Anastasia won a $650 million loan just one year ago to fund its partial buyout by TPG Capital, after amassing a vast social media following and high-profile clients like Kylie Jenner. That loan has fallen to a record low 82 cents on the dollar amid sales and earnings declines, in part because celebrity-driven beauty lines—including by Jenner—have lured business away, according to a Fitch Ratings report. The color make-up category is only getting more crowded, with Lady Gaga just launching her own brand.

Anastasia is seen as a pioneer of using social media to build its business: It touted 18.5 million Instagram followers and celebrity clients while seeking its loan in July last year. The subsequent fall in the debt’s price perhaps shows the pitfalls of lending to fast-growing companies that pitch atypical yardsticks to lenders, something that Uber Technologies Inc. and Tesla Inc. have also done.

“The company could have lost market share to several new celebrity-driven cosmetics lines, including Kylie Jenner’s Kylie Cosmetics, Rihanna’s Fenty Beauty and Glossier,” analysts at Fitch Ratings said in July, lowering Anastasia’s rating to B from BB-.

Anastasia’s sales fell nearly 30% in the first quarter, according to Fitch, which predicted an overall 2019 revenue decline of 6%. The company said it faced supply-chain disruptions from a warehouse move and weakness in the color-cosmetic space in 2018, as well as losing market share.

The company’s earnings before interest, tax, depreciation, and amortization, or Ebitda, declined to $155 million in 2018 from $183 million in 2017, according to a person familiar with the matter, who asked not to be identified discussing a private matter.

Based on its current debt level, that translates to an increase in leverage to more than four times Ebitda from 3.5 times when the loan deal closed about a year ago, the person said.

A representative for Anastasia didn’t immediately respond to a request for comment. A representative for TPG declined to comment.

Golden Ratio

Romanian-born founder Anastasia Soare set up her business’s flagship salon in Beverly Hills in 1997. The company is most famous for its eyebrow shapers, and uses a method based on a mathematical relationship known as the Golden Ratio.

The firm has touted how “earned media” helped it grow by cutting marketing costs. Other firms have relied on similar metrics—Uber took out a $1.5 billion loan last year after bruiting about its app penetration rate.

As the low-cost of social media enabled upstart brands to quickly expand, Lady Gaga, Rihanna, and Jenner with their millions of Instagram followers have entered the make-up space. Lady Gaga, the professional name used by singer Stefani Germanotta, this month started her HAUS Laboratories makeup collection in an exclusive tie-up with retail giant Amazon.com Inc.

In terms of Instagram followers, these celebrities dwarf Anastasia’s current 19.5 million-strong following. Jenner, a half-sibling of Kim Kardashian West (who has her own KKW Beauty line), started a cosmetics brand in 2015, and has more than 141 million followers. Barbadian singer Rihanna started her Fenty Beauty line in 2017 and has more than 70 million Instagram fans.

Growing Pains

Anastasia’s loan was part of the $1.37 billion that TPG paid to the founders of the company for a 38% stake. TPG put up $700 million. Amid this transition, from founder-owned company to a private-equity backed operation, earnings were negatively impacted by increased costs from adding senior management, Moody’s Investors Service said in a July report, which also downgraded the firm and cited its steepening competition.

Still, Anastasia continues to roll out new products and 2019 has been its biggest year for launches, including the Alyssa Edwards palette, named for an American drag performer. The question is whether Anastasia can continue benefiting from being a first-mover with its social media strategy, according to David Silverman, a senior director at Fitch.

“Their social media savvy as well as their existing fan base allowed them to connect with customers and grow their brand quickly,” said Silverman. “It is a strategy that has to some extent been copied, and the extent the first mover advantage erodes will be the issue.”

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