DIRECTORS’ REPORT

For the six months ended June 30, 2012

Corporate Governance

HSH N Funding II (the “Company”}, was incorporated on May 26, 2005 as an exempted company with limited liability under the laws of the Cayman Islands. The Company is a wholly owned subsidiary of HSH Nordbank AG (the “Bank”) which also provides one out of the three current directors to the Company. The financial results of the Company are consolidated within the Bank’s financial statements. The Company does not have any employees. Its day-to-day administration is delegated to MaplesFS Limited, an independent service organization, which also provides two directors to the Company from its employees for a fixed annual fee.

The Directors of the Company who held office during the period are as follows:

Cleveland Stewart (independent) (appointed September 3, 2008)

George Bashforth (independent) (resigned January 25, 2012)

Damon Bilchuris (independent) (appointed June 28, 2012

Aileen Sargent (independent) (appointed 25 January, 2012, resigned June 28, 2012)

Christoph.Christensen (resigned July 1, 2012)

The Directors held no interests in the Company as at June 30, 2012.

NB: Subsequent to period end John Zimmermann was appointed as director on 1 July, 2012.

Activities and Review of the Development of the Business

The business of the Company is principally limited to the issuance of two classes of preference shares and the investment of the proceeds thereof. The terms of the Company’s asset classes are similar to the terms of the Class A Preference Shares and Class B Preference Shares issued and as a result, all cash flows received are passed through or attributed to the holders of those preference shares. The value of both classes of preference shares in issue as at June 30, 2012 amounted to US$1,089,723,705 (December 31, 2011: 1.074,459.

The principal risks the Company faces include (i) credit risk within the various asset classes, mainly the counterparty risk associated with the Bank, and (ii) liquidity risk because an illiquid secondary market could have an adverse effect on the value of the Company’s assets and consequently the holders of preference shares. The direct exposure to market risk including changes in interest rates and credit spread risk is not significant.

The Company  earned  US$18,156,138  (June  30,  2011:  US$18,155,894)  as  scheduled interest income from its asset classes during the period and paid dividends on the Class B Preference Shares of NIL (June 30, 2011: NIL).

It is not intended that the business of the Company will diversify. The Company does not engage in the field of research and development.

Going Concern

Due to the limited recourse nature of the Company’s contractual arrangements, the Directors of the Company are of the opinion that the Company will be able to pays its debts as they fall due. Therefore, the financial statements have been prepared on a going concern basis, notwithstanding the current financial position of the Company and the carrying values of the Company’s asset classes which were predominantly issued by the Bank.

Results and Allocation

The Company reported a profit for the period of US$16,497,520 (June 30, 2011: US$16,450,868) and issued NIL Class A Preference Shares.

All potential profit or losses which may crystallize as a result of the Company holding or realizing its asset classes will be attributed to the holders of the preference shares and not to the Company itself.

Management’s Statement of Responsibility for Financial  Reporting

The financial statements of the Company have been prepared by management. Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies or making accounting estimates that are reasonable in the circumstances.

Statement on True and Fair View

The Directors of the Company state that, to the best of their knowledge:

– the unaudited financial statements dated as at June 30, 2012, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

– this report gives a true and fair view of the state of affairs of the Company as at the balance sheet date and of the course of affairs during the financial period of the Company together with a description of the principal risks the Company faces.

For and on behalf of the Board of Directors of the Company

Cleveland Stewart, Director

All documents are available at  http://www.hshnordbank.com