8-K: XAI Octagon Floating Rate & Alternative Income Trust Announces Private Placement of Convertible Preferred Shares

XAI Octagon Floating Rate & Alternative Income Trust has entered into an agreement to issue up to 1.8 million convertible preferred shares, potentially raising approximately $41.85 million.

Summary

• XAI Octagon Floating Rate & Alternative Income Trust has agreed to a private placement of up to 1,800,000 shares of its 6.95% Series II 2029 Convertible Preferred Shares.
• The initial sale of 400,000 shares occurred on June 13, 2024, at $23.25 per share, with the Trust expecting to receive approximately $9.3 million in net proceeds.
• The remaining 1,400,000 shares may be purchased by investors at one or more subsequent closings at the discretion of the Trust on or before December 10, 2025.
• If the Trust does not sell all the agreed shares by December 10, 2025, it will pay the purchasers $0.75 per unissued share.
• The preferred shares have a liquidation preference of $25.00 per share and pay a fixed annual dividend of 6.95%, or $1.7375 per share, payable quarterly.
• The shares are convertible into common shares at a price equal to the greater of the market price or the net asset value per common share.
• The Trust is required to redeem all outstanding preferred shares on December 31, 2029, at the liquidation preference plus any accumulated unpaid dividends.
• The Trust may also redeem the shares at its option after 18 months from the initial issuance date.
• The preferred shares rank senior to the common shares in terms of dividend payments and asset distribution upon liquidation.

Sentiment

Score: 7

Explanation: The document outlines a standard capital raising activity for a closed-end fund. The terms are reasonable and the potential for capital raise is positive. However, the lack of liquidity and potential costs associated with unissued shares temper the overall sentiment.

Positives

• The private placement provides the Trust with a potential capital raise of approximately $41.85 million.
• The fixed dividend rate of 6.95% on the preferred shares offers a predictable income stream for investors.
• The conversion feature provides potential upside for investors if the common share price increases.
• The preferred shares rank senior to common shares, offering a degree of protection in case of liquidation.
• The Trust has the flexibility to determine the timing of subsequent closings for the remaining shares.

Negatives

• The preferred shares are not listed on any exchange and cannot be transferred without the Trust's consent, limiting liquidity.
• The Trust is obligated to pay $0.75 per unissued share if it does not sell all the agreed shares by December 10, 2025, which could be a cost if demand is lower than expected.
• The conversion price is based on the greater of market price or net asset value, which could limit the benefit of conversion if the market price is below net asset value.
• The dividend rate is subject to adjustment under certain circumstances, which could reduce the income stream for investors.

Risks

• The Trust may not be able to sell all 1.8 million preferred shares by the deadline of December 10, 2025, incurring a cost of $0.75 per unissued share.
• The market price of the common shares could decline, reducing the value of the conversion option.
• The Trust's ability to redeem the preferred shares on the term redemption date depends on the availability of legally available funds.
• The dividend rate on the preferred shares is subject to adjustment, which could impact the income stream for investors.
• The preferred shares are not listed on an exchange, which limits their liquidity.

Future Outlook

The Trust intends to use the proceeds from the sale of the preferred shares to invest in accordance with its investment objective. The Trust has the option to sell the remaining shares at its discretion on or before December 10, 2025. The Trust is required to redeem all outstanding preferred shares on December 31, 2029, unless converted earlier.

Management Comments

• The Trust's investment objective is to seek attractive total return with an emphasis on income generation across multiple stages of the credit cycle.
• XA Investments LLC (XAI) serves as the Trust's investment adviser.
• Octagon Credit Investors, LLC (Octagon) serves as the Trust's investment sub-adviser.

Industry Context

This private placement is a common method for closed-end funds to raise capital. The issuance of convertible preferred shares allows the Trust to access capital while providing investors with a fixed income stream and potential upside through conversion to common shares. This is a typical strategy for funds seeking to leverage their capital structure and enhance returns.

Comparison to Industry Standards

• The 6.95% dividend rate is within the typical range for preferred shares issued by closed-end funds.
• The conversion feature is a common incentive to attract investors to preferred shares.
• The liquidation preference of $25.00 per share is standard for preferred shares.
• The redemption terms are typical for term preferred shares, with a mandatory redemption date and an optional redemption feature.
• Other closed-end funds such as PIMCO Corporate & Income Opportunity Fund (PTY) and BlackRock Enhanced Equity Dividend Trust (BDJ) also utilize preferred shares as part of their capital structure.

Corporate Governance

Stakeholder Impact

• Shareholders: The issuance of preferred shares may dilute the value of existing common shares, but the capital raise could lead to increased investment opportunities and potentially higher returns.
• Preferred Shareholders: The preferred shares offer a fixed income stream and potential upside through conversion, but they are subject to redemption and liquidity risks.
• Employees: The capital raise may provide the Trust with additional resources to support its operations and growth.
• Customers: The capital raise may enable the Trust to offer more investment opportunities and services.
• Suppliers: The capital raise may improve the Trust's financial stability and ability to meet its obligations.
• Creditors: The issuance of preferred shares may increase the Trust's leverage, but the capital raise could improve its overall financial health.

Next Steps

• The Trust will continue to offer the remaining 1.4 million preferred shares to investors on or before December 10, 2025.
• The Trust will pay quarterly dividends on the preferred shares.
• The Trust will monitor the asset coverage ratio to ensure compliance with redemption requirements.
• The Trust will manage the conversion of preferred shares into common shares as requested by holders.
• The Trust will redeem all outstanding preferred shares on December 31, 2029, unless converted earlier.

Key Dates

Keywords

convertible preferred shares, private placement, capital raise, fixed income, dividend, liquidation preference, redemption, conversion, XFLT, Eagle Point