutional leveraged loans based upon actual market weightings, spreads and interest payments. The S&P/LSTA U.S. Leveraged Loan 100 Index utilizes LSTA/LPC Mark-to-Market Pricing, which is based on bid/ask quotes gathered from dealers and is not based upon derived pricing models. The index uses the average bid for its market value calculation. Each loan facility’s total return is calculated by aggregating the interest return (reflecting the return due to interest paid and accrued interest) and price return (reflecting the gains or losses due to changes in the end of day prices and principal repayments). The return of each loan facility is weighted in the index based upon its market value outstanding, which reflects both the prior period’s prices as well as accrued interest. The overall index return is the aggregate of each component loan facility’s return multiplied by the market value outstanding from the prior time period.

Risks and Other Considerations

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

March 31, 2021 (Unaudited)

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

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

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

Performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted.

Risk Considerations

Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee the Trust’s investment objective will be achieved. Closed-end fund shares may frequently trade at a discount or premium to their net asset value. Senior loans may not be fully secured by collateral, generally do not trade on exchanges, and are typically issued by unrated or below-investment grade companies, and therefore are subject to greater liquidity and credit risk. Lower credit debt securities maybe more likely to fail to make timely interest or principal payments. Leverage increases return volatility and magnifies the Trust’s potential return and its risks; there is no guarantee a trust’s leverage strategy will be successful. The Trust’s shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation.

Please see “Risks” for more information regarding the Trust’s risks and considerations.

Visit the Trust’s website (www.xainvestments.com/XFLT) for additional information regarding the Trust. The Trust regularly updates performance and certain other data and publishes material information as necessary from time to time on its website. Investors and others are advised to check the website for updated performance information and the release of other material information about the Trust. References herein to the Trust’s website are intended to allow investors public access to information regarding the Trust and do not, and are not intended to, incorporate the Trust’s website in this report.

This material is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be, and should not be construed as, legal or tax advice and/or legal opinion. Always consult a financial, tax, and/or legal professional regarding your specific situation.

March 31, 2021 (Unaudited)

Growth of a $10,000 Investment (as of March 31, 2021)

The chart above represents historical performance of a hypothetical investment of $10,000 in the Trust since inception. Past performance does not guarantee future results. Performance reflects the partial waiver of the Trust’s advisory fees and/or reimbursement of expenses for certain periods since the inception date. Without these waivers and/or reimbursements, performance would have been lower. This chart does not reflect the deduction of taxes that a shareholder would pay on Trust distributions or the redemption of Trust shares. The chart assumes that distributions from the Trust are reinvested.