XFLT's Q3 2025 Earnings Call: Contradictions Emerge on CLO Equity Performance, Spread Tightening, and Market Conditions

Guidance:

• Many CLOs will be eligible for reset/non-call expirations in 1H 2026, and management expects those refinancings to be accretive and provide NAV uplift.
• Management views CLO equity spreads as close to a floor and expects limited further deterioration as loan supply and large LBOs in 2026 increase.
• Constructive on CLO BB tranches and CLO liabilities as robust income drivers.
• Institutional mandatory redeemable preferred issuance reduced blended leverage cost by ~40 bps; target leverage remains ~38–40%.
• Continue monthly distributions at $0.07 per share and ongoing expense reductions.

Business Commentary:

* Earnings and Distribution Performance: - XFLT reported net investment income of $0.14 per share for the 3-month period ended September 30, as rates declined. - The fund managed to reduce operating and leverage expenses, issuing a new form of institutional preferred to further reduce leverage expenses.

• Market Volatility and Discounts:
• XFLT was trading at a 14% discount, significantly higher than its historical trading performance of about a 2% premium.

• This was due to market volatility, particularly following the First Brands bankruptcy, which impacted credit funds and BDCs.

• Loan Market Performance:

• The loan market performed well in the third quarter, with XFLT's loan allocation outperforming the market.
• Single-B rated loans and BB CLO tranches were particularly strong, while CLO equity performance was challenged by narrowing spreads.

• Spread Compression Impact:
• The narrowing of spreads in the loan market compressed income for XFLT's loans and CLO equity.
• Despite this, the fund was able to generate robust returns on its NAV, driven by disciplined portfolio management and active liability management.
  

  Sentiment Analysis:

  Overall Tone: Neutral

  • Management repeatedly noted NAV and price pressure (NAV declines; shares trading ~14% discount) but emphasized actionable positives: 'current yields north of 20% (CLO equity) and north of 10% (CLO debt)', active refinancing/resetting, and a ~40 bps reduction in blended leverage cost via institutional preferreds; they expect many resets in 1H 2026 that should be accretive.

Q&A:

• Question from Kevin Davis (XA Investments): Specifically related to NAV, how did XFLT perform during the third quarter? And what were the main drivers of that performance?
  Response: Q3 NAV was positive overall; strong loan and BB mezz performance drove returns while CLO equity acted as the primary drag.

• Question from Kevin Davis (XA Investments): Can you discuss how CLO-focused closed-end funds have been trading in the secondary market relative to XFLT. Anything you want to expand on that?
  Response: XFLT's daily NAV provides transparency and makes it a bellwether; peers with lagged/quarterly NAVs have trailed XFLT's moves and XFLT's transparency led to earlier NAV declines and wider discounts.

• Question from Kevin Davis (XA Investments): How has the spread tightening affected XFLT's risk and return profile?
  Response: Spread tightening compresses income for loans and especially CLO equity because CLO liabilities reprice more slowly (2‑year call protection), reducing cashflows to equity until liabilities can be refinanced.

• Question from Kevin Davis (XA Investments): Could you discuss how loan market performance over the past quarter has impacted XFLT?
  Response: The loan allocation was a bright spot in Q3, delivering robust total returns and strong yields and benefiting from active trading and new‑issue opportunities.

• Question from Kevin Davis (XA Investments): How did the First Brands Group bankruptcy impact the fund's performance? And what lessons were learned from managing this credit event?
  Response: Exposure was roughly index‑level but was actively reduced, producing minimal impact to the trust; the event reinforced monitoring for concentrated ownership and off‑balance financing in diligence.

• Question from Kevin Davis (XA Investments): The proportion of loans trading at or above par declined in the third quarter—how should investors think about this as it relates to the trust?
  Response: The share above par dipped as of 9/30 implying reduced near‑term repricing, but the metric later rose to just under 50%, so some repricing remains likely between now and year‑end.

• Question from Kevin Davis (XA Investments): Can you discuss the performance of the CLO market over the past quarter as it relates to the trust? And what is Octagon's outlook for the next 6 to 12 months?
  Response: CLO BB tranches and CLO liabilities were healthy contributors in Q3; Octagon is constructive on BBs and views CLO liabilities as attractive ongoing income sources.

• Question from Kevin Davis (XA Investments): Can you elaborate on the fund's approach to managing risk in the CLO equity segment, especially given the recent dispersion in CLO equity returns and pressure on new issue arbitrage opportunities?
  Response: Risk management focuses on two drivers—cash‑flow generation and resets—so they actively pursue refinancing/resets when possible and prioritize best‑in‑class collateral managers.

• Question from Kevin Davis (XA Investments): Do you think that we're near a floor for new CLO equity levels?
  Response: Management's base case is yes—spreads are near post‑crisis tights and likely close to a floor, with expected increased loan supply and large 2026 LBOs helping stabilize spreads.

• Question from Kevin Davis (XA Investments): When will the bulk of the non‑call expiration‑related refinancing happen? Do you expect some related NAV uplift?
  Response: A significant tranche of resets/refinancings should occur in 1H 2026 and management expects those actions to be accretive and provide NAV uplift.

• Question from Kevin Davis (XA Investments): Could you discuss the trust's position in the market and its unique portfolio mix?
  Response: XFLT is intentionally about 50% senior loans and 50% CLO debt/equity (now >500 holdings), differentiating it from equity‑heavy peers and enabling more attractive, diversified financing.

• Question from Kevin Davis (XA Investments): Has the portfolio allocation shifted much over the past several quarters? And what's your rationale for the current mix?
  Response: Only marginal shifts—the BB mezz allocation is higher; management remains comfortable keeping a meaningful CLO equity allocation for yield and long‑term optionality.

• Question from Kevin Davis (XA Investments): Can you touch on the institutional preferred issuance and the redemption of the 2026 term preferreds? How has the fund's cost of leverage changed and what is the target leverage ratio going forward?
  Response: Issuance of institutional mandatory redeemable preferreds lowered blended leverage cost by ~40 bps (from ~6.11% to ~5.72% reported) versus prior retail preferreds; target regulatory leverage remains ~38–40%.

• Question from Kevin Davis (XA Investments): How does management determine the optimal mix between bank borrowings and preferred shares?
  Response: They match liability tenor to asset life—using longer‑dated preferreds to better align with long‑lived CLO equity to avoid asset‑liability mismatches.

Contradiction Point 1

CLO Equity Performance and Market Outlook

It involves differing perspectives on the performance and outlook for CLO equity, which is a significant component of the trust's portfolio and impacts investor expectations.

Could you explain the trust's Q3 performance, specifically regarding NAV, and the key drivers behind it? - Kevin Davis(XA Investments)

2025Q3: CLO equity had another tough quarter, but XFLT's equity performance exceeded market estimates. - Lauren Law(Senior Portfolio Manager)

How did loans perform in Q2, considering market volatility in April? - Kevin Davis(XA Investments)

2025Q2: CLO equity assets were down 4.7% in the quarter. This was driven by a decline in the lower-rated CLO equity assets. - Lauren Kristen Law(Senior Portfolio Manager)

Contradiction Point 2

Spread Tightening Impact on Income and Risk-Return Profile

It involves the impact of spread tightening on the income earned by the trust and its risk-return profile, which is crucial for understanding the fund's performance and risk management strategies.

How has spread tightening impacted XFLT's risk and return profile? - Kevin Davis(XA Investments)

2025Q3: Spread tightening pressures income earned by the trust on loans and CLO equity. - Lauren Law(Senior Portfolio Manager)

Is the fund's gross investment income increasing proportionally with rising leverage costs? - Unidentified Company Representative(XFLT)

2023Q2: Loan investment income rises with leverage costs due to base rates plus spreads. - Unidentified Company Representative(XFLT)

Contradiction Point 3

CLO Equity Arbitrage and Market Conditions

It involves expectations for CLO equity arbitrage and market conditions, which are crucial for understanding potential investment opportunities and risks.

Are we near a floor for new CLO equity spreads? - Kevin Davis (XA Investments)

2025Q3: Spreads are through postcrisis tights and cannot return to precrisis levels. Increased M&A activity is expected to increase loan supply, stabilizing spreads and improving CLO equity arbitrage. - Lauren Law(Senior Portfolio Manager)

How have CLO spreads changed across tranches, and how has volatility affected supply and demand in the CLO market? - Kevin Davis (XA Investments)

2025Q1: In Q1, CLO issuance was supported by tight spreads, but later, trade tensions caused CLO spreads to widen. CLO issuance slowed in March and April. - Lauren Kristen Law(Senior Portfolio Manager)

Contradiction Point 4

Economic Conditions and Borrower Health

It involves differing views on the economic conditions and the health of borrowers, which can influence the trust's investment strategy and risk assessments.

How did the First Brands Group bankruptcy affect the fund's performance, and what lessons were learned from this credit event? - Kevin Davis(XA Investments)

2025Q3: The First Brands exposure was equivalent to the index but was managed actively for alpha. The trust is diversified, so impact was minimal. - Lauren Law(Senior Portfolio Manager)

Can you discuss broader economic conditions affecting borrowers (e.g., consumer sentiment, employment, hiring trends) and Octagon's outlook? - Kevin Davis(XA Investments)

2025Q2: The U.S. economy remains supportive of levered credit, with low unemployment and modest jobless claims. However, there are pockets of stress in the lower-end consumer. - Lauren Kristen Law(Senior Portfolio Manager)

Contradiction Point 5

CLO Equity Performance and Market Environment

It highlights differing perspectives on CLO equity performance and market conditions, which are important for assessing the fund's investment strategies and market outlook.

Can you explain the trust's performance in the third quarter, particularly regarding NAV, and the key drivers? - Kevin Davis(XA Investments)

2025Q3: XFLT's equity performance exceeded market estimates. - Lauren Law(Senior Portfolio Manager)

How does Octagon's portfolio strategy impact XFLT, and what is their approach to managing different asset classes? - Gretchen Lam(Senior Portfolio Manager, Octagon Credit Investors)

2023Q2: CLO equity had a tough quarter, but XFLT's equity performance exceeded market estimates. - Lauren Law(Senior Portfolio Manager)