This term preferred (XFLT-A) will give 6.50% for the next year before mandatory redemption in March, 2026.
I hold an overweight position in this issue. It has traded steady as a rock for quite a while as we move closer to the redemption date.
XAI Octagon is a closed end fund.
Not a recommendation, but a notification for consideration.
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As discussed before XLFT is a closed end fund. As I look at it I see that as per CEFconnect it currently has a return on NAV of 10.55% and a distribution rate on NAV of 14.09%. It’s NAV has been steadily dropping recently.
This is all by way of asking how much you take these metrics into account when deciding on XFLT-A given the remaining maturity and the fact that it is a CEF?
As discussed before XLFT is a closed end fund. As I look at it I see that as per CEFconnect it currently has a return on NAV of 10.55% and a distribution rate on NAV of 14.09%. It’s NAV has been steadily dropping recently.
This is all by way of asking how much you take these metrics into account when deciding on XFLT-A given the remaining maturity and the fact that it is a CEF. Thanks
$6.50 common share price, and a 14% common share dividend. Price and dividend look to be relatively stable over the past few years, but high common dividends don’t give me that warm fuzzy feeling. And it seems they have only been around since 2017. Not a long history and only 1 major global event (covid) since inception.
Obviously, no one can predict the future (well, maybe some can 🙂 but not me), but how safe is XFLT-A? Are they issuing new debt to refinance these, or will they be redeeming from cash on the balance sheet? If I did the math correctly, this is about a $35 Million issue and it seems they have about $31 MM on the books currently.
I can just never wrap my head around how an entity can hold a bunch of sub 14% paper and yet pay out 14% in dividends. Yes, I know, leverage….. and derivatives….. and such. I guess that’s why they run the fund and I do not. Ha.
Was tempted but it is over par, a bit, but past call date so could be redeemed. Coupon 6.5%. Who knows, maybe not, maybe I will place limit order. Yield to worst is often though important criteria for me.
Tacitus–99% sure it won’t be called until mandatory redemption.
Tim,
Why are you 99% sure it won’t be called until mandatory redemption? Its coupon not especially low, coupon of 6.5%. But anyhow why so certain?
Tim didn’t mention it, but its last ex-div was Jan 15, and the next will be about April 15. This means it currently has about 14 cents of accrued interest (out of 41 cents). So if you calculate based on the stripped price, it’s actually trading a bit under par rather than over. This means that at 25.04 yield-to-worst would have been a little better than the current yield even if it’s called tomorrow.
Accrued dividend noted. But not so much a matter of making next to nothing or losing next to nothing if called, but opportunity cost. I did place a limit order with a gtc for about a month for sake of diversity and kind of what the heck since have surplus in money market. But remain curious as to why so confident it will not be called with preferred selling above par and a coupon of 6.5%. For some reason have a gut reason too it won’t but if there is an objective reason (e.g. such as a call premium company would have to pay if redeemed prior to maturity) would appreciate knowing. Will glance at prospectus and move on I guess.
T – Given you say that “Yield to worst is often though important criteria for me,” would it surprise you to know that YTW on XFLT-A figured at a price of 25.06 and settlement 2/18 is 13.37%? Is that something to be concerned about? Also I think YTM @ 25.06 for settlement 2/18 = 7.10% approx? I say approx because 1 calculator says 7.11 and the other 7.09%.
Yield to worst is a factor important to me but only in the context of some significant holding time. As stated above not interested in negligible gains per investment dollars. (e.g. opportunity cost important too). Nor relatedly interested because an accrued interest over an extremely short holding period offers a seemingly good yield to worst. Just my view as to what I personally prefer. Others may differ. Am primarily interested in buying a safe preferred with good income stream for some significant time period. But thanks I get your point involving accrued interest, and always (even with cumulative preferreds) check the prospectus to confirm if ever relevant in differing scenarios, as have with this one, prior to entering a limit order which was btw under par.
Am here to learn too and my only question remains, why so certain this issue will not be called? That is why I posted. If anyone can answer would appreciated knowing. Or if have different belief regarding whether the issue at any risk of being called prior to mandatory redemption, would be interested.
Thanks for the response, T. Regarding the question of certainty of XFLT-A not being called prior to maturity, all anyone can actually do is voice an opinion and try to back it up with sensible rationale… IMHO for a case like XFLT-A, I would say there are two possible scenarios in today’s interest rate world that one could consider in guessing on the likelihood of early call. First, are there savings to be had assuming a refinancing will be used to pay for the refinancing? When you look at XFLT you might want to guess what rate they might be able to issue a new 5 year piece of paper? The rule of thumb for a financially economic refunding I would say is can a new issue be done at 75-100 improvement to the existing? Issuance costs seem to sap up the difference, so how likely do you think it is that XFLT could issue new 5 year paper at 5.50-5.75% rate? When you see most similar issuers putting out paper in the 7.75%-9% range, I’d say that answer would support belief that these will not be called early.
The second possibility centers around whether or not the company is in such condition that they might want to pay up to do a new issue now to clear the decks of upcoming maturities while Mr Market allows them to because they fear they might not be able to later on. There are various times when you see this kind of thing happen. Right now, I’d say XFLT is doing pretty well so you’d not think they’d want to do this, however, imho, I think the odds of XFLT-A being called some time before maturity for this purpose are much higher than they are for the first reason. So, personally, I’d say Tim is over confident these won’t be called prior to maturity, however, I’d still consider a purchase more on the basis of YTM than YTC.
So if nothing else, here’s one opinion on your initial question. It’s worth what you paid for it.
In past, e.g. from a Seeking Alpha article, “Is Your Preferred Stock About To Be Called”, authored by Preferred Stock Investing (about 8k followers) read in one retrospective study the critical spread was lower than 0.75-1%.
“…For high quality preferred stocks issued during 2001, a savings of 0.375% was the “trigger point” beyond which issuing companies called their preferred stock shares.” Here is link for anyone interested, hope functional.
https://seekingalpha.com/article/515731-is-your-preferred-stock-about-to-be-called
But of course different time period. In any event the future movement of interest rates can certainly change things and this is unpredictable or at least I believe so. And so by extension am less than 99% certain whether this issuance will be called prior to maturity. Thought perhaps something in the prospectus or elsewhere I was not aware of, for such certainty to be offered. That was at the heart of my question. Anyhow thanks for your input.
Ignoring that Le Du’s article is 13 years old, I’ll point out that he’s focusing on high quality preferreds…. I can see where the breakeven spread might narrow for refunding of high quality issuers, but I suspect you’d agree that XFLT would not fall into that category…. I’ll stand by my rule of thumb because, if nothing else, it is just a rule of thumb don’t you know………In this case right now, 25 basis will not alter the conclusion imho
Ok you convinced me, I too now am “99 percent” certain that no matter what may occur, including higher price movement of this preferred (currently $25.11) future possibly declining interest rate movements, and its 6.5 percent coupon that there is virtually no possibility it will be called.
Was never contending with anyone’s ‘rule of thumb’ but was simply asking Tim why he was “99 percent” certain. Thought maybe he read something in the prospectus that I missed, such as a “call premium”. But am doubtful of that at this point. Frankly, in retrospect I should have just double checked the prospectus myself.
Thank you for your input, am moving on at this juncture. However if you can reference some study indicating how higher vs lower quality preferreds have different propensities requiring differing threshold spreads for calling their preferreds, it might be interesting to review. Even if the latest you can find or read is 12 years old. Generally speaking I would have simply, probably naively, guessed that if a company can make sufficient money via calliing its preferred it might do so.
I don’t follow XFLT-A closely, but the reason I presume it’s unlikely to be called soon is that they probably don’t have a cheaper option.
One way to explain this is to say that if they had a cheaper option, they would have taken it already. When it became callable in March 23, the 5 year treasury was at about 3.8%. It’s thus a plausible guess that they won’t call it until rates are something lower than that. The 5 year is currently at about 4.4% and most projections having it going higher in the future: https://www.chathamfinancial.com/technology/us-forward-curves
Another answer might be that when they issued the preferred in March 21, the 5 year treasury was at about .8%. Since it has a 6.5% coupon, this means the spread over risk-free was about 5.7%. If they were to issue something new to pay this off, it might have approximately the same spread. Since this would cost more than 6.5%, they probably won’t call it.
These are just my guesses, though. I’d be interested to hear what others with more in depth knowledge think. It might be that they have particular circumstances that would change the logic. Maybe spreads are sufficiently tighter now to make it possible? Or maybe the 5 year treasury isn’t the right benchmark?
(Mostly ninja’d by 2whiteroses. He probably has better insight on the possibility of a call if they aren’t refinancing.)
For the record, although nobody called me out, my calculation above is wrong because I did not originally take into account that maturity date (3/31/26) does not coincide with a payment date (1/31, 4/30, 7/31 and 10/31). YTM = more like 6.576% and YTC = 7.40%
Noticing how many Closed End Funds tout on their website they are investing in the, “safest,” Senior Secured Loans, but don’t publicize as much it is the CLO Equity tranche they own (XFLT is 30% CLO Equity, 12% CLO Debt, 50% Senior Secured 1st Lien…). Seems like multiple, seemingly separate companies, all enjoy making it somewhat difficult for the casual investor to find out the percent invested in CLO Equity vs Debt and what the risks of that tranche may be.
Even though the CEF debt/preferred leverage rules provide some comfort, with many spreads so tight, the hiding how much is in CLO equity aspect makes me want to make sure I’m doing my homework on what can go wrong.
Ping Pong–study them for 20 years and it becomes less difficult to figure out–but agree that they don’t make it too easy.
Not too hard- some like EIC & ECC have monthly reports:
https://www.eaglepointincome.com/documents/FG/eaglepoint_ic/ir/640883_EIC_Monthly_Portfolio_Update_December_2024.pdf
and you can always looks at quarterly reports as with OXLC–Summary of Portfolio Highlights portion ( with fine detail ):
https://s1.q4cdn.com/163016631/files/doc_presentations/2025/OXLC-Investor-Presentation-for-the-Quarter-Ended-December-31-2024-FINAL.pdf
Thank you Tim !
You’re welcome Bigbear.
What was the tax character of the 2024 distributions?
David–I don’t worry since my shares are all in IRA type accounts—BUT from their website.
8 The Trust expects that distributions paid will consist primarily of (i) investment company taxable income, which includes ordinary income and the excess, if any, of net short-term capital gain over net long-term capital loss, and (ii)
net capital gain (which is the excess of net long-term capital gain over net short-term capital loss). To permit the Trust to maintain more stable monthly distributions, the Trust may distribute more or less than the amount of the net
investment income earned in a particular period. There is no assurance the Trust will continue to pay regular monthly distributions or that it will do so at a particular rate. Distributions may be paid by the Trust from any permitted
source and, from time to time, all or a portion of a distribution may be a return of capital. The Trust estimates that the most recent distribution declared during the period consisted of 100% investment income, 0% realized short term
capital gains and 0% return of capital as of 12/31/2023. This information is not for tax reporting purposes. Common shareholders in the Trust should refer to their Form 1099-DIV for the tax treatment of such distribution.
Great, all we have to go on is a vague statement that’s over a year out of date 🙁
Thanks Tim. Added a few more shares to my wife’s account at $25.04.
Gary–there you go–didn’t know if anyone was going to be able to snag it at a good price.
Tim,
Have you ever held this type security during a period of “higher” rates?
that’s an excellent yield for a year+
I just received the report on a private institutional light commercial reit I hold and the writer of the report quoted
Peter Lynch to the effect that ” lower rates are a tailwind, but higher rates are a sieve. ”
Not that it applies here, but I really need a book of quotes like this.