By Una Galani

HONG KONG (REUTERS) - Troubled 1Malaysia Development Berhad (1MDB) has denied that a sovereign investor from the Gulf state is pulling a lifeline worth almost US$5 billion.

Abu Dhabi's relationship with 1MDB has become an embarrassment now that the fund is at the centre of allegations of mismanagement and graft involving Malaysian Prime Minister Najib Razak.

But cutting ties would only make things worse.

International Petroleum Investment Company (IPIC), which is chaired by Abu Dhabi ruling family member and Manchester City owner Sheikh Mansour bin Zayed Al Nahyan, was instrumental in 1MDB's debt-fuelled expansion. By the end of March 2014, it had racked up borrowings of RM42 billion (S$14 billion).

IPIC jointly guaranteed two bonds issued by 1MDB worth a total of US$3.5 billion (S$4.9 billion) to help it acquire energy assets in 2012. The following year, 1MDB raised US$3 billion to fund a joint venture with an IPIC subsidiary. 1MDB paid high fees to raise the money quickly but the terms of the joint venture were never finalised.

Things became more awkward following revelations that US$700 million had landed in the personal bank accounts of Najib, who is also chairman of 1MDB's board of advisers. Some of transfers came through an account at the Singapore branch of Falcon Private Bank, a Swiss lender owned by IPIC, and passed through companies linked to 1MDB, according to documents from a government investigation published by the Wall Street Journal but not verified by Reuters. Najib has denied taking any money for personal gain.

Around June, IPIC tried to draw a line under its relationship by handing over US$1 billion to help 1MDB repay bank debt. The Abu Dhabi investor also promised to assume full responsibility for the bonds it had partially guaranteed and provide some other debt relief in return for unspecified assets worth US$4.98 billion, according to calculations by Reuters Breakingviews. But the falling Malaysian ringgit has made the transaction trickier. In local currency, 1MDB's obligation has risen from RM18.6 billion when the deal was announced to RM21 billion ringgit today.

IPIC's role in 1MDB's debt binge has made it impossible for it to walk away. The debt settlement may be a commercial effort to limit losses. But if Mr Najib is forced out of power, the Abu Dhabi fund may have to share 1MDB's financial pain - and further embarrassment.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)