Flagging financial company

Finova

(FNV) - Get Franco-Nevada Corporation Report

will likely be swimming upstream in the wake of the collapse of a deal for new capital.

Commercial lender Finova and its would-be savior

Leucadia National

(LUK)

ended their

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investment agreement after it became clear they couldn't hammer out a restructuring agreement with Finova's bank lenders and public debt holders.

Last November, Leucadia had proposed investing at least $350 million -- and possibly as much as $400 million -- in troubled Finova. The circuitous deal involved, among other things, Leucadia buying 10 million new convertible preferred Finova shares that would be convertible into 100 million common Finova shares in June 2006. Analysts roundly criticized the deal when it was announced, claiming that Finova had given away the store. One analyst said the cost to Finova was too high and would essentially give away 75% of the company in exchange for the short-term support.

Yet despite the dim view that many observers took of the original deal, Leucadia's disappearance as a source of capital will leave Finova in a difficult position as it tries to put together an alternative restructuring plan.

This is not the first time Leucadia has backed out of a white knight-type agreement. In July of last year, the company called off a proposed $293 million purchase of cash-strapped insurer

Reliance Group Holdings

( REL), a move that has left Reliance in a tight spot as it seeks to avoid a bankruptcy filing. (In late December, Reliance was still involved in restructuring talks.)

Finova said it plans to continue working with its creditors in an attempt to come up with an alternative restructuring plan as soon as possible. Finova said it will need the support of almost all of its shareholders for a restructuring in order to avoid a reorganization under court protection.

The commercial lender has been hit with a string of problems since March, when a $70 million writedown for a loan to a computer distributor made investors skittish. Soon after, CEO Samuel Eichenfield resigned abruptly. After hiring an adviser to explore a possible sale, Finova started exploring the possibility of selling business lines after it became apparent that no one wanted to buy the company whole. Several debt downgrades and a dividend cut later, the picture is looking increasingly dark at Finova.

Shares of Finova slipped 13 cents, or 10%, to $1.13, while Leucadia lost 81 cents to $33.63.