Beginning on January 1, 2021, as permitted by regulations adopted by the SEC, paper copies of XAI Octagon Floating Rate & Alternative Income Term Trust’s (the “Trust”) annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from the Trust or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on the Trust’s website (www.xainvestments.com/XFLT), and you will be notified by mail each time a report is posted and provided with a website link to access the report.

If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications electronically from the Trust by contacting your financial intermediary, such as a broker-dealer or bank.

You may elect to receive all future reports in paper free of charge. If you own these shares through a financial intermediary, such as a broker-dealer or bank, you may contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. If you invest directly with the Trust, you can inform the Trust that you wish to continue receiving paper copies of your shareholder reports by calling (888) 903 -3358. Your election to receive reports in paper will apply to all funds held with the fund complex if you invest directly with the Trust or to all funds held in your account if you invest through your financial intermediary.

September 30, 2020 (Unaudited)

Dear Shareholder:

We thank you for your investment in XAI Octagon Floating Rate & Alternative Income Term Trust (the “Trust”). The COVID-19 pandemic continues to impact our health, societies, economies and financial markets. Our thoughts are with you during this time of significant disruption caused by the virus in your communities. This annual report covers the twelve months ended September 30, 2020 (the “Period”).

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. The investment objective of the Trust 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. There can be no assurance that the Trust will achieve its investment objective.

Prior to the COVID-19 crisis, the global economy had shown signs of improvement after trade tensions that had weighed on economic activity for much of 2019. To address the impact of COVID-19 shutdowns, central banks and governments around the globe have announced economic stimulus measures. During this Period, the U.S. Federal Reserve (the “Fed”) cut its benchmark interest rate to near zero. With historically low interest rates around the world, the need for better income sources has become more pressing for investors. The U.S. government has approved three relief packages, including a $2 trillion-dollar package directly supporting businesses and individuals. The Coronavirus Aid, Relief and Economic Security Act, called the CARES Act, has provided direct payments and expanded unemployment benefits to individuals, loans and grants to small businesses, loans and other money to large corporations and funding for hospitals, public health, education and state and local governments. While debate continues regarding future U.S. relief packages, the presidential election has made it difficult for politicians to come to a mutually-agreeable solution to further support economic recovery.

Uncertainty remains high and bouts of elevated volatility are expected to continue. We have observed signs of an economic recovery in the U.S with jobs, consumer spending, manufacturing and other indicators rebounding from their weakest levels. Additionally, progress toward a COVID-19 vaccine has been promising and the availability of that vaccine may drive the re-opening plans of state and local economies in 2021. In the 3rd quarter of 2020, the U.S financial markets have taken an optimistic view. For income investors and with this volatility in mind, we believe in the virtue of patience and taking a long-term perspective.

The Trust’s net asset value (“NAV”) decreased during the Period by 20.19% from $8.22 per common share to $6.56 per common share, largely reflecting unrealized losses due to valuation changes for the Trust’s investments in collateralized loan obligation (“CLO”) debt, CLO equity, and opportunistic loan segments.

For the twelve months ended September 30, 2020, 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 15.15%, 2.80%, and 1.71%,¹ respectively.

During the Period, the Trust declared aggregate monthly distributions totaling $0.798 per common share. The distribution of $0.060 per common share declared on September 1, 2020 represented an annualized distribution rate of 12.02% based on the Trust’s closing market price of $5.99 per common share on September 30, 2020. On October 1, 2020, the Trust increased the monthly distribution to $0.073 (up from $0.060) per common share which represents an annualized distribution rate of 14.62% based on the Trust’s closing market price of $5.99 per common share on September 30, 2020.

The closing price per share of the Trust’s common shares was $5.99 on September 30, 2020, representing an 8.69% discount to NAV per common share as of such date. From the Trust’s IPO on September 27, 2017 through September 30, 2020, the Trust’s common shares have traded on average at a 0.28% premium to NAV.

For the twelve months ended September 30, 2020, the Trust issued 2,256,440 common shares pursuant to the “at-the-market” program totaling $18,468,765 net assets to the Trust. The Trust also sold an additional 1,098,500 common shares through an underwritten offering of common shares that settled on November 19, 2019. The underwritten offering resulted in gross proceeds of $9,183,460 (before deduction of the sales load and offering expenses).

September 30, 2020 (Unaudited)

The last twelve months were characterized by market turbulence in both equity and debt capital markets due to the impact of COVID-19 related shutdowns. We observed rapid price declines in the loan market in March 2020 with continued retail loan fund outflows in the subsequent weeks. Loan and CLO debt prices have since improved, while CLO equity prices remain relatively depressed. We have observed an increase in ratings downgrades due to liquidity concerns and lower profitability and an increase in defaults resulting from the negative impact of COVID. We believe that strong fundamental credit analysis and active portfolio management will be key to outperformance in a weaker growth environment. Broader market volatility and increasing risk aversion are underscoring the later stage of the credit cycle; nevertheless, we expect continued institutional demand for floating-rate assets given attractive relative yields compared to other fixed income asset classes without the attendant interest rate duration risk.

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

September 30, 2020 (Unaudited)

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, Chief Executive Officer and Co-Chief Investment Officer), Michael B. Nechamkin (Co-Chief Investment Officer and Senior Portfolio Manager), Lauren B. Law (Portfolio Manager). In addition, Sean M. Gleason (Assistant Portfolio Manager), and Maegan Gallagher (Head of Trading and Capital Markets) are members 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 Assets¹ 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.

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.

Leveraged loans rebounded sharply from the late-March sell-off, with higher quality assets leading the rally early on as the market sprang back from extreme oversold conditions. Amid improving investor sentiment and better economic data—supported by massive monetary and fiscal stimulus—riskier assets have since assumed the lead of the market rally. Loans have produced gains in each month since April; by rating cohort, CCC rated loans, B rated loans, and BB rated loans have returned 23.84%, 15.93%, and 10.03% between April 1 and September 30, 2020, respectively.² Asset prices continued to advance to pre-COVID levels, with the weighted-average bid price of the S&P/LSTA Leveraged Loan Index (“LLI”) reaching $93.18 as of September 30, 2020, compared to $76.23 at the market trough on March 23, and $96.85 on February 27, 2020.³

The US economy continued its dramatic recovery from the depths of March/April, supported by the effects of massive monetary and fiscal stimulus and improving investor sentiment. Second quarter earnings generally exceeded expectations (with positive surprises in several instances), underscoring many businesses’ ability to adapt to an unprecedented operating environment. While certain industries and companies remained deeply challenged by the impacts of COVID-19, we expect third quarter earnings may start to reflect significantly better macroeconomic data. Meanwhile, key indicators point to reduced credit stress in the loan market. Loan downgrades have decreased considerably after reaching a record high in April, when the rating agencies were quick to act amid mounting COVID-related stress. Since August, we have seen an increase in loan upgrades. Borrower liquidity has generally improved over the past few months,⁴ and the portion of loans currently trading at stressed/distressed levels is down to roughly 5% compared to 56% in late March.⁵ The trailing 12-month (“LTM”) loan default rate increased to 4.17% as of September 30, though third quarter default volume was significantly lower than the prior quarter ($10.6 billion of defaulted loans across 11 issuers in the third quarter versus $23 billion across 27 issuers in the second quarter)⁶ and concentrated largely among companies facing pressure prior to the onset of the pandemic. With the Federal Reserve flooding markets with liquidity amid healthy demand for risk assets, we believe current market dynamics may keep defaults below the prior crisis’s peak levels. We expect the LTM loan default rate to modestly increase by calendar year-end, but remain well below the 11% peak reached in late-2009.⁶ Notably, some market participants and sell-side strategists have recently lowered their 2020 loan default projections, given the significant reduction in default activity and better-than-expected economic recovery in the third quarter.⁷

Technical dynamics have strengthened in recent months, driven by increasing demand from new CLO formation. Following near-record withdrawals in March, retail loan fund outflows have largely stabilized. Meanwhile, we have observed increased demand for loans from some separate account clients and private fund investors. The pace of new CLO issuance has accelerated amid a surge in new loan supply and tightening CLO liability costs, culminating with $10.6 billion of new deals pricing in September 2020—the highest monthly volume since April 2019.⁸ The third quarter was the busiest of the year for the primary CLO market; although year-to-date new deal issuance is substantially lower compared to 2019,⁸ the resurgence of new CLO formation and compression in CLO AAA spreads are encouraging given that the market was effectively shut down earlier this year.

As of September 30, year-to-date new issue institutional loan volume totaled $207 billion (down 13% versus the same period in 2019), with the lion’s share of issuance (roughly 80%) occurring in the first and third quarters.⁹ In the wake of March’s dislocation, many borrowers tapped loan markets in order to strengthen their cash positions, which created unique opportunities for the Trust to participate in very high coupon liquidity financings for investment grade bonds, BB rated bonds, and other compelling loan issuances. Towards the end of June, record high inflows into high yield bond funds, inflows from opportunistic loan buyers, and accelerating new CLO formation led to billions of dollars in loan demand. Many of the new issue loan deals that launched in June offered high spreads, steep original issue discounts (OID), more lender-friendly terms, and call protection. The average quarterly nominal spread of new issue loans rated B+/B widened to LIBOR plus 482 basis points (L+482 bps) in the second quarter; the average all-in spread (factoring in OID and the LIBOR floor benefit) reached L+661 bps in the second quarter, the highest level in at least eight years.¹⁰ Amid continued strong demand for loans, the average all-in spread for new issue B+/B loans tightened to L+501 bps in the third quarter but remains elevated compared to historical averages.⁹ New issue loan volume totaled $73.8 billion in the third quarter, a 68% uptick from second quarter levels.⁹ In addition to a surge of M&A financings in September (during which 56% of total third quarter M&A supply came to market),⁹ we saw increased opportunistic deal volume as issuers sought to take advantage of lower rates to refinance their debt obligations and manage upcoming maturities. Of note, B rated new loan issuance represented 72% of total issuance (versus 49% in the second quarter),⁸ which we view as a positive signal in support of risk assets.

We are encouraged by the dramatic rebound in the U.S. economy and the leveraged credit markets, though risks remain amid an uncertain outlook. The Federal Reserve recently announced its plan to maintain accommodative monetary policy and keep short-term interest rates near zero through 2023, which we believe should boost business and consumer confidence and be supportive of risk assets. Nevertheless, we expect the pace and magnitude of the recovery will be uneven and punctuated by bouts of volatility stemming from election risk, earnings results, the continued spread of COVID-19, and progress towards a vaccine. Periods of volatility typically create opportunities to generate alpha; in the current environment, we believe fundamental credit selection is critical to mitigating defaults and producing attractive risk-adjusted returns. To that end, Octagon’s Investment Team is acutely focused on ascertaining the immediate and longer-term impacts of the pandemic and election results on our issuer universe. As this extraordinary year draws to a close, we maintain the view that the Trust can continue to perform by adhering to Octagon’s time-tested investment approach based on deep credit research, relative value optimization, and active portfolio management. We will continue to focus on credits with strong underlying fundamentals and attractive terms, and will seek to proactively manage the Trust’s risk profile to withstand volatility. With a current average yield-to-three-year-takeout of 5.96%,¹¹ we believe the loan asset class continues to offer attractive relative value. Moreover, we believe loans’ senior priority and secured nature can help portfolios withstand challenging market conditions.

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

The CLO market rebounded over the past six months as the credit markets have rallied; as of September 25, CLO debt spreads had retraced 55-91% of COVID-related widening (depending on rating/tranche),¹² and CLO equity NAVs have improved from March/April lows in tandem with higher loan prices. Market volatility and heavy secondary supply caused CLO debt spreads to widen significantly in March, and new CLO formation came to a halt. Despite the historically high cost of financing, primary market activity resumed in April and has since gradually increased, with monthly new deal issuance reaching a year-to-date high in September. Year-to-date through September 30, new CLO issuance totaled $62.0 billion across 135 deals.¹³ CLO refinancings/resets were non-existent in the second quarter given turbulent market conditions; refinancing activity resumed in the third quarter but has been limited to fixed rate tranches, owing largely to lower rates. Secondary CLO trading volumes remained elevated, reflecting increased activity from more liquidity-driven investors, particularly among AAA tranches.¹⁴

After lagging the post-March rally in comparably rated credit assets, CLO AAA spreads tightened dramatically in late September, and we observed considerable tiering in new issue AAA levels.¹⁵ On average, primary AAA spreads tightened to 160 bps in the third quarter (from 194 bps in the second quarter), with AAA spreads for top tier managers’ new issue deals reaching post-COVID tights (125-130 bps) in September.⁹ Several new issue CLOs priced in the second quarter were shorter-dated, smaller deals with modestly lower leverage. As market conditions improved, the average reinvestment period for new CLOs issued in the third quarter increased to three years.⁹ Given the recent tightening in AAA liabilities, we have observed the reemergence of five-year reinvestment periods (the pre-COVID norm) in some primary deals.

CLO fundamentals have largely stabilized following a period of pronounced COVID-driven stress. After experiencing initial declines in overcollateralization (“OC”) tests due to the April/May spike in loan downgrades, most reinvesting CLOs have continued to perform amid supportive loan market conditions. Record-setting loan downgrade activity in April put pressure on CLOs’ CCC baskets; in turn, nearly 60% of CLOs reported exceeding the 7.5% CCC limit in April and 13% of CLOs failed their junior overcollateralization (“OC”) test,¹⁶ which contributed to 7% of reinvesting CLOs missing their April equity distribution.¹⁷ In July, 14% of reinvesting CLOs missed their equity payment, as distributions were challenged by lower LIBOR and the material base rate mismatch between CLO liabilities and underlying loan assets.¹⁷ The majority of CLOs reset the LIBOR on their liabilities in April, when three-month LIBOR was still well above 1%, while most underlying loan assets reference one-month LIBOR (which fell below 20 bps in May and June), thereby reducing the net interest margin available for equity payments. Lower rates have effectively resolved the base rate mismatch issue. Approximately 69% of the loans currently held in US CLO portfolios have a LIBOR floor, loans with floors are benefiting CLO weighted average spread tests by 24 bps, on average.¹⁸

As the pace of loan downgrades slowed in late-May and June, increased demand from opportunistic buyers strengthened the bid for risk assets. CCC rated loans rallied in the secondary market, thereby supporting both an increase in OC ratios and CLO managers’ ability to sell CCC loans at higher prices. Notably, approximately $2.3 billion (net) of loans held in CLOs have been upgraded from CCC to B/B- since August,¹⁹ which affords collateral managers additional cushion to test levels. As the median CCC basket decreased to 9.0% as of September 30, only 7% of reinvesting CLOs are currently failing an OC test.²⁰ We believe fewer loan downgrades, better-than-expected corporate earnings, lower default expectations, and continued central bank stimulus may provide support for underlying loan portfolios and drive improvements in CLO coverage tests. Weakening asset quality resulted in elevated ratings risk to CLO liabilities earlier this year, predominantly among mezzanine tranches. Nearly 60% of US B rated tranches and approximately 33% of BB rated notes have been downgraded since March,²¹ though the pace of rating agency downgrades and negative watch actions on CLO tranches has since slowed. Approximately 37% and 55% of US CLO BBB and BB rated tranches were on negative watch for downgrade at the end of June; both figures have since declined to roughly 5% as of September 30.²¹

In light of September’s robust primary activity, some sell-side CLO strategists have revised their full-year 2020 new issuance forecasts upwards, including Wells Fargo (from $65 billion to $70 billion)²² and Barclays (from $50-60 billion to $65-$75 billion.²³ We expect continued healthy demand driven by a strong AAA investor base and third-party structured credit-focused investment vehicles raised in 2019-2020. CLO manager tiering is likely to remain elevated given expectations of heavy new deal issuance and potential volatility due to election risk and various COVID-related concerns. We believe strong market technicals may help limit significant CLO spread widening into year-end.

We retain a constructive outlook for the CLO market despite potential near-term headwinds, and believe select CLO mezzanine debt and equity tranches offer attractive opportunities. Primary and secondary BB rated debt tranches currently offer coupons in the high 7-8% range, and we expect these tranches to benefit from improving fundamentals. We anticipate primary CLO equity to benefit from lower CLO liability costs and collateral managers’ ability to purchase loan assets at discounts to par. We believe secondary CLO equity may continue to benefit from stable/improving CCC rated loan performance, allowing managers more flexibility to reposition portfolios while mitigating par losses. With 98.1% of loans trading below par as of September 30,¹³ the secondary market may continue to present opportunities to buy discounted assets. We maintain the view that potential bouts of market turbulence may also 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, especially in more volatile loan markets.

How did the Trust perform for the twelve months ended September 30, 2020?

For the twelve-month period ended September 30, 2020, the Trust’s total return on market price was -24.14% and total return based on net asset value (“NAV”) was -9.54%. 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 September 30, 2020, the Trust’s market price of $5.99 represented a discount of 8.69% to its NAV of $6.56. 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?

From October 1, 2019 through April 1, 2020, the Trust paid a monthly distribution of $0.073 per share. For the remainder of the twelve-month period ended September 30, 2020, the Trust paid a monthly distribution to $0.060 per share, beginning with the distribution paid on May 1, 2020. The Trust declared a distribution of $0.073 per share on October 1, 2020, which represents an increase to the six previous distributions declared during the period and represents annualized distribution rate of 14.62% based on the Trust’s closing market price of $5.99 per common share on September 30, 2020. 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 twelve months ended September 30, 2020?

Pronounced volatility in March resulted in lower valuations across the Trust’s portfolio, which negatively impacted the Trust’s performance for the period. While the Trust generated strong returns in the second and third quarters of 2020 as asset prices rebounded, recent performance has not yet recouped the outsized unrealized losses sustained in the first quarter due to the late-March sell-off. CLO equity represented the largest detractor to performance for the 12-month period, reflecting lower CLO equity valuations owing to lower underlying loan prices. The drop in loan prices in March caused CLO equity valuations to turn negative in most instances, though valuations have since improved. The Trust’s CLO equity segment experienced a net loss of approximately ($0.37) per share for the period, during which the Trust’s CLO equity positions collected quarterly distribution payments totaling $10,743,820 or $0.89 per share, which were offset by market value losses of $15,205,524, or ($1.26) 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, and CLO equity trading activity has been limited since March. The Trust’s performing loan portfolio segment experienced a net loss of approximately ($0.12) per share for the period, followed by modest net losses in the Trust’s CLO debt, high yield bonds, and opportunistic loans segments, ranging from ($0.04) to ($0.01) per share.

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 1.71% for the 12-month period, the Bloomberg Barclays U.S. High Yield 1% Issuer Capped Index, which returned 2.80% for the 12-month period, and the JP Morgan BB/B CLO Debt Index, which returned -1.87% for the 12-month period. There is no representative benchmark index for CLO equity in the marketplace.

How is the Trust positioned for the remainder of 2020?

Looking ahead, we believe that the Trust is well-positioned across its primary investment segments to meet its investment objective and capitalize on potential bouts of market volatility through year-end. As of September 30, 2020, the Trust is invested predominantly in floating-rate assets, comprising first and second lien loans (45.1% of the total portfolio on a market value basis as of September 30, 2020), CLO equity (40.9%) and CLO debt securities (9.8%). We believe the Trust’s loan positions are appropriately diversified across industry sectors, with software, media, and health care providers and services representing the largest exposures as of September 30, 2020. The Trust’s CLO debt investments remain predominantly comprised of BB-rated tranches versus single-B tranches; we expect BB tranches will benefit from improving credit fundamentals. We believe primary and secondary CLO equity tranches present attractive opportunities for the Trust in the current market environment, and we maintain a constructive view of CLO equity over the longer term. We will continue to focus on investing in collateral managers that we believe are effectively managing credit risk and possess the expertise to navigate shifting market conditions within the CLO structure.

Discuss the Trust’s secondary market performance and the At-The-Market program.

For the twelve months ended September 30, 2020, the Trust issued 2,256,440 common shares pursuant to an At-the-Market (“ATM”) program totaling $18,468,765 net assets 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 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 twelve-month period ended September 30, 2020, the Trust traded at an average 0.21% discount to its NAV and has had average daily trading volumes of 103,590 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.

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.²⁴ Three-month LIBOR has declined dramatically during the period, from 209 bps as of September 30, 2019 to 23 bps as of September 30, 2020.²⁵ Distributions were impacted by lower LIBOR during the period, which was partly offset by higher credit spreads as well as the increasing prevalence of LIBOR floors for new issue loans, which should support distribution rates for the Trust going forward. In the near-term, we expect CLO equity payments through year-end to increase from prior quarter levels, owing to the LIBOR reset on CLO liability payments, as well as the benefit of LIBOR floors (LIBOR floors are adding approximately 24 bps to CLO portfolio weighted average spread tests)¹⁸ and higher loan spreads. Despite lower short-term rates, we believe the loan market currently offers attractive total return and income potential for long-term investors. Accommodative global central bank policy should continue to be supportive of risk assets and overall economic growth. We believe lower LIBOR should also result in lower all-in yields for CLO debt tranches.

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 may be accretive to income generation. The Trust currently employs leverage through a bank borrowing facility pursuant to which the Trust may borrow up to $55,000,000. As of September 30, 2020, the amount of outstanding borrowings under the facility was $35,650,000, which represented approximately 29.55% of the Trust’s Managed Assets (including proceeds of leverage).

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.

The views expressed in this report 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.

Please see “Risks” for a detailed discussion of 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.