Malaysian state fund 1MDB's agreement to resolve a debt dispute with Abu Dhabi's International Petroleum Investment Co (IPIC) may lift market sentiment, but uncertainty on how it will settle bond payments poses a lingering risk, Moody's said today.

1Malaysia Development Berhad (1MDB) and IPIC struck a conditional deal on Monday, under which 1MDB agreed to pay US$1.2 billion.

IPIC had guaranteed bonds issued by 1MDB. Now the fund and the Ministry of Finance Incorporated agreed with IPIC to assume responsibility for all future interest and principal payments for two bonds worth US$3.5 billion in total.

"It doesn't really change our picture - it's neither credit positive nor credit negative," Christian de Guzman, a Singapore-based senior credit officer at Moody's Investors Service told reporters at a Moody's event in Kuala Lumpur.

"I don't think it's a material development in terms of resolving the entire issue. The bonds continue to be outstanding so as long as the bonds are outstanding there will be contingent risks to the Malaysian government," he added.

When contacted for a comment, the Malaysian government and the Prime Minister's Office referred to a statement issued on Monday after the settlement was announced, in which 1MDB said it would sell its investment fund units to pay IPIC US$1.2 billion.

De Guzman said there was still a lack of clarity on where 1MDB would source the funds to foot the bond payments, and there continued to be sums that could be due to the government.

"There are questions regarding whether these funds are due from Ministry of Finance Incorporated or will it come from the government. But as we understand, it may be very difficult for budgetary resources to be used for 1MDB," de Guzman added.

However, he noted that there had been developments related to 1MDB's debt consolidation plan, and so the risks had receded over time.

Financial transactions by the Malaysian state fund are the subject of money-laundering investigations in at least six countries, including Switzerland and Singapore.

Prime Minister Najib Abdul Razak was chairperson of the fund's advisory board.

1MDB has denied any wrongdoing.

The fund defaulted on its bonds a year ago, sparking the dispute, with IPIC asking a London court to arbitrate over a claim totaling some US$6.5 billion.

Opposition leaders have criticised the settlement.

-Reuters