The relationship between one-time allies, Malaysia and United Arab Emirates seem to be coming under great strain. Malaysia's state fund 1Malaysia Development Berhad and Abu Dhabi's sovereign wealth fund, International Petroleum Investment Company have again crossed swords. This time they have both accused each other of failing to make payments on their obligations.

IPIC, in an announcement to the London Stock Exchange, said that 1MDB had failed to make a $1.1bn payment as part of a debt-restructuring agreement. As a result of this, it said the deal between both funds has been terminated.

IPIC had guaranteed $3.5bn of 1MDB's bonds four years ago. When the fund was short of cash, IPIC agreed to an emergency billion-dollar loan. It also promised to continue making interest payments on the same bonds it had guaranteed.

In return, 1MDB had agreed to transfer undisclosed assets to the Abu Dhabi fund. In its LSE statement, IPIC accused 1MDB and the Minister of Finance Inc. Malaysia of being in default. In addition, it said IPIC and its subsidiary, Aabar Investments PJS's obligations under the deal are no longer in place.

However, it insisted that both 1MDB and the Malaysian Ministry of Finance "continue to be bound by their respective obligations under the terms" of the deal, which includes their continued indemnification of IPIC and Aabar for any non-performance. The fund said that it had given 1MDB the chance "to remedy their defaults without success."

In its statement, IPIC said it is considering all its options, including referring the case to the "appropriate resolution forum." It did not give details.

1MDB however, in a statement of its own noted that "a dispute has recently arisen between IPIC" and 1MDB's energy arm and bond issuer, 1MDB Energy (Langat) Limited over each other's obligations under the agreement.

"Consequently, as of the time of this statement, the Issuer understands IPIC has not paid the interest. 1MDB wishes to make clear that it and its group entities will meet all of their other obligations under any other financing arrangements and have ample liquidity to do so," the state fund's statement said.

It is understand that as part of its deal, IPIC was to have made a $50m interest payment on 18 April to bondholders but has said it will not make the payment. 1MDB told the Malaysia's Ministry of Finance that it could make the $50m payment but that if it does so, it would hurt the negotiations with IPIC.

Separately, Malaysia's Ministry of Finance said in a statement on the same day that it had been notified of the dispute between both parties. It said: "The MoF wishes to make clear that it will continue to honour all of its outstanding commitments in the financial markets." No other details were given.

1MDB pays off other debts

1MDB also announced that it had prepaid in full and in advance of the repayment date of a RM2bn facility from Marstan Investments NV. The facility, entered into in February last year, was aimed at raising funds to repay RM2bn of debt owed to a syndicate of domestic banks.

"The facility was arranged by 1MDB by Tanjong, as an alternative commitment by Tanjong, to invest RM2bn of equity in 1MDB subsidiary, Powertek Investment Holdings Sdn Bhd," it said.

The state fund also announced that it had repaid a $150m term financing facility from EXIM Bank, again ahead of the repayment date. "1MDB has now fully repaid all its bank debt and short term debt," the fund said in a statement.

It said that over the past four weeks, it had announced debt principal repayments of around RM7.5bn. "1MDB retains a cash surplus of approximately RM2.3bn for infrastructure and other debt service requirements."