Rounders is a 1998 American drama film about the underground world of high-stakes poker starring Matt Damon and Edward Norton. The story follows two friends who need to win at high-stakes poker to quickly pay off a large debt. The term “rounder” refers to a person traveling around from city-to-city seeking high-stakes card games. Apply this to modern day asset-based lending (ABL) and it would be the equivalent of ABLs jumping from deal to deal just trying to “check” their way to the second round of processes before really digging in. It's not just shorter timelines driving this trend, but it’s also about broadly run processes to satisfy unrealistic client asks. Bankers/brokers are also guilty of setting unrealistic expectations with clients to win mandates. The result is the lending market has shifted to a poker equivalent of “checking” in the form of IOIs issued instead of formal term sheets. In poker, "checking" means passing the action to the next player without betting, essentially betting zero, and is only possible if no previous player has made a bet in that round. In practice, the time from getting in a deal to submitting it has become compressed, and groups don’t have enough time or conviction at the start of a process or at the “flop” to submit a formal term sheet. The IOI satisfies a step in their process and keeps the client happy. 

Each week advisors (aka the dealers), must manage a bunch of lenders who are competing against each other and internally to have conviction. ABL groups, and for the most part a majority of deal professionals, have become Rounders – going from deal to deal trying to get to the next card without betting. The market has become so efficient that most of the right lenders are seeing an applicable deal and given a very short timeline to provide an indication of interest. Access to management or a true deep dive is rarely available prior to submitting an IOI, as the goal is to ascertain who is serious. In fairness, the IOI does a fairly good job of weeding out the bottom rung of lenders who really have no conviction, but it does leave a wide swath of lenders who want optionality. It’s not a lot of work to submit a basic IOI with a range of values or brackets around key assumptions including opening liquidity, blocks and covenants, among other things. The market and competition are efficient in that many direct competitors, with of course the same cost of capital, submit similar indications of interest that say nothing, but give them time and more cards. This new dynamic of not committing is ironically being driven by companies and their advisors wanting fast timelines and often creating a non-existent sense of urgency to create demand. The players are simply adapting to the game.

The problem with this strategy is that the practice of “checking” in both poker and lending allows you to remain in the hand without putting any chips into the pot, but it's only an option if no one has bet before you in that betting round. Well right now, no lenders are being asked to bet, so everyone can check. What this means is that by giving a short timeline most lenders are not incented to commit resources to doing a deep dive to issue a formal term sheet. The result of this is that the company’s advisor now must choose from a number of incomplete offers that are all very aggressive based on limited work. This is partly driven by advisors pushing for maximum availability and flexibility without yet knowing if they have a good proverbial hand. Due to the nature of broad processes, many advisors/brokers don’t get enough feedback with the players (i.e., lenders) before the “check” process starts. This means the lenders are in a hand they can’t effectively play, and the advisor (dealer) has not dealt enough cards to know who truly has the best winning hand (deal that won’t re-trade).

From the lender’s point of view, they are going off what is in the book and from the advisor’s point of view that they expect the lender to not re-trade. This does cause many to drop out that may have a better hand, but others may be bluffing without buy-in from their credit committee. But that’s the position they’re put in. They must check or fold and often don’t have the time or the resources to make a smart bet. So much like poker, the best hand does not always win, better hands might simply drop out early because early IOIs are more aggressive to get to later rounds and then sign up a deal that will change. The winning lender’s strategy is to bluff, hope the company won’t perform, which it rarely does, and re-trade to a rationale place. While this practice is frowned upon, it’s highly debatable whether this is just not good poker. If the Company performs then the lender has the option value to stick to the deal, but if not then immediate grounds for changing are required.  This all starts with the IOI or checking process like the first hand of a poker game. 

The end of the movie is epic. In the final hand, Mike (Matt Damon) baits a boastful Teddy KGB (legend John Malkovich) into going all-in and defeats him with a “nut” straight by checking. Check, check, check is the market right now. When the winning lender finally must show its hand, it’s typically pocket twos and rarely a royal flush. The lesson to be learned in today’s market is the lender with the best offer for the prospect is not winning all the time. In poker, you don't play the cards, you play the players. The same could be said for lending right now.