XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) Q2 FY24 Earnings call transcript Aug 29, 2024

In a recent webinar, XFLT, a leading credit fund managed by Octagon, provided an update on its performance and the outlook for the asset class. The call, featuring executives Kevin Davis, Kimberly Flynn, and Lauren Law, offered valuable insights into XFLT's financial highlights, strategic direction, and market trends. Here are the key takeaways from the call.

Financial Highlights and Strategic Mix

XFLT has seen significant growth over the last 12 months, with total managed assets increasing by about $200 million. The fund's income-focused strategy, which includes a mix of senior loans and CLO investments, has been successful in generating strong net returns. As of June 2024, the fund had total managed assets of $700 million, with a mix of 50% senior loans and 50% CLO investments. This strategic mix has been instrumental in maximizing income and maintaining a balance of stability and flexibility.

Market Outlook and Trading Activity

The leveraged loan and CLO markets have shown strong performance in 2024, with broadly syndicated leveraged loans returning over 5% year-to-date and CLO BBs up almost 12.5%. Despite some challenges, such as spread compression and volatility, the outlook for the loan market remains constructive, with potential for more loan supply and M&A activity in the fall. XFLT's active secondary market trading has been a significant contributor to its growth and liquidity, reflecting the demand for income-oriented products in today's market.

Leverage, Fees, and Competition

XFLT's use of leverage, primarily floating rate bank borrowings and retail preferreds, has been strategic in enhancing income production and maintaining parity with the floating rate assets. The fund's lack of performance fees is a unique offering compared to some competitors, highlighting Octagon's focus on attractive distributions for shareholders. The market's response to XFLT's strategies, including its at-the-market program and hybrid asset mix, underscores the demand for income-focused funds with a flexible approach to credit markets.

Looking Ahead

The outlook for XFLT and the broader credit market is promising, with potential for continued growth and income generation. The challenges faced in 2022, including inflation and interest rate volatility, have been addressed through proactive management and strategic positioning. With the Fed's shift towards easing and the potential for increased M&A activity, XFLT is well-positioned to continue its strong performance and capitalize on opportunities in the evolving market.

As investors and analysts seek to understand the dynamics of the credit market and the strategies of leading players like XFLT, the insights from this earnings call provide a valuable perspective on the current landscape and future prospects. With a focus on income generation, strategic asset allocation, and a nimble approach to market trends, XFLT and Octagon are shaping the narrative for credit investment in today's market.