Malaysian institutions are considering issuing structured covered bonds, according to Malaysian Rating Corporation Berhad (MARC), which outlined the approach it will use to those it will rate and expects an Islamic version of the instrument to emerge.

The rating agency published a rating methodology for structured covered bonds last month, noting the history and fundamentals of the asset class, with the development of Asian markets such as South Korea.

“In Malaysia, structured covered bond transactions have stirred some interest among prospective issuers,” said Sandeep Bhattacharya, vice president at MARC.

He said that like previous UK structured covered bonds, “the structured covered bonds that will be rated by MARC will be executed under the contract law principles”.

Standard & Poor’s noted in research last week that Asia-Pacific covered bond jurisdictions have so far taken a “legislation light” approach to the asset class, with only Australia having so far introduced specific covered bond legislation. A consultation period on legislation recently ended in New Zealand, while the Monetary Authority of Singapore has published rules, while the South Korean authorities have released guidelines.

While Sukuks are commonplace in the bond markets today, discussions about the potential for Islamic covered bonds are not believed to have yet yielded results, even if some market participants have said that the asset class is particularly suited to such structures. The Malaysian rating agency said that it expects such instruments to evolve.

“Moving forward, MARC believes that there will be eventually an Islamic variant of a structured covered bond that may require extended credit rating evaluation,” it said. “Nonetheless, the fundamental rating approach outlined under this paper would remain as the basis.”

The MARC rating methodology paper can be found here.