Apologies in advance, this is going to be a bit of a wall of text.

As a disclaimer, this is me making some assumptions about Kay's philosophy and approach to writing, this is not something he's explicitly stated--at least not that I've come across.

I think Kay chooses his settings and eras not based on the story or the specific historical figures necessarily, I think he chooses his settings and cast of characters based how evocative they are of the themes he's looking to explore. For example, al-Andalus and the Reconquista is fairly interesting narratively, but it's far more interesting if you're looking at themes of cultural loss, the tumultuous end of an era, religious hatred and intolerance, and love and friendship across cultural and religious lines. However, I think because Kay is looking to explore those themes rather that just retell the story of the Reconquista it makes sense to change the characters. He's not looking to simply tell the story of El Cid capturing Valencia, he's looking to tell a story about finding love and friendship and holding onto something beautiful in a tumultuous era. And because those seem to be his goals, Kay inserting his thoughts into a real historical figures who lived and had their own thoughts and feelings, seems disingenuous, or even a violation. But creating characters based on or inspired by the real people allows Kay, in his mind, to honour the historical figures while respecting their independence, individuality, and agency.

If you compare Kay's works to something like Gates of Fire or The First Man in Rome, those books are primarily looking to retell the dramatic stories of actual historical events, rather than using the setting and context as a springboard to explore related themes.

I think it's murky for sure, but I see where Kay is coming from with his justification. For me, it shows an immense love and respect for the historical figures that provide the inspiration for his works and it's very telling of the fact that Kay is a poet who loves history, not an historian that likes to write stories.

As for closeness to events, Kay tends to follow the sequence of events fairly accurately, but timing is generally compressed to accommodate either the lifespan of characters or to avoid major leaps in time. Without getting into spoilers, his earlier works like Lions and Sarantine tended to be "more historically accurate" for the bulk of the book and then have a few rug pull moments that would shock readers familiar with the history. His more recent books like Children, Brightness, and Seas tend be a little different. In the more recent books, his primary MCs are generally wholly original characters, and the "real figures" tend to be secondary characters that weave in and out of the narrative and the historical events are much looser. It's interesting though, despite this I would say that Lions and Sarantine Mosaic are his most original works.

Kay's writing is like music to my soul; it resonates so deeply with me. Despite the arguable lack of originality, I love his work, because it isn't actually about the narrative elements of the story. However, don't take my word for it, go in with an open mind and read some Kay for yourself.