Malaysia's troubled state investment fund 1MDB is preparing to make a repayment, with Chinese assistance, to Abu Dhabi's state-owned International Petroleum Investment Company, as it seeks to settle a dispute in which the Emirati fund is claiming about $6.5 billion.
The move to begin repaying what the Malaysian fund owes, confirmed by two people familiar with the matter, marks a step forward in efforts to resolve the financial position of the heavily indebted state fund.
The two funds reached an impasse earlier this year, with 1MDB insisting it had fulfilled its obligations and Ipic taking the dispute to arbitration in London.
More from the Financial Times:
Malaysia intensifies crackdown on anti-corruption protesters
Singaporeto ban former Goldman Sachs star banker amid 1MDB probe
White House challenges Trump's Air Force One claim
The relationship between the two funds — once hailed as a "strategic partnership" between Abu Dhabi and Malaysia — has gone sour amid allegations that Emirati officials were involved in a plot to siphon more than $1bn from 1MDB.
Khadem al-Qubaisi, former head of Ipic, has been detained over his suspected role in the affair. He has not been charged with any offence.
China has been approached as a source of funds for 1MDB, according to three people with knowledge of the matter, one of whom said Malaysia would swap assets for financing.
Chinese state-owned enterprises have led a bailout of 1MDB — acquiring assets including a power generation business — that has relieved pressure on Najib Razak's Malaysian government at a time when financial flows linked to the state fund are being probed by regulators in the U.S., Singapore and Switzerland.
Relations between Kuala Lumpur and Beijing have grown increasingly cordial as US investigations into the 1MDB affair have complicated Malaysia's relationship with Washington.
The current dispute between the Abu Dhabi fund and its Malaysian counterpart arose from a bailout deal last year in which Ipic agreed to lend $1bn to 1MDB and assume payments on $3.5bn of the Malaysian fund's debt. It also forgave some debt that 1MDB owed Ipic.
In exchange, the Malaysian fund was to transfer assets to cover the amount of the loan, the assumed debt and the forgiven debt.
The Abu Dhabi fund claims 1MDB and Malaysia's ministry of finance failed to perform their contractual obligations under the bailout deal.
1MDB said in a statement in April that it had been "surprised" by Ipic's comments. The Malaysian fund said that it "unequivocally asserts that it has attempted to meet all its obligations to Ipic".
After Ipic took the dispute to arbitration, 1MDB said it was confident in its legal position and had submitted a "robust" response through legal counsel.
Arul Kanda, the former investment banker who is president of 1MDB, said in an email: "1MDB does not have anything further to add to previous statements in relation to the ongoing dispute with Ipic."
Mr Qubaisi's lawyer declined to comment.
A settlement between Ipic and 1MDB would mark the close of a troubled relationship between the two funds, which began with a pair of 1MDB bond issues in 2012 that were guaranteed by Ipic and grew into a "strategic partnership" that led to a further $3bn 1MDB bond issue in 2013 that was again guaranteed by the Abu Dhabi fund.
1MDB said at the time that this international partnership would focus on projects "vital to the long-term economic and social growth of Malaysia".
The 2012 and 2013 bond issues were arranged and underwritten by Goldman Sachs. Malaysia's finance ministry took over the fund's remaining assets in May.