A public dispute between the sovereign funds of Malaysia and Abu Dhabi has finally been resolved after Kuala Lumpur agreed to pay International Petroleum Investment Company PJSC (IPIC) a total of $1.2bn (£940m) by the end of the year.

The first tranche of $602.725m is due by 31 July 2017 and the second tranche is due by 31 December 2017.

In addition, 1Malaysia Development Berhad (1MDB) and the Minister of Finance (Inc) Malaysia have promised to assume responsibility for all future interest and principal payments due in 2022 under two bonds issued by 1MDB that are guaranteed by 1MDB and IPIC.

"The parties have provided suitable undertakings and indemnities in respect of the performance of obligations under the settlement. The parties have also agreed to enter into good faith discussions in relation to payments made by 1MDB Group to certain entities," IPIC said in a statement to the London Stock Exchange RNS.

The bonds, issued by 1MDB and backed by the Abu Dhabi government fund was to help in the purchase of power plants.

They refer to the $1.75bn fixed rate 5.75% notes due in 2022 issued by 1MDB Energy (Langat) Ltd and the $1.75bn fixed rate 5.99% notes due 2022 issued by 1MDB Energy Ltd.

The resolution over who should pay back investors who had bought the bonds was finally resolved after IPIC took 1MDB to the arbitration courts in London in 2016.

The deal is conditional on the Arbitration Tribunal making a consent award by 31 May 2017.

In July 2016, IPIC filed papers seeking arbitration to recover $6.5bn it claims it is owed, arguing that both 1MDB and the Malaysian Ministry of Finance had failed to perform "their obligations, cure their defaults or put forward acceptable proposals".

A bone of contention was payment allegedly made by 1MDB to Aabar Investments PJS Ltd, a subsidiary of IPIC. Malaysia claims $3.5b was transferred to Aabar Investments but IPIC claims it did not receive any funds and that a company which had a similar name to its subsidiary was not part of its corporate structure.

IPIC claimed that 1MDB was in default of the agreement after the sovereign fund failed to repay the loan. IMDB then defaulted on interest payments on two bonds guaranteed by IPIC. 1MDB however insisted that it had enough to repay the interest payments due but did not do so following the dispute with IPIC.

1MDB maintained that it was confident of its legal position and had submitted a "robust response".

1MDB near completing rationalisation programme.

In a statement issued by Malaysian Prime Minister Najib Razak's press secretary Tengku Sariffudin Tengku Ahmad, he said: "The government is pleased that IPC and 1MDB have resolved their differences in an amicable manner.

"We also note the modernisation of all 1MDB-owned investment fund units. These significant event represents positive progress made by 1MDB, which is nearing the completion of its rationalisation programme."

In a separate statement dated 24 April, 1MDB said that its obligations to IPIC will be met "primarily via monetisation of 1MDB-owned investment fund units."

It said the first tranche monetisation of around $50m has been received in cash.

"This arbitration settlement and monetisation of investment fund units represents the resolution of a significant challenge, and is a major part of the 1MDB rationalisation plan, which is now at its final stages of conclusion," it added.

Not over yet for 1MDB

The settlement however does not mean 1MDB is out of the woods yet. The sovereign fund, set by by Najib, who chaired the fund's advisory board, is still the subject of investigations in various countries, including Singapore, the United States and Switzerland.

The US Ministry of Justice has launched a civil suit in a bid to recover $1bn it claims were illegally diverted from the fund.