XAI Octagon Floating Rate & Alternative Income Trust (XFLT) Q3 FY2025 Earnings Call Transcript & Summary

Good morning. Good afternoon for those on the East Coast. Welcome to the XFLT Third Quarter Update Webinar. Thank you so much for joining us today. We're excited to get to the featured speakers, but we do have a few housekeeping items that we need to cover. Let me first begin with some brief introductions. I'm Kevin Davis with XA Investments. I head up sales and distribution for the firm. I'm happy to be joined today by Lauren Law from Octagon Credit who is a senior portfolio manager. She joined the firm in 2004 and oversees Octagon's structured credit investment strategies. She'll be covering the performance highlights from the quarter as well as the outlook for the fund and the asset class going forward. We're also joined today by my colleague, Kim Flynn, who's the President of XA Investments. Kim will be walking us through the financial highlights of the quarter as well as some of the trading trends that we've seen in the closed-end fund space. Before we get into the presentation, we do have a few important disclosures that we want to address. We will be talking about performance throughout the presentation. Certainly, past performance does not guarantee future results and current performance may be higher or lower than the performance that are quoted. We will also be discussing market outlook and the materials do contain forward-looking statements. Investors should not place undue reliance on forward-looking statements. We encourage you to review all the general disclosures of the presentation. One last housekeeping item. Please note the Q&A box at the bottom of the screen. If you have any questions, please type them into the box, and we will do our best to answer them in real time. We're also going to open up for questions at the end of the prepared remarks. If you don't get your question answered, please feel free to contact me directly, and we will get those answers for you. Lastly, please check out our website, xainvestments.com, to find information on our fund, our firm and some of the general educational materials that we've got concerning the asset class and some of the things that we're working on in-house. Okay. So let's get started. I'll begin with a few highlights of our sub-adviser Octagon Credit. For those newer to the firm, they are an industry leader in CLO issuance and CLO fund management. The firm was founded in 1994, has nearly $34 billion of assets under management as of 9/30 of this year. XFLT was launched in 2017, and it was Octagon's first strategy to be publicly available in a registered fund format. I'll also provide a brief background of XA Investments. There is quite a bit on this slide, but I'll just point out a few highlights. We are a Chicago-based boutique alternative asset manager. We were founded in 2006, over $900 million in managed assets at the end of the third quarter. We have a suite of proprietary registered funds focused on alternative income. We have 2 listed closed-end funds as well as an interval fund, which is also sub-advised by Octagon Credit and it's focused primarily on BB CLO debt. Lastly, in addition to our proprietary suite of funds, we do have a robust consulting and research practice focused on the closed-end fund space, the interval and tender offer fund markets. We help outside firms build products, we bring them to market. and we publish the research to support their efforts. We do also make our research available on a subscription basis for those interested in learning more about the space. Okay. So let's get to the topic at hand. We have some prepared questions and topics for the speakers, which we will address throughout the presentation. And a quick reminder, if you do have questions for the speakers, please type them into the Q&A box at the bottom of the screen. With that, let me turn the call over to Kim Flynn to begin with financial highlights. Kim?

Great. Thank you, Kevin. So thanks, everybody, for joining us. This is our second webinar in the past quarter. Lauren Law was kind enough to get on the October 23 update webinar that we hosted just in response to some of the market volatility in the secondary market. Obviously, since the first brands news has impacted a number of credit funds, BDCs and listed closed-end funds. We wanted to get in front of shareholders as soon as possible. I want to thank all of our attendees I know a number of people were in the waiting room for a bit of time. So thank you for sticking with us. To echo Kevin's remarks, if you do have questions, we want to make sure we address your questions either on the webinar today or in a subsequent call. So please type in any questions. We'll respond verbally, but we can also type responses to get to more people's questions. So we did, last night, filed with the SEC the annual report. I would encourage advisers and investors to take a look at the management letter, which does include a detailed Q&A. It will provide additional information beyond what we're talking about on today's webinar. We always use these opportunities with the webinar to report on the past, but we do make some forward-looking statements regarding kind of the upcoming period. The annual report is going to give you a lot of information for our year-end ended September 30. I'll cover a few of the highlights now. And and then we can take more questions if you have it. So we did report for the annual report last night. And for the 3-month period ended September 30, net investment income represented about $0.14 per share. So we've seen throughout the year, earnings has come down for XFLT as rates have declined. And we have some good news with respect to what we've been able to do in terms of reducing operating expenses, reducing leverage expenses for the period ended September 30. We were also able to issue a new form of institutional preferred in October which will further reduce leverage expenses. I'll talk about the institutional preferreds at a later point in this webinar since that's going to impact future earnings. And we've been thoughtful with trying to reduce expenses for shareholders. XFLT is a floating rate fund. We benefited significantly over the prior 2-year period as rates increased. And subsequently, our leverage expenses increased. You've got a natural mechanism there with as earnings increase, the leverage cost increase. Now as rates have come down, we've benefited from lower leverage expenses because our leverage -- a large part of our leverage is floating rate. And so we wanted to highlight that it's been a period where there's been a lot of change in the year ended 9/30. We're remaining steady with our monthly distributions, our most recent 3 monthly distribution declarations were at $0.07 per share, and we continue to manage distributions as we have in the past. Overall managed assets have come down as the NAV of the fund has declined this year. You see on the slide, we always provide a current snapshot of market prices for the securities within the portfolio. And if you take note of CLO equity, the mark-to-market price for CLO equity is about 50. And obviously, that shows up in our daily NAV in our fund, and we've seen those mark-to-market declines in the NAV of the fund we like to highlight that these are still attractive cash flowing investments, CLO equity. Current yields are north of 20%. CLO debt, the current yields are north of 10%, but we're going to see mark-to-market volatility based on where these securities are priced in the marketplace, and that has impacted XFLT in 2025. And so if you turn to the next slide, Slide 9. This -- we report for every reporting period, but I'll just highlight the quarter-to-date NAV return has been significantly impacted by these mark-to-market declines or losses. Now these are not realized losses, they're unrealized because they're reflecting the prices for these securities. We hold on to CLO equity in our top 10 of our portfolio. Each of the top 10 positions in the portfolio represents CLO equity. And so the fund was impacted on NAV. You've seen that in terms of the NAV performance, I'll let Lauren speak to what she's seeing on NAV. But I'll just address the price performance we've seen most recently, since the end of September with the first brands news, our fund and our competitor funds have both reacted on price, significantly increasing discounts in the secondary market. So prices are lower than the NAVs that you're seeing. And so both NAV and price we're reporting lower returns than we'd like given the significant pressure that we've seen in XFLT. And we're not alone. The slide here shows XFLT relative to its peers. We have a number of CLO debt and equity-focused funds that are in our peer group. This peer group typically does trade well in the secondary market, obviously not today. investors have long looked to CLO debt and CLO equity as an attractive source of income in a diversified income portfolio. And right now, XFLT is trading at a 14% discount, the peers are trading at about a 12.5% discount. So significantly discounted relative to XFLT's historical trading performance. So we've -- like I said, we've seen both NAV pressure and price pressure. And that's why we wanted to be in front of you in October, and we're happy to be back in front of you today.

Thank you for that Kim. So let's bring Lauren into the conversation, maybe go back a couple of slides and look at performance. So Lauren, specifically related to NAV, how did XFLT perform during the third quarter? And what were the main drivers of that performance?

Sure. No, happy to expand a little there. And again, I am going to focus my comments on NAV performance because that really reflects how the underlying portfolio is doing. And what we really have control over as we manage the portfolio. And as you can see on Slide 9, performance on NAV was positive in the third quarter in what was a challenging environment for both CLO equity and CLO equity-focused funds as Kim just mentioned. XFLT invest in broadly syndicated leveraged loans directly, CLO BB mezzanine tranches and of course, CLO equity. The loan market in total performed well in the third quarter. XFLT's loan allocation did as well. We actually did better than the market. Single B rated loans were the best performing portion of the loan market and XFLT is significantly overweight that rating cohort. The same was true for BB CLO tranches and the trust holdings of them. CLO equity on the other hand, as I mentioned, had another tough quarter of performance in Q3. And while there's no index to quote CLO equity returns, many sell-side observers do post estimates. As far as we can tell, the trust equity performance did exceed the estimated performance of the market by a fairly good degree as well. However, it was a challenging period for CLO equity and the trust equity allocation was a drag on fund total return relative to its loan and BB mezz. We remain focused on delivering strong NAV performance through being disciplined with our portfolio management. For investors evaluating the fund today, the discount that the shares are trading at can create a more attractive entry point versus the underlying NAV, but the NAV is where we're focused, and we think we do have the ability to continue to generate robust returns on the NAV going forward.

Thank you for that. Kim, let's bring you back into the conversation. You had showed a slide earlier, but 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?

Yes. I think the one point that I didn't mention a moment ago, which is that XFLT will lead the market in terms of its NAV and its pricing. We saw this in 2020, and we saw it again earlier this year. And when I say -- we have a daily NAV. And so we have transparency for shareholders that we think is important. And the reason we have a daily NAV goes back to the asset mix because our fund is invested in a combination of senior loans, CLO debt and CLO equity. And so relative to our competitors, which are more heavily weighted towards CLO equity, we can accomplish a daily NAV. We've had a daily NAV since the Fund's IPO in 2017. And so what that means is XFLT is sort of a bellwether for where the category is going to go. And we understand that and we think that the value of transparency outweighs any sort of consequence of having that. And so the reality is our competitors, many of them have quarterly NAVs with monthly estimates. And so there's a lag in terms of where those funds NAVs go, that's what Slide 12 here is showing. XFLT is highlighted in the sort of medium blue, the thicker line there in terms of where you see our NAV was decreasing as a result of the secondary market and the way the securities within the portfolio were being priced. And we understood that. And so there was no estimation. We use third-party valuation, and that's reflected every single day. And so what you're noticing, though, with the competitor funds is those funds sort of lag behind in terms of where NAV is going. So this will happen as NAV declines. This will also happen on the way back up when NAVs increase. And so we just wanted to sort of contrast what XFLT is doing. We know that many of the advisers who invest in this space invest in a number of these funds, and they've told us that they look at XFLT to kind of see where things are headed in terms of the other funds in the space that have lagged NAVs. Now that doesn't mean we get to escape any of the market dislocation, this whole group, this whole category, there's been concerns about the first brands news, and that's why we wanted to speak with you in October. XFLT was not impacted. And so we wanted people to know that, how are shareholders supposed to know what kind of exposure we have. I'm not sure about competitor funds. Obviously, a number of the BDCs were impacted, but that dark cloud was hanging over the entire category of credit funds, including BDCs and the listed CLO funds. So we appreciate why there are concerns in the credit market. And Lauren is going to go into more detail with respect to the fund's portfolio. And we always remind investors that the listed closed-end fund structure is really built [indiscernible] XFLT, but also our competitor strategies, this is how you want to navigate volatile markets. These funds are all built for income. They are producing high levels of cash flows and distributions for shareholders. And the listed closed-end fund structure is an appropriate fit because this is an environment where you have this type of news, you do not want to be selling securities in a time like this. You do not want to be selling CLO debt or equity if you don't have to. And that's what the listed closed-end fund allows the portfolio manager to navigate this period of time when there is NAV pressure, when there is price pressure. And so while the market right now is discounted and sort of judging and weighing some of the news that's coming out, it is really the benefit that the structure can navigate periods of this. It's obviously a challenging period for XFLT in its own history. I think there's another slide that just shows the history of XFLT's trading performance since inception. And there was a moment if you look at -- it typically has traded at about a 2% premium, but there have been a few moments in time at the end of 2018 and December, there was some volatility. Obviously, April of 2020, there was some volatility with COVID. And those were 2 moments previously where the funds discount got as large, actually larger than the discount that we saw about 2 weeks ago for XFLT, which got up to 18%, 19% in terms of its discount. It's come in now to about 14%. But obviously, that's clearly wide of where XFLT has traded over its 8-year history.

Yes. And we will address first brands here shortly. Before we get to that, Lauren, I want to go back to you and address spreads in the marketplace. So we saw spreads tighten in the third quarter after briefly widening in the prior quarter due to the tariff announcements. How has the spread tightening affected XFLT's risk and return profile?

Yes, spread tightening has been a continued challenge for the market this year. To say it very simply as to how this impacts XFLT, spread tightening does pressure the income earned by the trust. It pressures the income we earn on the loans and it pressures the income we earn on CLO equity. As we mentioned last quarter, the month of July was the most active month on record for repricing activity. And in total, the third quarter was actually the second most active quarter on record. So we were busy. About 82% of the loan market activity was driven by refinancings. Most of this simple spread reduction, but we did also see borrowers take advantage of supportive market conditions to extend their loans where needed, that is healthy for the market. And in addition, new issue loan spreads did tighten again this quarter after widening marginally during the second quarter ball. Tight and tightening spreads have been a continuing theme. They have weighed on CLO equity performance broadly syndicated leveraged loans benefit from 6 months of call protection. And that just means a borrower cannot reduce their interest rate in the first 6 months of the life of a loan. If you say that a little bit differently, it becomes more clear and that's just to say, borrowers can reduce their interest rate if market conditions allow every 6 months. And we have seen some borrowers come back to refinance their cost of borrowing lower more than once, maybe not every 6 months, but more than once. CLO liabilities, on the other hand, can only be refinanced lower every 2 years as they are structured with 2 years of call protection. And this match has resulted in a contraction of the level of cash flows available to CLO equity and this has weighed on the return of that asset class. It is one of the factors, but it is a main factor. And so as we have mentioned many, many times previously, when a CLO is able to refinance its liabilities, it can be incredibly accretive. It's just not able to do that as quickly as the loans in which it invests. So we, as the sub-adviser here as the manager of the XFLT portfolio have been very active with our equity holdings refinancing as quickly as we possibly can, we were doing it last year. We've been doing it all this year, and we'll continue to do so next year as soon as non-call periods expire. In fact, I think the level of refinancing the trust has participated in has been one of the reasons why our equity holdings have performed as well as they have relative to the market. It's just -- it is hard to outrun the headwind of spread compression, at least in the short term. The CLO market will catch up when that 2 years of non-call protection expires on the liabilities, but it will do so at a lag to the loans.

Thank you, Lauren. Let's -- I'm going to stick with you and let's look at the loan book. So could you discuss how loan market performance over the past quarter has impacted XFLT?

Sure. The loan market was a bright spot for the trust in the third quarter. While our loan allocation is also going to be impacted by the theme of spread tightening that I just went through in some detail. Total return activity was actually robust in Q3. Prices rebounded from the second quarter volatility. Despite base rates having come down and despite spreads compressing, we are actually still earning a very good yield on the loans in total. In addition to just the repricing activity that we've spent a lot of time talking about, the market actually also saw an increase in new loan creation during 3Q, not as much as we would have liked, but certainly more than the preceding period. Importantly, some of this was M&A related, but PE sponsors did also capitalize on market strength to extract some dividends from well-performing portfolio companies. We traded actively within the quarter to capitalize on some attractive new issue opportunities and then move risk where appropriate as well. So all of that together, I would say the third quarter was healthy overall for the U.S. leveraged loan market.

So Lauren, the question that a number of folks have asked about First Brands. How did the First Brands Group bankruptcy impact the fund's performance? And then maybe what lessons were learned from managing this credit event?

Sure. Yes. First Brands has been incredibly topical. And so while I said the third quarter was healthy overall, there were some credit issues. There were some pockets of weakness in First Brands is an example of that. It was one of several well-publicized credit issues in the broader markets during 3Q. It was the only one that was really specific to the broadly syndicated leveraged loan market, but there were a few out there. The trust was exposed to first brands through both its direct holdings of the loan, but also indirectly through the CLOs it owns. In total, our exposure to the situation was roughly equivalent to the index ahead of the volatility. We did, however, manage this position actively, which was a source of alpha relative to the index. And additionally and importantly, many of the collateral managers we invest in also manage this position actively and cut exposure as the price deteriorated as risk increased, thus avoiding the total magnitude of loss. Overall, the impact on the trust stemming from First Brands was actually minimal. The trust, the CLOs it owns, they're both highly diversified. And while we endeavor to avoid credit losses wherever possible, there is some level of loss that is to be expected in the below investment-grade credit markets. It's why the spreads are as high as they are. We do feel that we're compensated for it. In our view, First Brands was unique in its size, unique in the speed at which the situation deteriorated, which was largely driven by the aggressive use of off-balance sheet financing arrangements fraud has been alleged in this situation. I'm sure the market will continue to learn more as the bankruptcy process unfolds. And in the meantime, as we approach the construction of the XFLT loan portfolio, as we diligence the managers that we invest in, in terms of the CLO equity in BB assets that we own, we continue to look for similar risks such as concentrated ownership base, aggressive use of different types of financing markets. But in the end, we feel that despite this example of an isolated pocket of weakness and some other themes that we're trying to manage around. On the whole, the market remains fundamentally sound.

One last question on the loan book. So we saw the proportion of loans trading at or above [ par ] decline in the third quarter. How should investors think about this as it relates to the trust?

Yes. I can't recall whether we've kind of talked about this, we'll call it, leading indicator in a lot of depth in other quarterly webinars. But just as a starting point, the percentage of loans trading above par is typically viewed as a forward indicator of repricing activity. And the higher that percentage is, the more likely you're going to see repricing activity. And so after an incredibly robust quarter of repricing activity. And then situations like First Brands and Tricolor and some other credit issues in other markets, we did see the percentage of loans trading above par tick down as of September 30, which would imply lower repricing activity going forward. Unfortunately, this is a moving target. This data is through September 30, we have seen that figure move back up, and it sits at just under 50% of the market today. And so given where we are in the calendar year, I don't think we expect another huge wave of repricing activity, but the market is certainly set up to experience a little bit between now and year-end, given that dynamic.

So let's shift the conversation to and drill down on CLOs. Lauren, can you discuss the performance of the market over the past quarter as it relates to the trust? And what is Octagon's outlook for the next 6 to 12 months?

Sure. I may focus a little bit more on the debt tranches as I answer this question. Since we've talked a lot about equity, but CLO liabilities have had a very, very healthy 2025 and Q3 specifically. As we discussed earlier, CLO BB tranches had a healthy Q3 prices rebounded after a little bit of volatility in Q2. And the asset class continues to generate really robust current income for investors. The trust allocation to BB mezz tranches was a healthy source of return during the quarter. And we would expect them to remain so going forward. So we're very constructive on BBs, very constructive on CLO liabilities in general. We think fundamentally, they are well positioned. And from a risk-adjusted total return perspective, they remain attractive.

So Lauren, we've gotten a few questions on this. 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?

Sure. To answer this question, I think it makes sense to kind of dissect CLO equity return into really 2 main drivers. The one main driver of CLO equity returns is the value of the cash flow stream earned by the equity. And as discussed, this has been under pressure as the income on loans has come down, spreads have repriced more quickly than CLO liabilities. And so to manage that element of return, we reset and refinance actively, which means we are targeting the equity we buy to be able to generate value from this reset and refinancing activity and then we push for that activity to occur as quickly as possible upon the expiration of non-call periods. The other important factor about resetting, which again, as a reminder, resetting a deal is simply a refinancing with a contractual extension of the life of that CLO equity. Resetting deals and extending the life of our equity holdings not only increases the stream of expected cash flows, that one important driver of return, but it also allows managers greater flexibility to manage the portfolio of loans they own. And it is hard to overstate the importance of that flexibility. It allows managers to manage credit losses effectively and allows managers to manage credit losses proactively sell something they think is going to go down in value and buy something they think is going to go up in value. It is a huge driver of equity returns. So a lot of our management of our equity book has resulted around picking managers, who actively manage credit risk and actively manage it successfully. Our views of managers can change over time. We are constantly analyzing recent performance, extended periods of performance and trying to anticipate which managers are going to continue to perform and which may not and trading our book accordingly. So I cannot overstate the importance of both active liability management, that refinancing and resetting as well as collateral manager analysis and picking best-in-class portfolio -- excuse me, best-in-class collateral managers for our book of equity holdings.

Got it. So I want to shift to portfolio positioning. Before we get to that, there was a question while we're on the topic of CLO equity. There was a question that came in from the audience. And Lauren, I'll address this to you. Do you think that we're near a floor for new CLO equity [indiscernible] levels?

I do. I hate to make that projection. But what I would say is that spreads are through postcrisis tights. And I don't -- I think structurally, the market cannot get back to precrisis tights. So spreads are as tight as they have ever been, meaning there's less that can be taken out of the market. And when you look forward, part of the reason -- got to take a step back, part of the reason that spreads have come in so dramatically is that the market has been in a period of technical imbalance. There has been a significant amount of demand for loans, and there has simply not been enough supply. And as we look forward into 2026, there is a calendar of loans that has been built and continues to build. It is being driven by M&A activity. And in contrast to other periods where the market has been told that there will be more loan supply, that M&A activity has been announced. The forward calendar contains the largest ever LBO announced. That will be launching into the market very early in Q1. There are other large announced transactions that will follow it, and all signs point to increased M&A activity in addition to what is already announced. And so all of that is to say that I think spreads, while they may tick lower before they move higher I think, are very, very close to a floor and that should lead to a situation where CLO equity arbitrage is not going to get worse from here. famous last words, but that's my base case here.

Right. All right. Well, so there's one other question from the audience, I want to get to before we get to portfolio -- the portfolio mix. And Lauren, I'll stick with you. The question is when the bulk of the non -- when will the bulk of non-call expiration-related refinancing happen? Do you expect some related NAV uplift?

So non-call expiration is really a rolling target. I think there is another large number of deals that will be eligible for reset or refinancing in the first half of 2026. If you remember back to the first half of 2024, it was a period of time when [indiscernible] spreads were incredibly wide. And so as all of those deals exit non-call, you should see them be reset, refinanced, and that will be incredibly accretive. When those deals are reset and refinanced, they should increase in value and that should provide some NAV uplift.

Thank you. Let me bring Kim back in, and we'll shift the conversation to portfolio positioning. So Kim, could you discuss the trust's position in the market and its unique portfolio mix?

Sure. So this is going to look Very similar to prior quarters, and that is by design. XFLT, we did have a couple of audience questions just about relative trading performance. XFLT is unique in its asset mix. The fund in its history has been basically 50% senior loans, first lien mostly some second lien, and then it's 50% CLO equity and CLO debt. And so that half and half provides attractive risk-adjusted returns. And it's by design that Octagon manages the portfolio with these complementary investments. And when you contrast what XFLT's portfolio looks like relative to its competitors, many of the competitors are CLO equity dominant, north of 90% of the investments in the competitor funds are CLO equity. I understand the rationale, which is that, that's the highest yielding investment among these types of floating rate investments. And so that's been a benefit to XFLT because it's uniquely positioned. There aren't other funds that have the same asset mix. And our top 10 holdings because when you buy CLO equity, Octagon obviously is able to buy attractive CLO equity and they're going to hold on to it. So it tends to be the larger pieces of the XFLT portfolio. We now have, through diversification over time. We have now north of 500 holdings in the fund. A lot of those positions are senior loans in the portfolio. But this asset mix also gives us an advantage, Kevin, when we go to finance our leverage. XFLT has always been a levered fund we lever to enhance income over time. Currently, regulatory leverage is about 37.7%. We typically are running leverage in a target range between about 38% and 40%. And because XFLT has this strategic mix of loans and CLO debt and CLO equity, we're able to borrow at a more attractive leverage financing rate because we have bank borrowings, whereas most of our competitor funds are using preferreds or using baby bonds as the primary source of leverage, which tends to be more expensive.

Yes. So Lauren, I want to shift to you, but stay on the topic of portfolio allocation. And has the portfolio allocation shifted much over the past several quarters? And what's your rationale for the current mix?

Sure. You can see on Slide 26, some marginal shifts in the portfolio allocation over time. at 9/30, we probably got our BB mezzanine allocation as high as it's been in some time and that's really a reflection of my comments on the attractiveness of that portion of the portfolio allocation. The reality for XFLT is that CLO equity, while it has been under pressure is something that we do believe in, in the longer term. It has had a tough short-term performance, but it still generates a compelling yield for the fund. And longer term, I really do believe in the optionality associated with these positions and what they can mean for the trust from a total return perspective, when they're able to reset and refinance and spread compression stabilizes. So the way I look at this fund is roughly 50-50 loans and CLOs. We move the CLO debt allocation up over time or down over time as we see the relative value between equity change, but we are always going to have a meaningful allocation to CLO equity, which is the best yielding asset available to this fund. We feel very comfortable with the asset allocation as it sits today. We feel very comfortable with the loans we own. We think there is upside in the equity allocation. And we think the BB debt creates a great complement to the equity we own and opportunity for [ outsized return. ]

So Kim, you touched on leverage earlier. I wanted to make sure that we highlighted the recent issuance of the mandatory redeemable preferred shares of [indiscernible]. Can you touch on that and the redemption of the 2026 term preferreds? How is that -- how is the fund's cost of leverage changed? And what is the target leverage ratio going forward?

Yes. So I mentioned that we had been working on this institutional preferred issuance for several months. And we were really pleased to get this done because it -- as you see on the comparison of the cost of leverage, this is going to benefit the fund on a going-forward basis. We were already able to reduce leverage through the bank borrowings that we have, which were floating rate. And so you'll see that in the annual report. But on a going-forward basis, the cost of leverage is going to be lower by about 40 basis points. Cost of leverage as of 9/30 on a blended basis was about [ 6 11 ]. Here going forward as of end of October, the cost of leverage was projected to be about [ 5 72 ] because of both the decline in the rate on the bank borrowings and because of the addition of the mandatory redeemable preferred shares. And so we used these institutional preferred shares to replace the retail preferreds, which shows up as the second row in the table. Those were 650 preferreds. They were coming up on their redemption date in Q1 of 2026. And so we were able to get the mandatory redeemable preferred done at a significantly lower cost of leverage here showing up at [ 5 92. ] And so there will be -- this benefit that we have with the combination of bank borrowings and preferreds allows us to manage our leverage more dynamically than just simply having bank borrowings alone. And having the institutional preferreds come in at a lower cost of leverage is quite attractive. And I think that there was a lot of demand for those institutional preferreds. So we were pleased with that issuance.

Yes. And maybe last question for you, Kim, just to expand on that slightly. How does management determine the optimal mix between bank borrowings and preferred shares?

Yes. So the -- we think about the liabilities as a reflection of the assets or the investments in the portfolio. So what I mean there is we're looking at the life of the assets. And if you look at CLO equity, the average life of a CLO equity might be 7 or 8 years. So it's much longer than senior loans. And so we want the liabilities or the leverage here to reflect the fund's asset mix. And so that's what we were talking about XFLT's unique mix of having half the portfolio in senior loans and half the portfolio in CLO equity and CLO debt, we want the leverage to reflect the assets and having those preferred better allows us to line up the preferreds with the longer-dated CLO equity that we have in the portfolio. Otherwise, there'd be a mismatch in terms of assets and liabilities. And so we're trying to align that, so there isn't a mismatch and that's what we were able to sort of go back to having the liabilities reflect the asset mix. And as you know, when you issue preferred -- like when we issued the retail preferred before and these institutional preferreds, you're going to see the asset mix shift over time as the fund grows or as the fund shrinks. And so an issuance like this is a chance to true that up so that you have that asset liability harmony that you want to see. And so that's what this gave us an opportunity to do.

Yes. That's great. Well, we are running up on time here. I want to thank you both so much for your input, your commentary today. I will remind everyone that the webinar will be available via replay on our website. And as I mentioned at the outset, there's a wealth of information on our website in the knowledge bank. Please reach out if you have additional questions or needs, and we certainly appreciate your time today. Thank you.