EC 136/2025, ADI 7873, and the Repricing of Brazilian Precatorios: Where the Asymmetry Sits for Institutional Investors

Executive brief for international investors

In Brazil, precatorios are court-ordered government payment claims.

Two legal abbreviations are essential for global allocators:

• EC (Emenda Constitucional): Constitutional Amendment.
• ADI (Ação Direta de Inconstitucionalidade): direct constitutional challenge before Brazil's Supreme Court (STF).

EC 136/2025 reset the risk-return profile of this market. ADI 7873 may act as a catalyst for judicial recalibration.

What EC 136/2025 changed in practical terms

EC 136/2025, enacted on September 9, 2025, changed core variables that drive valuation:

• timing and budget mechanics for inclusion of liabilities;
• annual disbursement limits linked to Net Current Revenue (RCL);
• default accrual based on IPCA plus 2% simple interest per year (subject to Selic cap), without compounding;
• immediate application effects over already-registered and unpaid stock.

In portfolio language, this is a three-layer repricing shock: duration, carry, and legal-transition uncertainty.

Why market prices moved

When expected cash flows are pushed out and accrual economics are compressed, fair value declines.

The market response followed that logic:

• longer expected duration;
• weaker effective carry during delay;
• wider legal uncertainty premia.

Result: broader discount expansion and more assets priced at stressed regulatory assumptions.

Why ADI 7873 matters for valuation

ADI 7873 challenges key EC 136 mechanics that directly affect pricing assumptions.

If the STF narrows any high-impact pillar, repricing can occur through:

• duration compression (shorter expected time to cash);
• carry normalization (improved accrual profile);
• transition relief (better treatment for already-registered stock).

This is the source of asymmetry: downside already embedded in stressed entries, with potential non-linear upside under partial legal normalization.

Historical signal from STF behavior

In prior constitutional cycles related to precatorios, STF has made material adjustments when creditor rights were seen as excessively compressed.

For investors, this is not a guarantee of outcome. It is a regime signal that one-sided legal compression may be revisited.

Convexity lens: simplified institutional example

Hypothetical mechanics:

• asset acquired at deep discount under prolonged-duration assumptions;
• judicial recalibration shortens expected payment path and improves accrual expectation;
• market equilibrium migrates to materially tighter discount bands.

Face value does not need to change for equity value to reprice significantly.

Portfolio implementation for non-Brazilian investors

This is a jurisdiction-sensitive strategy, not a broad beta trade.

Execution quality requires:

• tribunal-level legal mapping;
• procedural monitoring of each claim path;
• disciplined underwriting of timeline and enforceability risk.

Investment conclusion

EC 136/2025 created a stressed pricing regime. ADI 7873 introduces medium-term legal optionality.

For institutional investors with robust legal-process underwriting, the setup can offer attractive risk-adjusted convexity.

Leonard da Rosa

Director of Financial Business

www.lummenativos.com.br