Independent proxy advisory firm Egan-Jones Ratings Company has recommended that shareholders of XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) vote against a proposal to replace the current sub-advisor, Octagon Credit Investors, with Rockford Tower Asset Management, a subsidiary of King Street Capital Management, at the special shareholder meeting scheduled for July 30.

In its analysis, Egan-Jones stated that the fund's board of trustees has provided insufficient justification for the proposed change, and that the move would not be in the best interests of shareholders. The firm's opposition is based on several key reasons.

First, Egan-Jones argues that the performance benchmark used by the board is inappropriate. The board's primary justification for replacing Octagon is its underperformance relative to the Morningstar LSTA US Leveraged Loan 100 Index. However, Egan-Jones contends that this index does not reflect XFLT's actual investment strategy. The fund's portfolio includes loans, CLO debt, CLO equity, and utilizes leverage, making it incomparable to a single, unlevered asset class index. When Egan-Jones applied a composite benchmark that matches the fund's disclosed allocation, it produced a significantly different performance result.

Second, the advisory firm raised concerns about the proposed fee structure. While the fund's overall management fee would remain unchanged, the new agreement would substantially increase the portion of that fee allocated to the primary advisor, XAI, increasing from approximately 41% under the current agreement to 48% under the new one. This shift, Egan-Jones noted, provides no direct benefit to shareholders.

Third, Egan-Jones highlighted potential issues with board independence. The report noted that two of the six trustees who approved the transaction have current or past direct financial relationships with XAI, creating a potential conflict of interest that shareholders should carefully examine.

Egan-Jones also observed that the board has linked a tender offer repurchase plan to the outcome of the sub-advisor replacement vote and has entered into a voting agreement with activist investor Bulldog Investors. However, the firm believes this should not influence shareholders' independent judgment on the proposal itself.

Egan-Jones stated that its recommendation to vote against the proposal aims to prompt the board to reconsider its decision-making process. The voting results are expected to be announced after the special meeting on July 30.