* Investor road show around Europe is going well - sources
* Bulgaria hit by S&P credit rating downgrade, bank crisis
* Faces second snap election in two years this autumn
* Funds likely to be raised in two tranches-analyst (Adds maturity details on planned bond, analyst comment)
By Tsvetelia Tsolova
SOFIA, June 24 Bulgaria will go ahead as planned with a 1.5 billion euro bond sale despite a sovereign credit rating downgrade and an expected state rescue of a local bank as these will not push yields up to unattractive levels, two sources familiar with the sale said.
Bulgaria kicked off a European investor roadshow in Germany on Monday to raise money needed to repay global bonds that mature in January and to finance a budget deficit the government targets at 1.8 percent of gross domestic product this year.
The roadshow, which also travels to London, Paris and Vienna this week, has been overshadowed by a run on Corporate Commercial Bank (Corpbank) by depositors rattled by media reports of suspect deals at Bulgaria's No.4 lender.
Both the bank and its main shareholder deny any wrongdoing.
Bulgaria's central bank has taken control of Corpbank and a recently acquired subsidiary and has outlined a plan for a state rescue of the lender if talks with existing shareholders to prop up the bank with more capital fail.
The bank run followed on the heels of a sovereign downgrade by global ratings agency Standard & Poor's earlier in June to one notch above junk, citing ongoing political turmoil that has put the brakes on reforms needed to spur economic growth.
But two sources familiar with discussions with investors at the start of the roadshow in Germany indicated that the Bulgarian government would not be forced to delay the sale, the country's first such issue since 2012.
"DEAL WILL GO WELL"
"The meeting in Germany went quite well, there has been an interest," one source told Reuters on Tuesday. "Of course the rating cut and the Corpbank events will pressure the yields, but there will not be a massive correction. The deal will go well."
A second source, who also declined to be named, said: "The one-to-one meetings in Germany went really well. The interest is now good also in London."
Bulgaria is expected to set terms on Thursday for the deal, which may be split into two tranches of different maturities.
"The Ministry of Finance seems likely to target the medium and longer end of the yield curve in two tranches, assuming demand is sufficient," said Jefferies bank analyst Richard Segal, who attended the roadshow.
He said there were no specifics but he expected one tranche to be of seven-to-10 years' maturity, and the other at 15 years.
Bulgaria is the poorest member of the 28-nation European Union but is also one of its least indebted. Public debt stands at only about 18 percent of GDP.
But the Balkan nation has been racked by political instability since early 2013 and is expected to hold its second snap election in under two years in September or October. Economic growth is sluggish and foreign investment has fallen sharply.
Stephan Imre, a financial analyst at Raiffeisen bank, said in a note on Tuesday that investors would probably demand a modest spread pick-up to compensate for the S&P downgrade and Corpbank's expected nationalisation.
"Still, the bond placement will be subject to market conditions so there remains a risk the government may delay the issue should it find the pricing offer unattractive," Imre said.
Citigroup, HSBC and JP Morgan are the lead managers on the sale. (Additional reporting by Carolyn Cohn in LONDON; Writing by Matthias Williams; Editing by Gareth Jones and Catherine Evans)